As filed with the Securities and Exchange Commission on
December 9, 2009
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
FINANCIAL ENGINES,
INC.
(Exact name of registrant as
specified in its charter)
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California (prior to reincorporation)
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Delaware (after reincorporation)
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6282
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94-3250323
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(State or other jurisdiction
of
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(Primary Standard
Industrial
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(I.R.S. Employer
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incorporation or
organization)
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Classification Code
Number)
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Identification
No.)
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1804 Embarcadero Road
Palo Alto, California
94303
(650) 565-4900
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Jeffrey N.
Maggioncalda
Chief Executive
Officer
1804 Embarcadero Road
Palo Alto, California
94303
(650) 565-4900
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Jorge del Calvo, Esq.
Davina K. Kaile, Esq.
Pillsbury Winthrop Shaw Pittman LLP
2475 Hanover Street
Palo Alto, CA 94304
(650) 233-4500
(650) 233-4545
facsimile
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Douglas D. Smith, Esq.
Stewart L. McDowell, Esq.
Gibson, Dunn & Crutcher LLP
555 Mission Street, Suite 3000
San Francisco, CA 94105
(415) 393-8200
(415) 986-5309 facsimile
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box.
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large
accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
þ
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Smaller reporting
company
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(Do not check if a smaller
reporting company)
CALCULATION OF
REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate
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Registration
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Securities to be Registered
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Offering Price(1)(2)
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Fee
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Common Stock, $0.0001 par value per share
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$
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100,000,000
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$
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5,580
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(1)
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Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(o)
under the Securities Act of 1933.
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(2)
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Includes shares that the
underwriters have the option to purchase to cover
over-allotments, if any.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We and the selling stockholders may not sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
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Subject to Completion. Dated
December 9, 2009.
Shares
Common Stock
This is an initial public offering of shares of common stock of
Financial Engines, Inc.
Financial Engines is
offering
of the shares to be sold in the offering. The selling
stockholders identified in this prospectus are offering an
additional shares.
Financial Engines will not receive any of the proceeds from the
sale of the shares being sold by the selling stockholders.
Prior to this offering, there has been no public market for the
common stock. It is currently estimated that the initial public
offering price per share will be between
$ and
$ . Financial Engines
intends to list the common stock on The Nasdaq Global
Market under the symbol FNGN.
See Risk Factors on page 17 to read about
factors you should consider before buying shares of the common
stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to Financial Engines
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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To the extent that the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from Financial Engines and the selling stockholders at the
initial public offering price less the underwriting discount.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2010.
Goldman, Sachs &
Co.
UBS Investment Bank
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Piper
Jaffray
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Cowen and Company
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Prospectus
dated ,
2010
TABLE OF
CONTENTS
No dealer, salesperson or other person is authorized to give
any information or to represent anything not contained in this
prospectus.
You should rely only on the information contained in this
prospectus and any free writing prospectus prepared by or on
behalf of us. This prospectus is an offer to sell only the
shares offered hereby but only under circumstances and in
jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
Through and
including ,
2010 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealers obligation to
deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscriptions.
The market data and certain other statistical information
used throughout this prospectus are based on independent
industry publications, governmental publications, reports by
market research firms or other independent sources. Some data
are also based on our good faith estimates. Although we believe
these third-party sources are reliable, we have not
independently verified the information attributed to these
third-party sources and cannot guarantee its accuracy and
completeness.
FINANCIAL
ENGINES
®
,
INVESTOR
CENTRAL
®
,
THE POWER TO SHAPE THE
FUTURE
®
,
FINANCIAL ENGINES INVESTMENT
ADVISOR
®
,
WE MAKE IT
PERSONAL
®
,
RETIREMENT HELP FOR
LIFE
®
,
the Financial Engines logo and a sun and cloud design mark are
all trademarks or service marks owned by Financial Engines,
Inc., registered in the United States and other countries. In
addition, Financial Engines, Inc. owns the trademarks
ADVICESERVER
®
and
FORECASTER
®
,
registered in Japan and
FINENG
®
,
registered in Tunisia. The mark ADVICE LIGHT is also a trademark
owned by Financial Engines, Inc. All other trademarks, service
marks and trade names appearing in this prospectus are the
property of their respective owners.
i
PROSPECTUS
SUMMARY
This summary highlights selected information contained
elsewhere in this prospectus. Because this is only a summary, it
does not contain all of the information you should consider
before investing in our common stock. You should carefully read
the entire prospectus, especially the risks set forth under the
heading Risk Factors and our consolidated financial
statements and related notes included elsewhere in this
prospectus, before making an investment decision. Our investment
advisory and management services are provided through our
subsidiary, Financial Engines Advisors L.L.C., a federally
registered investment adviser. References in this prospectus to
Financial Engines, our company,
we, us and our refer to
Financial Engines, Inc. and its consolidated subsidiaries during
the periods presented unless the context requires otherwise.
Financial
Engines, Inc.
Overview
Our company was founded to address the need for independent
investment advice. Traditionally, high quality, customized
investment advice had been available only to large institutions
and the affluent, and providing such advice to low asset balance
investors had been cost-prohibitive. We believe that our advice
technology platform allows us to cost-effectively service the
needs of individual investors with low asset balances, many of
whom are underserved by the financial services industry. We
believe shifting retirement industry trends present us with an
opportunity to provide independent portfolio management
services, investment advice and retirement help to plan
participants who previously did not have access to these
services.
Our
Company
We are a leading provider of independent, technology-enabled
portfolio management services, investment advice and retirement
help to participants in employer-sponsored defined contribution
retirement plans, such as 401(k) plans. We help investors plan
for retirement by offering personalized plans for saving and
investing, as well as by providing assessments of retirement
income needs and readiness, regardless of the investors
personal wealth or investment account size. We use our
proprietary advice technology platform to provide our services
to millions of retirement plan participants on a cost-efficient
basis. We believe that our services have significantly lowered
the cost and increased the accessibility to plan participants of
independent, personalized portfolio management services,
investment advice and retirement help.
Our business model is based on workplace delivery of our
services. We target three key constituencies in the retirement
plan market: plan participants (employees of companies offering
401(k) plans), plan sponsors (employers offering 401(k) plans to
their employees) and plan providers (companies providing
administrative services to plan sponsors). We generate revenue
primarily from management fees based on the value of the assets
we manage for plan participants, which we refer to as
Professional Management revenue. We refer to the amount of
retirement plan assets that we manage for plan participants as
part of our Professional Management service as Assets Under
Management, or AUM. We refer to plan participants who are
enrolled in our Professional Management service as members. We
also generate revenue from recurring, subscription-based
platform fees for access to either our full suite of services,
including Professional Management, Online Advice and Retirement
Evaluation, or our Online Advice service only, which we refer to
collectively as platform revenue. Platform fees are paid by the
plan sponsor, plan provider or the retirement plan itself,
depending on the plan structure.
We offer three principal services:
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Professional Management
is a discretionary managed
account service designed for plan participants who want
affordable, personalized and professional portfolio management
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services, investment advice and retirement help from an
independent investment advisor without the conflicts of interest
that can arise when an advisor offers proprietary products. Our
investment recommendations are limited to the investment
alternatives available in a 401(k) plan as determined and
approved by a plan fiduciary other than us, although we do take
into account other identified holdings of the plan participant
when offering investment advice. With the exception of employer
stock, if any, included as an investment alternative, we do not
provide advice on or manage single-company securities. We do not
consult with, or make recommendations to, the plan sponsor
regarding which investment alternatives to make available in a
particular plan. In some cases, we provide this service by
acting as a subadvisor to a plan provider acting as the
investment manager to plan participants.
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Online Advice
is a nondiscretionary Internet-based
service that offers personalized advice to plan participants who
wish to take a more active role in personally managing their
retirement portfolios. In some cases, we provide this service by
acting as a subadvisor to a plan provider acting as the
investment advisor to plan participants.
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Retirement Evaluation
is a retirement readiness
assessment provided to plan participants upon plan rollout and
generally annually thereafter, accompanied by a Professional
Management enrollment form. Retirement Evaluations highlight
specific risks in a plan participants retirement account
and assess the likelihood of achieving the plan
participants retirement income goals. The assessment also
provides guidance on how to reduce these highlighted risks.
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Our total revenue for the nine months ended September 30,
2009 was $58.8 million, compared to $52.3 million for
the nine months ended September 2008, an increase of 13%. We
generated Professional Management revenue of $34.4 million
for the nine months ended September 30, 2009, an increase
of 23% from $27.9 million for the nine months ended
September 30, 2008. We generated platform revenue of
$22.5 million for the nine months ended September 30,
2009, an increase of 2% from $22.2 million for the nine
months ended September 30, 2008.
We target large plan sponsors across a wide range of industries.
As of September 30, 2009, we had signed contracts to make
our services available through 107 Fortune 500 companies
and seven Fortune 20 companies. As of September 30,
2009, we were under contract to provide either our full suite of
services, including Professional Management, Online Advice and
Retirement Evaluation, or our Online Advice service only,
through more than 765 plan sponsors with approximately
7.6 million plan participants, whose retirement savings
represented more than $500 billion in assets. Within this
group, we provide our full suite of services to 341 plan
sponsors representing approximately 3.7 million
participants and approximately $242 billion of assets in
retirement plans for which we have rolled out our Professional
Management service, which we refer to as Assets Under Contract,
or AUC. As of September 30, 2009, we had approximately
$23.5 billion in AUM, and managed the accounts of
approximately 383,000 members who have delegated investment
decision-making authority to us. Our AUC does not include assets
in plans where we have signed contracts but for which we have
not yet rolled out our Professional Management service. We
deliver our services to plan sponsors and plan participants
primarily through existing connections with eight retirement
plan providers. Based on information from Pensions and
Investments, as of March 31, 2009, and one plan provider,
we estimate that these eight plan providers collectively service
plan sponsors representing more than $1.5 trillion in plan
assets, or more than 80% of the assets contained in plans with
more than 10,000 participants.
The key steps associated with delivering our Professional
Management service are as follows:
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First, we sign a contract that allows us to provide our
Professional Management service to the plan sponsors
employees;
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Second, we obtain plan and plan participant data, set up the
plan on our systems and make our services available to all
eligible plan participants upon completion of plan rollout;
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Third, we deliver Retirement Evaluations and enrollment
materials to plan participants; and
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Fourth, for plan participants who elect to enroll in our
Professional Management service, we allocate the plan
participants 401(k) assets pursuant to the
participants investment objectives and investment options
available, at which time the participants 401(k) assets
become AUM.
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We launched our Professional Management service in September
2004. From December 31, 2004 to September 30, 2009, we
had a compound annual growth rate, or CAGR, of 93% for AUM and
98% for membership. As of September 30, 2009, we had AUM of
approximately $23.5 billion and approximately 383,000
members, compared to AUM of approximately $15.6 billion and
approximately 322,000 members at December 31, 2008.
The following tables illustrate the increase in our AUM and
membership, and the corresponding CAGR, from December 31,
2004 to September 30, 2009.
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Assets
Under Management
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Total
Members
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All data are shown
as of December 31 of the applicable year except 2009, for which
the data are shown as of September 30.
The following table illustrates the number of plan sponsors
where Professional Management is available, and the
corresponding CAGR. The data below includes plan sponsors where
no members had yet enrolled.
Total
Plan Sponsors
All data are shown
as of December 31 of the applicable year except 2009, for which
the data are shown as of September 30.
Our Market
Opportunity
We believe the United States retirement savings industry is
large and growing and that shifting trends within the retirement
industry present us with an opportunity to help plan sponsors
provide independent portfolio management services, investment
advice and retirement help to their employees. We believe the
following key market trends will continue to drive the growth of
our business and increase the value of our service offerings:
Shifting Demographics Drive a Growing Need for Retirement
Assistance.
The ongoing growth in retirement
assets, especially 401(k) assets, is driven in part by
individuals seeking to
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supplement retirement funds they expect to receive from Social
Security and corporate defined benefit plans. Defined
contribution assets, including 401(k) assets, are not evenly
distributed by age. According to data contained in the Federal
Reserve Boards Survey of Consumer Finances for 2007,
households headed by individuals age 45 through 64 represented
45% of all retirement account holders, but account for 56% of
the assets in retirement accounts. Members of the Baby Boomer
generation, which refers to individuals born between 1946 and
1964, will begin to reach traditional retirement age in 2011.
However, studies suggest that many Baby Boomers are not
financially prepared to support themselves in retirement. The
Employee Benefits Research Institute, or EBRI, 2009 Retirement
Confidence Survey indicates that approximately 36% of workers
age 45 through 54, and approximately 30% of workers age 55 or
older, report total savings and investments, excluding the value
of their primary residence and any defined benefit plans, of
less than $10,000. Despite the increased reliance on defined
contribution plans, we believe many investors are not equipped
to adequately formulate an investment strategy for their
retirement assets. As a result, we believe these investors face
significant investment risk and potentially inappropriate market
exposure and asset allocations.
Growing Reliance on Defined Contribution
Plans.
As employer-sponsored retirement plans
shift from defined benefit plans to defined contribution plans,
the responsibility for making retirement investment decisions
shifts from professional pension fund managers to individual
investors. Cerulli Associates estimates that private defined
contribution assets, excluding Individual Retirement Accounts,
or IRAs, were approximately $4.2 trillion and constituted
more than 25% of total retirement assets in the United States,
excluding Social Security, in 2007. According to Cerulli
Associates, there were approximately 57 million 401(k) plan
participants as of December 31, 2007. Of the workers
surveyed in EBRIs 2009 Retirement Confidence Survey, 42%
estimate that a major source of their retirement funds will come
from
employer-sponsored
retirement savings plans.
Changing Legal and Regulatory
Framework.
As the burden of retirement
investing shifts to the individual, we believe that there is an
increasing need for assistance and guidance on how to maximize
retirement wealth. However, according to a 2009 survey by Hewitt
Associates, the primary reason cited by plan sponsors for not
making investment advice available to employees has been the
fear of increased fiduciary or legal risk. We believe the
Pension Protection Act of 2006 and subsequent Department of
Labor regulations can reduce these concerns. In addition to
providing specific guidelines for plan sponsors to automatically
enroll employees into qualified plans and accelerate
contributions on an annual basis, the Pension Protection Act of
2006 further supports the existing foundation for professional
asset management of 401(k) accounts. Adherence to these
guidelines provides specific safeguards to plan sponsors from
fiduciary and legal risk.
Automatic 401(k).
As a result of the
Pension Protection Act of 2006 and Department of Labor
guidelines, plan sponsors are now actively seeking automatic
retirement savings solutions for their employees. According to a
2009 401(k) plan survey conducted by Hewitt Associates, the
percentage of employers that automatically enroll new
participants has increased from 19% in 2005 to 58% in 2009.
Similarly, automatic contribution escalation, where
employees contribution rates are automatically increased
over time unless the employee affirmatively elects otherwise,
increased from 9% in 2005 to 44% in 2009. A 2006 report by the
Retirement Security Project estimates that the automatic 401(k)
could increase net national saving by about 0.34% of gross
domestic product per year, or approximately $44 billion per
year.
Our Competitive
Strengths
We believe that our market-leading position results from the
following key competitive strengths:
Independent and Unconflicted Advice.
We
believe that many plan participants value an investment advisor
that is independent and free from potential conflicts of
interests. We also believe that many plan fiduciaries similarly
value making independent and unconflicted advice available to
their plan participants. We do not receive differential
compensation based on the investments we
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recommend. We offer no proprietary investment products and are
free from the conflicts or the perception of conflicts of
interest that can arise for competitors who offer such products.
We do not hold assets in custody or execute trades. Our
investment recommendations are limited to the investment
alternatives available in a 401(k) plan as determined and
approved by a plan fiduciary other than us, although we do take
into account other identified holdings of the plan participant
when offering investment advice. With the exception of employer
stock, if any, included as an investment alternative, we do not
provide advice on or manage single-company securities. We do not
consult with, or make recommendations to, the plan sponsor
regarding which investment alternatives to make available in a
particular plan. We are not affiliated with or controlled by any
broker-dealer, registered investment company, insurance company
or financial services organization. We base our investment
advice on quantitative criteria applied through a computerized
model that is consistently applied across plan participants,
plan sponsors, plan providers and investment choices.
Proprietary Investment Advice
Technology.
Our Advice Engines, which consist
of our Optimization and Simulation Engines, incorporate
portfolio analysis methods commonly used by large institutional
investors and pioneered by our co-founder and Nobel Laureate,
Professor William F. Sharpe. Our technology-based investment
approach incorporates the following:
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Our Optimization Engine allows us to make personalized
investment recommendations, chosen from the investment options
available within each plan, with consideration of the plan
participants individual circumstances including investment
horizon, existing investment allocations and characteristics of
his or her 401(k) plan, as well as any anticipated benefits from
other employer plans, such as cash balance or defined benefit
plans. Our Optimization Engine also allows our advice to adjust
for the risks and correlations of other financial assets and a
participants risk tolerance. In addition, we provide
personalized savings recommendations to help plan participants
reach their retirement objectives;
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Our Simulation Engine allows us to model the risk and return
characteristics of more than 30,000 securities, including the
funds and employer stocks in the plans to which we provide
services, taking into consideration factors such as asset class
exposures, expenses, turnover, manager performance, active
management risk, stock specific risk and the securitys
tax-efficiency;
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Our Advice Engines ability to manage a plan
participants employer stock holdings is an attractive
feature to plan sponsors seeking to reduce the risk of fiduciary
liability that can arise when employer stock is included in a
401(k) plan. The advice produced by our Advice Engines also
generally reduces plan participants undiversified exposure
to the equity risk that results from holding an overly-high
concentration in employer stock; and
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Our Advice Engines are able to provide advice that takes into
consideration after-tax returns by taking into account the
specific tax characteristics of securities and the tax
attributes of investor households.
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Scalable Technology Platform.
We
believe our technology platform allows us to
cost-effectively
service the needs of large numbers of individual investors with
low asset balances while providing sophisticated, personalized
investment advice. As of September 30, 2009, approximately
46% of our Professional Management members had less than $20,000
of retirement assets in their accounts. We believe that the
ability to serve these low balance plan participants
cost-effectively is a key advantage of our business model.
Significant Invested Capital.
Our
services are based on our proprietary technology, which we
developed over a number of years, and in which we have invested
significant financial and personnel resources. We believe that
any potential competitor will face significant challenges in
terms of the human capital, time, money and technology required
to develop a competitive offering. Furthermore, the technology
interfaces that we have established with our retirement plan
providers and plan
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sponsors are complex and would be time-consuming and costly for
our plan providers and plan sponsors to replicate.
Established Relationships and Data Connections with
Retirement Plan Providers.
We have built data
retrieval, transaction processing and fee deduction interfaces
with a number of retirement plan providers, including these
eight primarily: ACS, Fidelity, Hewitt, ING, JPMorgan, Mercer,
T. Rowe Price and Vanguard. Based on information from Pensions
and Investments, as of March 31, 2009, and one plan
provider, we estimate that these eight plan providers
collectively service plan sponsors representing more than $1.5
trillion in plan assets, or more than 80% of the assets
contained in plans with more than 10,000 participants.
Large, Industry-Leading Retirement Plan Sponsor
Clients.
We believe our brand recognition and
experience serving large plan sponsors from a wide variety of
industries provide us with a competitive advantage and enhance
our position as an acknowledged leader in our markets. We
believe that many plan sponsors that contemplate switching plan
providers consider the availability of our services on
alternative plan provider platforms in making their decisions.
We believe that this in turn provides incentives to the plan
providers to maintain ongoing relationships with Financial
Engines.
Our Business
Model
Recurring and Resilient Revenue
Base.
We believe our business model has
structural advantages that allow us to demonstrate resiliency in
difficult environments. We currently serve investors with 401(k)
accounts that, unlike other non-retirement investment accounts,
generally receive consistent automatic contributions from
participants and have adverse tax treatment on early
withdrawals. We create portfolios with a diversified mix of
equity and fixed income exposure designed to reduce volatility.
Our investment methodology is also designed to avoid market
timing biases that can increase volatility for investors. In
addition, our contracts with plan sponsors typically have
initial terms of three years and evergreen clauses that extend
the initial term until terminated by either party after a
specified notice period. In a given year, a significant portion
of our Professional Management revenue consists of recurring
revenue earned from contracts in place prior to the beginning of
that year. Revenue from contracts in place as of
December 31, 2007 accounted for approximately 99% of our
total revenue for the year ended December 31, 2008.
While market declines may impact the value of our AUM, we
believe our business model may mitigate the effects of market
declines. From December 31, 2007 to December 31, 2008,
our AUM declined approximately 4%. This was a challenging time
for the equity markets, as shown by a decline in the S&P
500 of approximately 38% over the same period. We believe the
effect on our AUM during this period was mitigated as a result
of new business, ongoing participant contributions and less
volatile investment performance, among other factors. From
December 31, 2008 to September 30, 2009, our AUM
increased 51%.
Attractive Economic Model.
We believe
the scalability of our technology platform results in attractive
per-member economics. We have incurred significant up front
expenses to establish connectivity with plan provider and plan
sponsor platforms. We believe that our investments in technology
allow us to manage existing member accounts at significantly
lower costs and to add new plan sponsors and plan participants
with less than pro rata incremental expenses.
Sole Access and Customer Retention.
Our
business model enjoys a number of structural advantages that
result in sole access to plan participants and high plan sponsor
retention levels. The 341 plan sponsors representing
approximately $242 billion in AUC who make available our
Professional Management service have each made us the sole
provider of these services to their plans. We believe this
reflects the desire of plan sponsors to avoid inconsistent
methodologies, to simplify choices for plan participants, and to
avoid building new data connections with multiple investment
advice vendors.
6
Since the launch of our Professional Management service in
September 2004, we have retained over 97% of our plan sponsors
each year. We believe this reflects the desire of plan sponsors
to maintain continuous and consistent provision of investment
advisory services for their employees. In addition, we have been
largely unaffected if a plan sponsor changes its underlying
recordkeeping platform or the investment alternatives available
to its employees because of the breadth of our data connections
and our independent investment methodology.
Significant Growth Opportunity Within Our Existing
Customer Base.
We believe our business has a
significant opportunity for growth from our existing customer
base. As of September 30, 2009, we had approximately
$23.5 billion in AUM and approximately 383,000 members,
while our Professional Management service was available to
employees representing a total of approximately
$242 billion in AUC and approximately 3.7 million
potential members. This implies a participant enrollment rate of
approximately 10.3% across all plans where Professional
Management is available, including plans where enrollment
campaigns are not yet concluded or have not been commenced. We
believe we can increase our revenue and net income by increasing
our participant enrollment rate within our existing client base.
Our Growth
Strategy
Increase Penetration Within Our Existing Professional
Management Plan Sponsors.
We believe we have
a significant opportunity for growth within our existing
Professional Management plan sponsor base by increasing
enrollment rates for our Professional Management service. As of
September 30, 2009, we managed approximately 11.0% of plan
assets in plans to which our Professional Management service has
been actively rolled out for at least 14 months. We plan to
increase enrollment by both continuing to promote our services
to participants in Active Enrollment campaigns and encouraging
plan sponsors to initiate Passive Enrollment campaigns. Active
Enrollment campaigns require that plan participants proactively
sign up for our Professional Management service. Passive
Enrollment campaigns automatically enroll some or all of a plan
sponsors plan participants into our Professional
Management service unless the individual participant declines or
opts-out of the service. Over time, we believe that
we can increase our enrollment rate in Active Enrollment
campaign plans through annual enrollment campaigns, direct
marketing to plan participants and other promotional activities.
Our past experience also indicates that in cases where a plan
sponsor used Passive Enrollment, the enrollment rate of plan
assets was higher and achieved at lower acquisition cost per
member than in cases where a plan sponsor used Active
Enrollment. We believe Passive Enrollment is attractive to plan
sponsors due to the lower fees payable by plan participants who
are passively enrolled, the fiduciary protection afforded to
plan sponsors by participants having to affirmatively elect not
to receive professional advice and the relatively higher number
of participants likely to be enrolled and receiving professional
management upon rollout. We believe that the adoption of Passive
Enrollment among more plan sponsors will likely increase our AUM
as a result of the higher enrollment rates that these campaigns
historically generate. Depending on the proportion of the
plans participants who are passively enrolled, we
eliminate or reduce our platform fees, as well as reducing the
fees payable by plan participants.
Enhance and Extend Our Services as Baby Boomers Enter
Retirement.
We intend to expand our portfolio
management, investment advisory and retirement planning services
to help individual investors as they near and enter retirement.
More than 40% of our current Professional Management members are
over the age of 50. We believe that many of these members would
value advice on whether to roll over their 401(k) into an IRA or
other similar accounts and how to turn their investments into
income they can spend in retirement. A McKinsey & Company
report, Redefining Defined Contribution (2007),
indicated that 85% of the consumers concerned or extremely
concerned about not having a sufficient income for retirement
are interested in seeking advice on how to guarantee sufficient
income for retirement.
We intend to expand our services to help members of our
Professional Management program who roll over their 401(k) into
an IRA account available through the plan provider and to help
other
7
individual IRA investors manage and draw down income from their
IRAs. We also plan to expand our services to more fully serve
the defined contribution market. We believe our established
investment methodology, technology and relationships with plan
providers, plan sponsors and plan participants provide us with
the distribution and technological capabilities to help
individuals who want ongoing, lifetime payouts from their
retirement accounts.
Expand Number of Retirement Plan
Sponsors.
We intend to sell our services to
other plan sponsors that are not current clients but are
serviced by the plan providers with whom we have relationships.
We also plan to create data connections with additional plan
providers to access defined contribution plans of educational
institutions, non-profit organizations and government entities.
Offer Professional Management to Online Only
Plan Sponsors.
We have an
online-services-only relationship with many of our plan sponsor
customers. We plan to pursue growth by seeking to convert these
plan sponsors to our full Professional Management, Online Advice
and Retirement Evaluation suite of services.
Risks Related to
Our Business
Investing in our common stock involves substantial risk,
including those described under the heading Risk
Factors immediately following this summary. Our ability to
execute our strategy is also subject to significant risks.
Before you invest in our common stock, you should carefully
consider all the information in this prospectus including
matters set forth under the heading Risk Factors.
Corporate
Information
We were incorporated in California in May 1996. Prior to the
completion of this offering, we intend to become a Delaware
corporation. Our principal executive offices are located at 1804
Embarcadero Road, Palo Alto, California 94303. Our telephone
number at that location is
(650) 565-4900.
Our website address is
www.FinancialEngines.com
.
Information on our website is not part of this prospectus and
should not be relied upon in determining whether to make an
investment decision.
8
Terminology
References in this prospectus to the following terms shall have
the meanings set forth below:
AUC:
AUC, or Assets Under Contract, is
defined as the amount of assets in retirement plans under
contract for our Professional Management services that have been
rolled out. The value of assets is reported by plan providers as
of various points in time and is not always updated or marked to
market. Some plan participants may not be eligible for our
services due to plan sponsor limitations on employees treated as
insiders for purposes of securities laws or other
characteristics of the plan participant. Certain securities
within a plan participants account may be ineligible for
management by us, such as employer stock subject to trading
restrictions, and we do not manage or charge a fee for that
portion of the account. We believe that AUC is a useful
approximation of the assets in plans available for enrollment
efforts that, if successful, can result in these assets becoming
AUM.
AUM:
AUM, or Assets Under Management,
is defined as the amount of retirement plan assets that we
manage as part of our Professional Management service.
Enrollment Rate:
When used in reference
to participant enrollment rate, enrollment rate is defined as
the percentage of plan participants who use our Professional
Management service across all plans in which Professional
Management is available, including plans in which enrollment
campaigns are not concluded or have not yet commenced.
When used in reference to asset enrollment rate, enrollment rate
is defined as AUM as a percentage of AUC across all plans in
which Professional Management is available, including plans in
which enrollment campaigns are not concluded or have not yet
commenced.
In addition to measuring enrollment in all plans that have been
rolled out, we measure enrollment in plans that have been
actively rolled out for at least 14 months and in plans
that have been actively rolled out for at least 26 months.
We consider a plan to be actively rolled out upon mailing of
initial enrollment materials. We measure enrollment in plans
that have been rolled out for at least 14 months and at
least 26 months because we generally seek to commence
annual campaigns 12 months after the start of the prior
campaign, and each campaign typically lasts
45-60 days.
Members:
Members are defined as plan
participants who are enrolled in our Professional Management
service.
401(k) Plans:
401(k) plans collectively
refer to defined contribution plans, such as 401(k), 403(b) and
457 plans, in which participants contribute a specified dollar
amount into the plan on a regular basis and, upon retirement,
can draw from the amount of money resulting from these
contributions and the investment return earned on those
contributions.
9
THE
OFFERING
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Shares of common stock offered by Financial Engines
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Shares
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Shares of common stock offered by the selling stockholders
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Shares
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Total shares of common stock offered
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Shares
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Shares of common stock to be outstanding immediately after this
offering
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Shares
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Option to purchase additional shares offered by Financial Engines
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Shares
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Option to purchase additional shares offered by the selling
stockholders
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Shares
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Use of proceeds
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We intend to use a portion of the net proceeds from this
offering to prepay all of the then outstanding indebtedness
under our term loan and the remainder for general corporate
purposes, including working capital and capital expenditures. As
of September 30, 2009, the amount outstanding under our
term loan was $8.9 million. See Use of Proceeds.
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Dividend Policy
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We do not currently intend to declare dividends on shares of our
common stock. See Dividend Policy.
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Risk Factors
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You should carefully read the Risk Factors section
of this prospectus for a discussion of factors that you should
consider carefully before deciding to invest in shares of our
common stock.
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Proposed Nasdaq Global Market symbol
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FNGN
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The number of shares of common stock to be outstanding
immediately after this offering is based on
32,784,581 shares outstanding as of September 30,
2009, and excludes:
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10,560,935 shares of common stock issuable upon the
exercise of options outstanding as of September 30, 2009,
at a weighted average exercise price of $5.76 per share;
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108,290 shares of common stock issuable upon the exercise
of a warrant outstanding as of September 30, 2009, at an
exercise price of $9.23 per share; and
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2,000,000 shares of common stock reserved for future
issuance under our 2009 Stock Incentive Plan following the date
of this offering.
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Unless otherwise stated, all information in this prospectus
assumes:
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the conversion of all of our outstanding shares of preferred
stock into an aggregate of 22,349,972 shares of common
stock effective upon the completion of this offering, assuming a
one-to-one
conversion ratio of our outstanding shares of preferred stock
into common stock;
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our reincorporation from California into Delaware and the filing
of our restated certificate of incorporation prior to the
completion of this offering; and
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no exercise of the option to purchase additional shares granted
to the underwriters.
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10
As of September 30, 2009, 1,167,331 shares remained
available for future issuance under our 1998 Stock Plan. Upon
the completion of this offering, no shares of our common stock
will remain available for future issuance under our 1998 Stock
Plan. Shares originally reserved for issuance under our 1998
Stock Plan, but which are not subject to outstanding options on
the effective date of our 2009 Stock Incentive Plan, and shares
subject to outstanding options under our 1998 Stock Plan on the
effective date of our 2009 Stock Incentive Plan that are
subsequently forfeited or terminated for any reason before being
exercised, up to a number of additional shares not to exceed
2,000,000, will become available for awards under our 2009 Stock
Incentive Plan.
11
SUMMARY
CONSOLIDATED FINANCIAL INFORMATION
The information set forth below should be read together with
Capitalization, Selected Consolidated
Financial Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes
included elsewhere in this prospectus.
The summary consolidated statements of operations data for the
years ended December 31, 2006, 2007 and 2008 have been
derived from our audited consolidated financial statements,
which are included elsewhere in this prospectus. The summary
consolidated statements of operation data for the nine months
ended September 30, 2008 and 2009 and the summary
consolidated balance sheet data as of September 30, 2009
have been derived from our unaudited consolidated financial
statements, which are included elsewhere in this prospectus.
Historical results are not necessarily indicative of the results
to be expected in the future, and results of interim periods are
not necessarily indicative of results for the entire year.
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Nine Months Ended
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Year Ended December 31,
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September 30,
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2006
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2007
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2008
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2008
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2009
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(Unaudited)
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(In thousands, except share and per share data)
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Statements of Operations Data:
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Total revenue
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$
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48,233
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$
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63,350
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$
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71,271
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$
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52,264
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$
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58,847
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Cost of revenue
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15,691
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20,602
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|
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27,588
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20,511
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21,057
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Gross profit
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32,542
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42,748
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43,683
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31,753
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37,790
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Total operating expense
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41,096
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44,247
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46,722
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32,962
|
|
|
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35,540
|
|
|
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|
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|
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|
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Income (loss) from operations
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|
|
(8,554
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)
|
|
|
(1,499
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)
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|
|
(3,039
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)
|
|
|
(1,209
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)
|
|
|
2,250
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Interest income (expense) and other, net
|
|
|
579
|
|
|
|
(274
|
)
|
|
|
(563
|
)
|
|
|
(323
|
)
|
|
|
(210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income (loss) before income tax expense
|
|
|
(7,975
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)
|
|
|
(1,773
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)
|
|
|
(3,602
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)
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|
|
(1,532
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)
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|
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2,040
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Income tax expense
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|
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8
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|
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31
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12
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9
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|
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359
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|
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Net income (loss)
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(7,983
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)
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|
|
(1,804
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)
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(3,614
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)
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(1,541
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)
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1,681
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Less: Preferred stock dividend
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930
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2,362
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|
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|
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|
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Net income (loss) attributable to holders of common stock
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$
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(8,913
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)
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$
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(1,804
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)
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$
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(5,976
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)
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$
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(1,541
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)
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$
|
1,681
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|
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Net income (loss) per share attributable to holders of common
stock:
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Basic
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$
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(1.00
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)
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$
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(0.19
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)
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$
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(0.61
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)
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$
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(0.16
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)
|
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$
|
0.17
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Diluted
|
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$
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(1.00
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)
|
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$
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(0.19
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)
|
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$
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(0.61
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)
|
|
$
|
(0.16
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)
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|
$
|
0.05
|
|
Shares used to compute net income (loss) per share attributable
to holders of common stock:
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|
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|
|
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|
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|
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|
|
|
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Basic
|
|
|
8,879
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|
|
|
9,427
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|
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9,767
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|
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9,711
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|
|
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10,050
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Diluted:
|
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8,879
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|
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9,427
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9,767
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|
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9,711
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|
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34,648
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Pro forma net income (loss) per share (unaudited):
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|
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|
|
|
|
|
|
|
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Basic
|
|
|
|
|
|
|
|
|
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$
|
(0.19
|
)
|
|
|
|
|
|
$
|
0.05
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
$
|
0.05
|
|
Shares used to compute pro forma net income (loss) per share
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
32,117
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|
|
|
|
|
|
|
32,400
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|
Diluted
|
|
|
|
|
|
|
|
|
|
|
32,117
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|
|
|
|
|
|
|
34,648
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|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
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|
|
|
|
|
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Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
as Adjusted
|
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(In thousands, unaudited)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
(1)
|
|
$
|
15,798
|
|
|
$
|
15,798
|
|
|
$
|
|
|
Working capital
|
|
|
12,075
|
|
|
|
12,075
|
|
|
|
|
|
Total
assets
(1)
|
|
|
50,514
|
|
|
|
50,514
|
|
|
|
|
|
Bank borrowings and note payable
|
|
|
8,889
|
|
|
|
8,889
|
|
|
|
|
|
Total liabilities
|
|
|
33,096
|
|
|
|
33,096
|
|
|
|
|
|
Total stockholders
equity
(1)
|
|
|
17,418
|
|
|
|
17,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(In thousands, unaudited)
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
(2)
|
|
$
|
(855
|
)
|
|
$
|
8,333
|
|
|
$
|
8,409
|
|
|
$
|
4,595
|
|
|
$
|
11,427
|
|
Adjusted net income
(loss)
(2)
|
|
|
(5,024
|
)
|
|
|
2,612
|
|
|
|
3,006
|
|
|
|
703
|
|
|
|
6,329
|
|
Notes to Summary
Consolidated Financial Information and Other Data
|
|
(1)
|
The table above presents a summary of our balance sheet data as
of September 30, 2009:
|
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis to give effect to the issuance of
22,349,972 shares of common stock issuable upon the
conversion of all of our outstanding shares of preferred stock
upon completion of this offering; and
|
|
|
|
on a pro forma as adjusted basis to give effect to the sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share, the
mid-point of the price range set forth on the cover of this
prospectus, after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us
and the repayment of $8.9 million of outstanding
indebtedness.
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease), on a pro forma as adjusted basis,
each of cash and cash equivalents, total assets and total
stockholders equity by approximately
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us and the repayment of
$8.9 million of outstanding indebtedness.
|
|
(2)
|
Adjusted EBITDA
represents net income
(loss) before interest (income) expense, net, income tax
expense, depreciation, withdrawn offering expense, amortization
of internal use software, direct response advertising and
deferred sales commissions and stock-based compensation.
|
Adjusted Net Income (Loss)
represents
net income (loss) before stock-based compensation expense and
withdrawn offering expense.
Our management uses adjusted EBITDA and adjusted net income
(loss):
|
|
|
|
|
as measures of operating performance;
|
13
|
|
|
|
|
for planning purposes, including the preparation of annual
budgets;
|
|
|
|
to allocate resources to enhance the financial performance of
our business;
|
|
|
|
to evaluate the effectiveness of our business
strategies; and
|
|
|
|
in communications with our board of directors concerning our
financial performance.
|
Management may also consider adjusted EBITDA and adjusted net
income (loss), among other factors, when determining
managements incentive compensation beginning in 2010.
We also present adjusted EBITDA and adjusted net income (loss)
as supplemental performance measures because we believe that
these measures provide our board of directors, management and
investors with additional information to measure our
performance. Adjusted EBITDA provides comparisons from period to
period by excluding potential differences caused by variations
in the age and book depreciation of fixed assets (affecting
relative depreciation expense) and amortization of internal use
software, direct response advertising and commissions, and
changes in interest expense and interest income that are
influenced by capital structure decisions and capital market
conditions. Management also believes it is useful to exclude
stock-based compensation expense from adjusted EBITDA and
adjusted net income (loss) because non-cash equity grants made
at a certain price and point in time do not necessarily reflect
how our business is performing at any particular time.
We believe adjusted EBITDA and adjusted net income (loss) are
useful to investors in evaluating our operating performance
because securities analysts use adjusted EBITDA and adjusted net
income (loss) as supplemental measures to evaluate the overall
performance of companies and we anticipate that our investor and
analyst presentations after we are public will include adjusted
EBITDA and adjusted net income (loss).
Adjusted EBITDA and adjusted net income (loss) are not
measurements of our financial performance under U.S. GAAP
and should not be considered as an alternative to net income
(loss), operating loss or any other performance measures derived
in accordance with U.S. GAAP, or as an alternative to cash
flows from operating activities as a measure of our
profitability or liquidity.
We understand that, although adjusted EBITDA and adjusted net
income (loss) are frequently used by securities analysts,
lenders and others in their evaluation of companies, adjusted
EBITDA and adjusted net income (loss) have limitations as an
analytical tool, and you should not consider them in isolation,
or as a substitute for an analysis of our results as reported
under U.S. GAAP. In particular you should consider:
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|
|
|
|
Adjusted EBITDA and adjusted net income (loss) do not reflect
our cash expenditures, or future requirements for capital
expenditures or contractual commitments;
|
|
|
|
Adjusted EBITDA and adjusted net income (loss) do not reflect
changes in, or cash requirements for, our working capital needs;
|
|
|
|
Adjusted net income (loss) does not reflect the interest expense
or the cash requirements necessary to service interest or
principal payments on our debt;
|
|
|
|
Adjusted EBITDA and adjusted net income (loss) do not reflect
the non-cash component of employee compensation;
|
|
|
|
Although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized often will have to be
replaced in the future, and adjusted EBITDA does not reflect any
cash requirements for such replacements;
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|
|
|
Due to either net losses before income tax expenses or the use
of federal and state net operating loss carryforwards in 2006,
2007 and 2008 and nine months ended September 30, 2008 and
2009, we had income tax payments of approximately $8,000,
$31,000, $12,000,
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14
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|
|
|
|
$9,000 and $359,000, respectively. Income tax payments will be
higher if we generate net income before income tax expenses and
our existing net operating loss carryforwards for federal and
state income taxes of approximately $152 million and
$77 million, respectively, as of September 30, 2009,
have been fully utilized or expired; and
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|
|
|
|
Other companies in our industry may calculate adjusted EBITDA
and adjusted net income (loss) differently than we do, limiting
their usefulness as a comparative measure.
|
Management compensates for the inherent limitations associated
with using adjusted EBITDA and adjusted net income (loss)
measures through disclosure of such limitations, presentation of
our financial statements in accordance with GAAP and
reconciliation of adjusted EBITDA and adjusted net income (loss)
to the most directly comparable GAAP measure, net income (loss).
Further, management also reviews GAAP measures and evaluates
individual measures that are not included in adjusted EBITDA,
such as our level of capital expenditures, equity issuance and
interest expense, among other measures.
The table below sets forth a reconciliation of net income (loss)
to adjusted EBITDA based on our historical results:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(In thousands, unaudited)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,983
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
(1,541
|
)
|
|
$
|
1,681
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|
Interest (income) expense, net
|
|
|
(579
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)
|
|
|
352
|
|
|
|
563
|
|
|
|
323
|
|
|
|
506
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|
Income tax expense
|
|
|
8
|
|
|
|
31
|
|
|
|
12
|
|
|
|
9
|
|
|
|
359
|
|
Depreciation
|
|
|
1,388
|
|
|
|
1,284
|
|
|
|
1,641
|
|
|
|
1,188
|
|
|
|
1,317
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|
Withdrawn offering
expense
(1)
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|
|
|
|
|
|
|
|
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3,031
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|
|
|
|
|
|
|
|
|
Amortization of internal use
software
(2)
|
|
|
2,488
|
|
|
|
3,020
|
|
|
|
2,196
|
|
|
|
1,634
|
|
|
|
2,053
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|
Amortization of direct response advertising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Amortization of deferred sales commissions
|
|
|
864
|
|
|
|
1,034
|
|
|
|
991
|
|
|
|
738
|
|
|
|
853
|
|
Stock-based compensation
expense
(3)
|
|
|
2,959
|
|
|
|
4,416
|
|
|
|
3,589
|
|
|
|
2,244
|
|
|
|
4,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
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|
$
|
(855
|
)
|
|
$
|
8,333
|
|
|
$
|
8,409
|
|
|
$
|
4,595
|
|
|
$
|
11,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
Note:
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Adjustments to net loss represent after-tax adjustments at our
historical effective tax rate ranging from 0-2%.
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(1)
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As of November 2008, we had incurred approximately
$3.0 million of costs directly attributable to a planned
initial public offering. These costs were being deferred until
the completion of the offering. In the quarter ended
December 31, 2008, these costs were charged to expense as a
result of our decision in November 2008 to cease efforts to
pursue an initial public offering because of the disruption in
the equity capital markets and general adverse economic
conditions present at that time.
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(2)
|
Amortization of internal use software expense excluding
stock-based compensation includes engineering costs associated
with developing and enhancing our service offering including the
website. Associated direct development costs are capitalized and
amortized using the straight-line method over their estimated
lives. Costs in this area include compensation and related
expenses and fees for external consulting services.
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15
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(3)
|
Stock-based compensation expense is included in:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, unaudited)
|
|
|
Cost of revenue
|
|
$
|
358
|
|
|
$
|
648
|
|
|
$
|
817
|
|
|
$
|
501
|
|
|
$
|
818
|
|
Research and development
|
|
|
921
|
|
|
|
1,134
|
|
|
|
796
|
|
|
|
468
|
|
|
|
969
|
|
Sales and marketing
|
|
|
1,189
|
|
|
|
1,150
|
|
|
|
1,112
|
|
|
|
697
|
|
|
|
1,484
|
|
General and administrative
|
|
|
480
|
|
|
|
1,434
|
|
|
|
801
|
|
|
|
532
|
|
|
|
1,304
|
|
Amortization of internal use software
|
|
|
11
|
|
|
|
50
|
|
|
|
63
|
|
|
|
46
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
2,959
|
|
|
$
|
4,416
|
|
|
$
|
3,589
|
|
|
$
|
2,244
|
|
|
$
|
4,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth a reconciliation of net income (loss)
to adjusted net income (loss) on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(In thousands, unaudited)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,983
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
(1,541
|
)
|
|
$
|
1,681
|
|
Stock-based compensation expense
|
|
|
2,959
|
|
|
|
4,416
|
|
|
|
3,589
|
|
|
|
2,244
|
|
|
|
4,648
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss)
|
|
$
|
(5,024
|
)
|
|
$
|
2,612
|
|
|
$
|
3,006
|
|
|
$
|
703
|
|
|
$
|
6,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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16
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below before
making a decision to buy our common stock. The risks and
uncertainties described below are not the only ones we face. If
any of the following risks actually occurs, our business,
financial condition, results of operations or growth prospects
could be harmed. In that case, the trading price of our common
stock could decline and you might lose all or part of your
investment in our common stock. Additional risks and
uncertainties not currently known to us or that we currently
deem immaterial may also impair our business operations. You
should also refer to the other information set forth in this
prospectus, including our consolidated financial statements and
the related notes.
Risks Related to
Our Business
Our revenue
and operating results can fluctuate from period to period, which
could cause our share price to fluctuate.
Our revenue and operating results have fluctuated in the past
and may fluctuate from
period-to-period
in the future due to a variety of factors, many of which are
beyond our control. Factors relating to our business that may
contribute to these fluctuations include the following factors,
as well as other factors described elsewhere in this prospectus:
|
|
|
|
|
a decline or slowdown of the growth in the value of financial
market assets, which may reduce the value of assets we have
under management and therefore our revenue and cash flows;
|
|
|
|
negative public perception and reputation of the financial
services industry;
|
|
|
|
variations in expected enrollment rates for our Professional
Management service;
|
|
|
|
unanticipated delays of anticipated rollouts of our services;
|
|
|
|
unanticipated changes to economic terms in contracts with plan
providers or plan sponsors, including renegotiations;
|
|
|
|
downward pressure on fees we charge for our portfolio
management, investment advisory and retirement planning services;
|
|
|
|
changes in laws or regulatory policy that could impact our
ability to offer services to plan providers as a subadvisor;
|
|
|
|
failure to enter into contracts with new plan sponsors;
|
|
|
|
cancellations or non-renewal of existing contracts with plan
providers or plan sponsors;
|
|
|
|
fluctuations in quarterly revenue due to changes in fees paid by
Professional Management members based on performance incentives
in contract terms;
|
|
|
|
fluctuations in gross margins due to changes in fees paid by us
to plan providers for whom we are not acting as a subadvisor for
data retrieval, transaction processing and fee deduction
interfaces based on performance incentives in contract terms;
|
|
|
|
mix in plan sponsors that choose our Active Enrollment or
Passive Enrollment options;
|
|
|
|
changes in the number of Professional Management members who
withdraw all assets from their 401(k) plan, effectively
terminating their relationship with us, or who decide to cancel
their Professional Management program participation;
|
|
|
|
elimination or reduction of sponsor matching contributions into
members 401(k) plans, which could reduce the growth rate
of assets under management;
|
|
|
|
unanticipated changes in costs of our printed materials or mix
of materials sent to our Professional Management members and
postage costs;
|
17
|
|
|
|
|
unanticipated delays in recognizing revenue based on timing of
meeting specified milestones under contracts with customization
and consulting services; and
|
|
|
|
changes in our pricing policies or the pricing policies of our
competitors to which we have to adapt.
|
As a result of these and other factors, the results of any prior
quarterly or annual periods should not be relied upon as
indications of our future revenue or operating performance.
A substantial
portion of our revenue is based on fees earned on the value of
assets we manage. Our revenue and earnings could suffer if the
financial markets experience a downturn or a slowdown in
growth that reduces the value, or slows the growth, of our
Assets Under Management.
We derive a significant and growing portion of our revenue from
asset management fees based on the assets in the retirement
accounts we manage, which we refer to as Assets Under
Management, or AUM. We allocate these assets among the
investments available to each particular plan participant. The
investment alternatives for a particular plan are selected by
the plans fiduciary, not by us, and may include retail
mutual funds, institutional funds, exchange-traded funds,
fixed-income investments and potentially higher volatility
employer stock, if it is an investment alternative in a
particular plan. In addition, our business is highly
concentrated in the 401(k) plans of plan sponsors in the United
States and the United States subsidiaries of international
companies. The value of these investments can be affected by the
performance of the financial markets globally, currency
fluctuations, interest rate fluctuations and other factors.
Currently, our fees are generally based on AUM on a day within
the last 10 days of a quarter. As a result, a decline in
the financial markets at the end of a quarter could have an
adverse effect on our revenue, even if the financial markets had
performed well earlier in the quarter. In addition, an economic
downturn or slowdown in growth could cause plan participants or
their employers to contribute less to their 401(k) plans and
cause fewer eligible employees to participate in 401(k) plans,
which could adversely affect the amount of AUM. If plan
participants are not satisfied with the performance of their
retirement portfolios due to a decline in the financial markets
or otherwise, our cancellation rates could increase, which in
turn would cause our AUM to decline. As of October 1, 2008,
our voluntary cancellation rate over the preceding
12 months was 6.7% of our total number of members, and as
of April 30, 2009, our voluntary cancellation rate had
increased to 8.7% of our total number of members. As of
September 30, 2009, our voluntary cancellation rate over
the preceding 12 months was 7.5% of our total number of
members. A voluntary cancellation occurs when a member
proactively terminates their membership in our Professional
Management service. This differs from a rollover or involuntary
cancellation when a plan participant rolls out of their
retirement plan and is no longer eligible for our Professional
Management service. If any of these factors reduces the value of
assets we have under management, the amount of fees we would
earn for managing those assets would decline, which in turn
would harm our revenue, operating results and financial
condition. These percentages may not be indicative of future
voluntary cancellation rates, which may increase.
Our revenue
could be harmed if we experience unanticipated delays in
rollouts of our services.
We generally do not earn platform fees from a plan sponsor until
our services are available to plan participants and we do not
earn fees for our Professional Management service until we begin
to manage a participants account. If rollouts are delayed,
our receipt of revenue would be delayed. This in turn would
affect our operating results for a particular period.
18
Our revenue
could suffer if we experience unanticipated variations in new
enrollment campaigns or if we fail to enroll plan
participants.
Unanticipated variations in the number, size or timing of new
enrollment campaigns as well as ongoing annual campaigns at our
existing plan sponsors could also affect our revenue for a
particular period.
Our revenue
could be harmed if we do not grow enrollment in our Professional
Management service.
Our enrollment rate, and therefore our revenue, depend on plan
participants signing up for or, in the case of a Passive
Enrollment campaign, not declining, the Professional Management
service. If we are unable to continue to grow our enrollment,
our business may not grow as we anticipate. Increasing plan
participant enrollment in our Professional Management service
increases the AUM on which we earn fees. We may not be able to
generate expected enrollment under a particular contract, which
would negatively affect our revenue growth. For example, we have
found that if plan sponsors do not use our standard enrollment
campaign, enrollment rates tend to be lower. If fewer plan
sponsors elect Passive Enrollment for their plan participants,
which typically generates higher enrollment rates, our revenue
may not grow at anticipated rates. Even when we have rolled out
our Professional Management service at a particular plan
sponsor, some plan participants may not be eligible for our
services due to plan sponsor limitations on employees treated as
insiders for purposes of securities laws or other
characteristics of the plan participant. Certain securities
within a plan participants account may be ineligible for
management by us, such as employer stock subject to trading
restrictions, and we do not manage or charge a fee for that
portion of the account. Further, individual plan participants
whose accounts we manage may choose at any time to stop having
us manage those accounts. If large numbers of plan participants
choose to stop using or are not able to continue using our
Professional Management service, our revenue, operating results
and financial condition would suffer. The voluntary cancellation
rate by plan participants whose accounts we manage, measured as
a percentage of AUM, was approximately 15% in 2008 and has
averaged approximately 1% per month during our history and less
than 1% per month during 2009. The overall average voluntary
cancellation rate during the first year of membership in our
Professional Management service is approximately 7.3% of such
members. The overall average voluntary cancellation rate is
approximately 5.9% of such members and approximately 3.4% of
such members in the second and third year of service,
respectively. These percentages may not be indicative of future
voluntary cancellation rates, which may increase.
We plan to
extend and expand our services and may not accurately estimate
the impact of developing and introducing these services on our
business.
We plan to extend our services into new areas, including helping
investors turn their retirement assets into retirement income.
For example, we intend to work within the existing 401(k) plans
we service to help our Professional Management members manage
their defined contribution assets and maintain their retirement
goals while directing payouts from their retirement accounts. We
also recently introduced the Financial Engines Retirement
Evaluation, a personalized retirement assessment designed to let
plan participants know how close they are to reaching their
retirement income goals based on their current savings and
investments. We intend to invest significant resources to the
research, development, sales and marketing of these new
services. We have limited experience in these areas, including
the determination of income payments from defined contribution
accounts. If our assessments or forecasts with respect to the
expected duration and sufficiency of assets to support
retirement income payments to participants are inaccurate, or if
we fail to ensure that payouts are made at the times expected,
our business and reputation could suffer. We may not be able to
anticipate or manage new risks and obligations or legal,
compliance or other requirements that may arise if we offer
investment management or retirement income payout services for
accounts other than 401(k) accounts. We may not be able to
accurately estimate the impact of these future
19
services on our business or how the benefits of these services
will be perceived by our clients. In addition, the anticipated
benefits of these services on our business may not outweigh the
resources and costs associated with their development. If we do
not realize the anticipated benefits of these services, our
business would suffer.
Our revenue is
highly dependent upon a small number of plan providers with whom
we have relationships, and the renegotiation or termination of
our relationship with any of these plan providers could
significantly impact our business.
Our relationships and data connections with plan providers allow
us to effectively manage plan participant accounts and integrate
our services into plan providers current service
platforms. These relationships also provide us with an advantage
in trying to sign potential plan sponsors. If a plan provider
were to terminate our contract, reduce its volume of business or
substantially renegotiate the terms of its contract with us, our
revenue could be reduced.
Of our eight primary retirement plan provider relationships,
three are subadvisory relationships. The fees we earn through
our subadvisory relationships are based on services to more than
650 plan sponsors as of September 30, 2009; however, we do
not have a direct relationship with those plan sponsors and
therefore may be less able to influence decisions by those plan
sponsors to use or continue to use our services. We have
historically earned, and expect to continue to earn on a
combined basis, a significant portion of our revenue through
these three retirement plan providers. The renegotiation or
termination of our relationship with any of these plan providers
could significantly impact our business. In 2008, 18%, 17% and
11% of our total revenue was attributable to JPMorgan, ING and
Vanguard, respectively, the three retirement plan providers with
whom we have subadvisory relationships. Revenue attributable to
these three plan providers includes subadvisory fees they pay to
us directly, as well as revenue from certain plan sponsors that
work with these plan providers but pay us directly. JPMorgan,
Vanguard and ING directly accounted for approximately 17%, 11%
and 10%, respectively, of our total revenue in 2008.
Our contracts with plan providers generally have terms ranging
from three to five years, and have successive automatic renewal
terms of one year unless terminated in accordance with prior
notice requirements. Certain of the plan provider agreements are
in or will soon be in renewal periods. For example, our
contracts with Fidelity and Vanguard will enter renewal periods
on April 1, 2010 and December 31, 2010, respectively,
unless a notice of termination is received by February 1,
2010 with respect to Fidelity or by June 30, 2010 with
respect to Vanguard. A plan provider may also terminate its
contract with us at any time for specified breaches. In
addition, there are unpredictable factors, other than our
performance, that could cause the loss of a plan provider. If we
lose one of our plan providers with whom we have a relationship
or if one of those plan providers significantly reduces its
volume of business with us or renegotiates the economic terms of
its contract with us, our revenue, operating results and
financial condition could be harmed.
Some plan
providers with whom we have relationships also provide or may
provide competing services.
Some plan providers with whom we have relationships, such as
Fidelity, offer or may offer directly competing investment
guidance, advice and portfolio management services to plan
participants. We also face indirect competition from products
that could potentially substitute for our portfolio management,
investment advisory and retirement planning services, most
notably target-date retirement funds, which are offered by a
number of plan providers with whom we have relationships,
including J.P. Morgan, Fidelity and Vanguard.
20
Our revenue is
highly dependent upon the plan sponsors with whom we have
relationships, and the renegotiation or termination of our
relationship with any of these plan sponsors could significantly
impact our business.
A substantial portion of our revenue is generated as a result of
contracts with plan sponsors. Under these contracts, we earn
annual platform fees that are paid by the plan sponsor, plan
provider or the retirement plan itself as well as fees based on
AUM that are generally paid by plan participants. In 2008,
revenue from contracts in place on December 31, 2007
accounted for approximately 99% of our total revenue. Our
contracts with plan sponsors typically have initial terms of
three years and evergreen clauses that extend the initial term
until terminated by either party after a specified notice
period. At any time during the initial term or thereafter, a
plan sponsor can cancel a contract for fiduciary reasons or
breach of contract. A plan sponsor can generally terminate a
contract after the initial term upon 90 days notice. As of
September 30, 2009, the cancellation rate for plan sponsors
that offered our Professional Management service over the past
12 months was approximately 1% of our plan sponsors. If a
plan sponsor cancels or does not renew a contract, we would no
longer earn platform fees under that contract. In addition, we
would no longer manage any assets in that plan, and consequently
would no longer earn fees based on AUM in that plan. If a
significant number of plan sponsors were to cancel their
contracts with us or fail to renew those contracts, our revenue,
operating results and financial condition would be adversely
affected.
Our
Professional Management service makes up a significant and
growing part of our revenue base. Our business could suffer if
fees we can charge for these services decline.
We earn fees for our Professional Management service based on
the value of assets in the accounts we manage. In 2008, asset
management fees from our Professional Management service
accounted for approximately 55% of our total revenue. We believe
that these services will continue to make up a substantial and
growing portion of our revenue for the foreseeable future. There
are many investment advisory and management services and other
financial products available in the market place, which could
result in downward pressure on fees for our Professional
Management service. Government regulation, such as legislative
constraints on fees, could also limit the fees we can charge for
our Professional Management service. Performance incentives in
contract terms may reduce the fees we charge for Professional
Management service and may also reduce our gross margin. If we
are forced to lower the fees we charge for our Professional
Management service, it could harm our revenue, operating results
and financial condition.
Our failure to
increase the number of plan sponsors with whom we have
relationships could harm our business.
Our future success depends on increasing the number of plan
sponsors with whom we have relationships. If the market for our
services declines or develops more slowly than we expect, or the
number of plan sponsors that choose to provide our services to
their plan participants declines or fails to increase as we
expect, our revenue, operating results or financial condition
could suffer.
We rely on
plan providers and plan sponsors to provide us with accurate and
timely plan and plan participant data in order for us to provide
our portfolio management services, investment advice and
retirement help, and we rely on plan providers to execute
transactions in the accounts we manage.
Our ability to provide high-quality portfolio management
services, investment advice and retirement help depends on plan
sponsors and plan providers supplying us with accurate and
timely data. Errors or delays in the data we receive from plan
providers or plan sponsors, or missing data, could lead us to
make advisory or transaction errors that could harm our
reputation or lead to financial liability, or may prevent us
from providing our services to, or earning revenue from,
otherwise eligible plan participants. In addition, when we make
changes in an account we manage, we instruct the plan
21
provider to execute the transactions. If a plan provider fails
to execute transactions in an accurate and timely manner, it
could harm our reputation or lead to financial liability.
We may be
liable to our plan sponsors, plan participants or plan providers
for damages caused by system failures, errors or unsatisfactory
performance of services.
If we fail to prevent, detect or resolve errors in our services,
our business and reputation could suffer. Errors in inputs or
processing, such as plan
set-ups,
transaction instructions or plan participant data, could be
magnified across many accounts. Concentrated positions held by
many plan participants, particularly in employer stock, could
result in a large liability if a systematic input or processing
error was to cause us to make errors in transactions relating to
those positions. We may not be able to identify or resolve these
errors in a timely manner. Since inception of the Professional
Management service in 2004, we have made payments to plan
participants in an aggregate amount of approximately $360,000
due to system errors and other incidents. In addition, failure
to perform our services for Professional Management members on a
timely basis could result in liability. We may also have
liability to the plan provider where we have a subadvisory
relationship with the plan provider. After an error is
identified, resolving the error and implementing remedial
measures would likely divert the attention and resources of our
management and key technical personnel from other business
concerns. Any errors in the performance of services for a plan
sponsor or plan provider, or poor execution of these services,
could result in a plan sponsor or plan provider terminating its
agreement. Although we attempt to limit our contractual
liability for consequential damages in rendering our services,
these limitations on liability may be unenforceable in some
cases, or may be insufficient to protect us from liability for
damages. ERISA and other applicable laws require that we meet a
fiduciary obligation to plan participants. We maintain general
liability insurance coverage, including coverage for errors or
omissions; however, this coverage may not continue to be
available on reasonable terms or may be unavailable in
sufficient amounts to cover one or more large claims. An insurer
might disclaim coverage as to any future claim. A successful
assertion of one or more large claims against us that exceeds
our available insurance coverage or changes in our insurance
policies, including premium increases or the imposition of a
large deductible or co-insurance requirement, could harm our
operating results and financial condition.
If our
reputation is harmed, we could suffer losses in our business and
revenue.
Our reputation, which depends on earning and maintaining the
trust and confidence of plan providers, plan sponsors and plan
participants that are current and potential customers, is
critical to our business. Our reputation is vulnerable to many
threats that can be difficult or impossible to control, and
costly or impossible to remediate. Regulatory inquiries or
investigations, lawsuits initiated by other plan fiduciaries or
plan participants, employee misconduct, perceptions of conflicts
of interest and rumors, among other developments, could
substantially damage our reputation, even if they are baseless
or satisfactorily addressed. In addition, any perception that
the quality of our investment advice may not be the same or
better than that of other providers can also damage our
reputation. Any damage to our reputation could harm our ability
to attract and retain plan providers, plan sponsor customers and
key personnel. This damage could also cause plan participants to
stop using or enrolling in our Professional Management service,
which would adversely affect the amount of AUM on which we earn
fees.
Any failure to
ensure and protect the confidentiality of plan provider, plan
sponsor or plan participant data could lead to legal
liability, adversely affect our reputation and have a material
adverse effect on our business, financial condition or results
of operations.
Our services involve the exchange of information, including
detailed information regarding plan participants provided by
plan providers and plan sponsors, through a variety of
electronic and non-electronic means. In addition, plan
participants routinely input personal investment and financial
information, including portfolio holdings and, in some
instances, credit card data, into our systems. We
22
rely on a complex network of process and software controls to
protect the confidentiality of data provided to us or stored on
our systems. If we do not maintain adequate internal controls or
fail to implement new or improved controls, this data could be
misappropriated or confidentiality could otherwise be breached.
We could be subject to liability if we inappropriately disclose
any plan participants personal information, or if third
parties are able to penetrate our network security or otherwise
gain access to any plan participants name, address,
portfolio holdings, credit card number or other personal
information. Any such event could subject us to claims for
unauthorized credit card purchases, identity theft or other
similar fraud claims or claims for other misuses of personal
information, such as unauthorized marketing or unauthorized
access to personal information.
Many of our agreements with plan sponsors and plan providers do
not limit our potential liability for breaches of
confidentiality and consequential damages. If any person,
including any of our employees, penetrates our network security,
misappropriates or mishandles sensitive data, inadvertently or
otherwise, we could be subject to significant liability from our
plan sponsors and plan providers for breaching contractual
confidentiality provisions or privacy laws. In addition, our
agreements with plan sponsors and plan providers require us to
meet specified minimum system security and privacy standards.
Given the growing concern over privacy and identity theft, we
have been and expect to continue to be subject to increased
scrutiny by both plan providers and plan sponsors, which have
increased the frequency and thoroughness of their audits. If we
fail to meet these standards, our plan sponsors and plan
providers may seek to terminate their agreements with us.
Unauthorized disclosure of sensitive or confidential data,
whether through breach of our computer systems, systems failure
or otherwise, could damage our reputation, expose us to
litigation, cause us to lose business, harm our revenue,
operating results or financial condition and subject us to
regulatory action, which could include sanctions and fines.
Privacy
concerns could require us to modify our
operations.
As part of our business, we use plan participants personal
data. For privacy or security reasons, privacy groups,
governmental agencies and individuals may seek to restrict or
prevent our use of this data. We have incurred, and will
continue to incur, expenses to comply with privacy and security
standards and protocols imposed by law, regulation, industry
standards or contractual obligations. Increased domestic or
international regulation of data utilization and distribution
practices, including self-regulation, could require us to modify
our operations and incur significant additional expense, which
could have an adverse effect on our business, financial
condition and results of operations.
Acquisition
activity involving plan providers or plan sponsors could
adversely affect our business.
Acquisitions or similar transactions involving our plan
providers or plan sponsors could negatively affect our business
in a number of ways. After such a transaction, the plan provider
or plan sponsor might terminate, not renew or seek to
renegotiate the economic terms of their contracts with us.
Companies involved in these transactions may experience
integration difficulties that could increase the risk of
providing us inaccurate or untimely data or delay rollout of our
services. Any of our existing plan sponsors may be acquired by
an organization or a plan sponsor with no relationship with us,
effectively terminating our relationship, or be acquired by a
plan sponsor with an online services-only relationship rather
than a Professional Management relationship which might cause us
to lose business and harm our revenue, operating results or
financial condition. Plan providers could be acquired by a
company offering competing services to ours, which could
increase the risk that they terminate their relationship with
us, or be acquired by an organization with no relationship with
us which might cause us to lose that plan provider, have to
renegotiate the economic terms of their contract with us and
harm our revenue, operating results or financial condition. For
example, ING Groep N.V. recently announced a restructuring of
its business to reduce debt, including the potential sale of
certain divisions. ING Investment Advisors, L.L.C., an indirect
subsidiary of ING Groep N.V.,
23
accounted for 10% of our total revenue in 2008. We cannot
predict the impact, if any, that these corporate actions may
have on our revenue, operating results or financial condition.
Our ability to
compete, succeed and generate profits depends, in part, on our
ability to obtain accurate and timely data from third-party
vendors on commercially reasonable terms.
We currently obtain market and other financial data we use to
generate our investment advice from a number of third-party
vendors. Termination of one or more of our agreements or
exclusion from, or restricted use of a data providers
information could decrease the information available for us to
use and offer our clients and may have a material adverse effect
on our business, financial condition or results of operations.
For example, we obtain mutual fund data from Lipper, corporate
action data from Interactive Data, stock data from MSCI
Inc.s Barra unit and stock price data from FTID. We do not
currently have secondary sources or other suppliers for some of
these data items. If these data feed agreements were terminated,
backup services would take time to set up and our business and
results of operations would be harmed. We rely on these data
suppliers to provide timely and accurate information and their
failure to do so could harm our business.
In addition, some data suppliers may seek to increase licensing
fees for providing content to us. If we are unable to
renegotiate acceptable licensing arrangements with these data
suppliers or find alternative sources of equivalent content, we
may experience a reduction in our profit margins or market share.
Our portfolio
management and investment advisory operations may subject us to
liability for losses that result from a breach of our fiduciary
duties.
Our portfolio management and investment advisory operations
involve fiduciary obligations that require us to act in the best
interests of the plan participants to whom we provide advice or
for whom we manage accounts. We may face liabilities for actual
or claimed breaches of our fiduciary duties. We may not be able
to prevent plan participants, plan sponsors or the plan
providers to or through whom we provide investment advisory
services from taking legal action against us for an actual or
claimed breach of a fiduciary duty. Because we currently provide
investment advisory services on substantial assets, we could
face substantial liability to plan participants or plan sponsors
if we breach our fiduciary duties. In addition, we may face
liabilities for actual or claimed deficiencies in the quality or
outcome of our investment advisory recommendations, investment
management and other services, even in the absence of an actual
or claimed breach of fiduciary duty. While we believe that we
would have substantial and meritorious defenses against such a
claim, we cannot predict the outcome or consequences of any such
potential litigation.
Competition
could reduce our share of the portfolio management, investment
advisory and retirement planning market and hurt our financial
performance.
We operate in a highly competitive industry, with many
investment advice providers competing for business from
individual investors, financial advisors and institutional
customers. Direct competitors that offer independent portfolio
management and investment advisory services to plan participants
in the workplace include Morningstar, Inc., GuidedChoice and
ProManage LLC. Plan providers that offer directly competing
portfolio management and investment advisory services to
investors in the workplace include Fidelity and Merrill Lynch.
We currently have a relationship with Fidelity that allows us to
provide our services to plan sponsors for whom Fidelity is the
plan provider who elect to hire us. We also face indirect
competition from products that could potentially substitute for
our portfolio management services, investment advice and
retirement help, most notably target-date retirement funds.
Target-date funds are offered by multiple financial
institutions, including BlackRock (formerly Barclays Global
Investors), T. Rowe Price, Fidelity and The Vanguard Group, Inc.
These funds provide generic asset allocation based on the
investment horizon of the investor. Target-date funds, managed
accounts and balanced funds have been granted Qualified Default
Investment Alternative, or QDIA, status by the Department of
Labor. Plan providers offer or may choose to offer directly and
indirectly
24
competitive products in the future. The plan providers with whom
we do not have contractually exclusive relationships may enter
into similar relationships with our competitors. This in turn
may harm our business.
Many of our competitors have larger customer bases and
significantly greater resources than we do. This may allow our
competitors to respond more quickly to new technologies and
changes in demand for services, to devote greater resources
developing and promoting their services and to make more
attractive offers to potential plan providers, plan sponsors and
plan participants. Industry consolidation may also lead to more
intense competition. Increased competition could result in price
reductions, reduced gross margins or loss of market share, any
of which could hurt our business.
Our future
success depends on our ability to recruit and retain qualified
employees, including our executive officers.
Our ability to provide portfolio management services, investment
advice and retirement help and maintain and develop
relationships with plan participants, plan providers and plan
sponsors depends largely on our ability to attract, train,
motivate and retain highly skilled professionals, particularly
professionals with backgrounds in sales, technology and
financial and investment services. We believe that success in
our business will continue to be based upon the strength of our
intellectual capital. For example, due to the complexity of our
services and the intellectual capital invested in our investment
methodology and technology, the loss of personnel integral to
our investment research, product development and engineering
efforts would harm our ability to maintain and grow our
business. Consequently, we must hire and retain employees with
the technical expertise and industry knowledge necessary to
continue to develop our services and effectively manage our
growing sales and marketing organization to ensure the growth of
our operations. We believe there is significant competition for
professionals with the skills necessary to perform the services
we offer. We experience competition for analysts and other
employees from financial institutions and financial services
organizations such as hedge funds and investment management
companies that generally have greater resources than we do and
therefore may be able to offer higher compensation packages.
Competition for these employees is intense, and we may not be
able to retain our existing employees or be able to recruit and
retain other highly qualified personnel in the future. If we
cannot hire and retain qualified personnel, our ability to
continue to expand our business would be impaired and our
revenue could decline.
If our
intellectual property and technology are not adequately
protected to prevent use or appropriation by our competitors,
our business and competitive position would
suffer.
Our future success and competitive position depend in part on
our ability to protect our proprietary technology and
intellectual property. We rely and expect to continue to rely on
a combination of trademark, copyright, patent and trade secret
protection laws to protect our proprietary technology and
intellectual property. We also require our employees,
consultants, vendors, plan sponsors and plan providers to enter
into confidentiality agreements with us. We have nine issued
U.S. patents, three of which have been issued on our user
interface, four of which relate to outcomes-based investing,
including our financial advisory system, our pricing module and
load-aware optimization, and two of which have been issued on
advice palatability. We also have seven pending U.S. patent
applications. In addition, we have issued patents and pending
applications in foreign jurisdictions. One or more of our issued
patents or pending patent applications may be deemed to be
directed to methods of doing or conducting business, and may
therefore be categorized as so-called business
method patents. The general validity of software patents
and business method patents has been challenged in a
number of jurisdictions, including the United States. The United
States Supreme Court is currently considering a case that may
impact the scope of patent eligible subject matter. Our patents
may become less valuable if software or business methods are
found to be a non-patentable subject matter or if additional
requirements are imposed that our patents do not meet.
25
The steps we have taken may be inadequate to prevent the
misappropriation of our proprietary technology. Our patent and
trademark applications may not lead to issued patents and
registered trademarks. There can be no assurance that others
will not develop or patent similar or superior technologies,
products or services, or that our patents, trademarks and other
intellectual property will not be challenged, invalidated or
circumvented by others. The legal standards relating to the
validity, enforceability and scope of protection of intellectual
property rights are uncertain and still evolving. Unauthorized
copying or other misappropriation of our proprietary
technologies could enable third parties to benefit from our
technologies without paying us for doing so, which could harm
our business. Policing unauthorized use of proprietary
technology is difficult and expensive and our monitoring and
policing activities may not be sufficient to identify any
misappropriation and protect our proprietary technology. In
addition, third parties may knowingly or unknowingly infringe
our patents, trademarks and other intellectual property rights,
and litigation may be necessary to protect and enforce our
intellectual property rights. If litigation is necessary to
protect and enforce our intellectual property rights, any such
litigation could be very costly and could divert management
attention and resources.
We also expect that the more successful we are, the more likely
it becomes that competitors will try to develop products that
are similar to ours, which may infringe on our proprietary
rights. If we are unable to protect our proprietary rights or if
third parties independently develop or gain access to our or
similar technologies, our business, revenue, reputation and
competitive position could be harmed.
Third parties
may assert intellectual property infringement claims against us,
or our services may infringe the intellectual property rights of
third parties, which may subject us to legal liability and
harm our reputation.
Assertion of intellectual property infringement claims against
us, plan providers or plan sponsors could result in litigation.
We might not prevail in any such litigation or be able to obtain
a license for the use of any infringed intellectual property
from a third party on commercially reasonable terms, or at all.
Even if obtained, we may be unable to protect such licenses from
infringement or misuse, or prevent infringement claims against
us in connection with our licensing efforts. We expect that the
risk of infringement claims against us will increase if more of
our competitors are able to obtain patents for software products
and business processes, and if we hire employees who possess
third party proprietary information. Any such claims, regardless
of their merit or ultimate outcome, could result in substantial
cost to us, divert managements attention and our resources
away from our operations and otherwise harm our reputation. Our
process for controlling employees use of third party
proprietary information may not be sufficient to prevent
assertions of intellectual property infringement claims against
us.
Any inability
to manage our growth could disrupt our business and harm our
operating results.
We expect our growth to place significant demands on our
management and other resources. Our success will depend in part
upon the ability of our senior management to manage growth
effectively. Expansion creates new and increased management and
training responsibilities for our employees. In addition,
continued growth increases the challenges involved in:
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recruiting, training and retaining sufficient skilled technical,
marketing, sales and management personnel;
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preserving our culture, values and entrepreneurial environment;
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successfully expanding the range of services offered to our plan
sponsors and plan participants;
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developing and improving our internal administrative
infrastructure, particularly our financial, operational,
compliance, recordkeeping, communications and other internal
systems; and
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maintaining high levels of satisfaction with our services among
plan sponsors and plan participants.
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Our ability to
raise capital in the future may be limited and our failure to
raise capital when needed could prevent us from executing our
growth strategy.
In the absence of this offering, we believe that our existing
cash and cash equivalents will be sufficient to fund our planned
capital expenditures and other anticipated cash needs for at
least the next 12 months. If our capital resources are
insufficient to satisfy our liquidity requirements, we may seek
to sell additional equity or debt securities or obtain debt
financing. We have not made arrangements to obtain additional
financing and there is no assurance that financing, if required,
will be available in amounts or on terms acceptable to us, if at
all.
We will be
subject to additional regulatory compliance requirements,
including section 404 of the Sarbanes-Oxley Act of 2002, as
a result of becoming a public company and our management has
limited experience managing a public company.
We have never operated as a public company and will incur
significant legal, accounting and other expenses that we did not
incur as a private company. The individuals who constitute our
management team have limited experience managing a publicly
traded company, and limited experience complying with the
increasingly complex and changing laws pertaining to public
companies. Our management team and other personnel will need to
devote a substantial amount of time to new compliance
initiatives and we may not successfully or efficiently manage
our transition into a public company. We expect rules and
regulations such as the Sarbanes-Oxley Act of 2002 to increase
our legal and finance compliance costs and to make some
activities more time-consuming and costly. We will need to hire
a number of additional employees with public accounting and
disclosure experience in order to meet our ongoing obligations
as a public company. For example, Section 404 of the
Sarbanes-Oxley Act of 2002 requires that our management report
on, and our independent auditors to attest to, the effectiveness
of our internal control structure and procedures for financial
reporting in our annual report on
Form 10-K
for the fiscal year ending December 31, 2011.
Section 404 compliance may divert internal resources and
will take a significant amount of time and effort to complete.
We may not be able to successfully complete the procedures and
certification and attestation requirements of Section 404
by the time we will be required to do so. If we fail to do so,
or if in the future our chief executive officer, chief financial
officer or independent registered public accounting firm
determines that our internal controls over financial reporting
are not effective as defined under Section 404, we could be
subject to sanctions or investigations by The NASDAQ Stock
Market, the Securities and Exchange Commission, or the SEC, or
other regulatory authorities. Furthermore, investor perceptions
of our company may suffer, and this could cause a decline in the
market price of our stock. Irrespective of compliance with
Section 404, any failure of our internal controls could
have a material adverse effect on our stated results of
operations and harm our reputation. If we are unable to
implement these changes effectively or efficiently, it could
harm our operations, financial reporting or financial results
and could result in an adverse opinion on internal controls from
our independent auditors.
Our insiders
who are significant stockholders may control the election of our
board and may have interests that conflict with those of other
stockholders.
Our directors and executive officers, together with members of
their immediate families, beneficially owned, in the aggregate,
approximately 47% of our outstanding capital stock as of
September 30, 2009. As a result, acting together, this
group has the ability to exercise significant control over most
matters requiring our stockholders approval, including the
election and removal of directors and significant corporate
transactions.
27
We have an
accumulated deficit and have incurred net losses in the past. We
may incur net losses in the future.
As of September 30, 2009, we had an accumulated deficit of
approximately $161.4 million. We have incurred net losses
in each year through 2008. We may incur net losses in the future.
We could face
liability for certain information we disclose, including
information based on data we obtain from other
parties.
We may be subject to claims for securities law violations,
negligence, or other claims relating to the information we
disclose, such as the mutual fund assessments we call
scorecards. Individuals who use our services may
take legal action against us if they rely on information that
contains an error, or a company may claim that we have made a
defamatory statement about it or its employees. We could also be
subject to claims based upon the content that is accessible from
our website through links to other websites. We rely on a
variety of outside parties as the original sources for the
information we use in our published data. These sources include
securities exchanges, fund companies and transfer agents.
Accordingly, in addition to possible exposure for publishing
incorrect information that results directly from our own errors,
we could face liability based on inaccurate data provided to us
by others. Defending claims based on the information we publish
could be expensive and time-consuming, and could adversely
impact our business, operating results and financial condition.
If our
operations are interrupted as a result of service downtime or
interruptions, our business and reputation could
suffer.
The success of our business depends upon our ability to obtain
and deliver time-sensitive,
up-to-date
data and information. Our operations and those of our plan
providers and plan sponsors are vulnerable to interruption by
technical breakdowns, computer hardware and software
malfunctions, software viruses, infrastructure failures, fire,
earthquake, power loss, telecommunications failure, terrorist
attacks, wars, Internet failures and other events beyond our
control. Any disruption in our services or operations could harm
our ability to perform our services effectively which in turn
could result in a reduction in revenue or a claim for
substantial damages against us, regardless of whether we are
responsible for that failure. We rely on our computer equipment,
database storage facilities and other office equipment, which
are located primarily in the seismically active
San Francisco Bay Area. We maintain off-site
back-up
facilities in Phoenix, Arizona for our database and network
equipment, but these facilities could be subject to the same
interruptions that may affect our headquarters. If we suffer a
significant database or network facility outage, our business
could experience disruption until we fully implement our
back-up
systems. We also depend on certain significant vendors for
facility storage and related maintenance of our main technology
equipment and data at these locations. Any failure by these
vendors to perform those services, any temporary or permanent
loss of our equipment or systems or any disruptions to basic
infrastructure like power and telecommunications could impede
our ability to provide services to our plan participants, harm
our reputation, cause plan participants to stop using our
investment advisory or Professional Management services, reduce
our revenue and harm our business. Our agreements with our plan
providers or plan sponsors also require us to meet specified
minimum system security and privacy standards. If we fail to
meet these standards, our plan sponsors and plan providers may
seek to terminate their agreements with us. This in turn could
damage our reputation and harm our market position and business.
28
Risks Related to
Our Industry
Changes in
laws applicable to our portfolio management, investment advisory
and retirement planning services may adversely affect our
business.
We may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, Department of
Labor or other U.S. regulatory authorities or
self-regulatory organizations that supervise the financial
markets and retirement industry. In addition, we may be
adversely affected by changes in the interpretation of existing
laws and rules by these governmental authorities and
self-regulatory organizations. It is impossible to determine the
extent of the impact of any new laws, regulations or initiatives
that may be proposed, or whether any of the proposals will
become law. It is difficult to predict the future impact of the
broad and expanding legislative and regulatory requirements
affecting our business. For example, legislation or regulation
regarding fees may affect our business. Future legislation or
regulation could change or eliminate certain existing
restrictions relating to conflicts of interest, which might
lower the relative value of our independence. Changes to laws or
regulations could increase our potential liability for offering
portfolio management services, investment advice and retirement
help, affect our ability to offer our Passive Enrollment option
or invalidate pre-dispute arbitration clauses in our agreements,
leading to increased costs to litigate any claims against us.
Changes to laws or regulations could also increase our legal
compliance costs, divert internal resources and make some
activities more time-consuming and costly. The laws, rules and
regulations applicable to our business may change in the future
and we may not be able to comply with any such changes. If we
fail to comply with any applicable law, rule or regulation, we
could be fined, sanctioned or barred from providing investment
advisory services in the future, which could materially harm our
business and reputation.
We are subject
to complex regulation and any compliance failures or regulatory
action could adversely affect our business.
The financial services industry is subject to extensive
regulation at the federal and state levels. It is very difficult
to predict the future impact of the legislative and regulatory
requirements affecting our business. The securities laws and
other laws that govern our activities as a registered investment
advisor are complex and subject to rapid change. The activities
of our investment advisory and management operations are
primarily subject to provisions of the Investment Advisers Act
of 1940, referred to as the Investment Advisers Act, and the
Employee Retirement Income Security Act of 1974, as amended,
referred to as ERISA, as well as certain state laws. We are a
fiduciary under ERISA. Our investment advisory services are also
subject to state laws including anti-fraud laws and regulations.
The Investment Advisers Act addresses, among other things,
fiduciary duties, recordkeeping and reporting requirements,
disclosure requirements and also includes general
anti-fraud
prohibitions. If we fail to comply with any applicable law, rule
or regulation, we could be fined, sanctioned or barred from
providing investment advisory services in the future, which
could materially harm our business and reputation. Any claim of
noncompliance, regardless of merit or ultimate outcome, could
subject us to investigation by the SEC or other regulatory
authorities. This in turn could result in substantial cost to us
and divert managements attention and other resources away
from our operations. Furthermore, investor perceptions of us may
suffer and this could cause a decline in the market price of our
common stock. Our compliance processes may not be sufficient to
prevent assertions that we failed to comply with any applicable
law, rule or regulation.
We face
additional scrutiny when we act as subadvisor and any failure to
comply with regulations or meet expectations could harm our
business.
Some of the plan providers to whom we are subadvisors are
broker-dealers registered under the Securities Exchange Act of
1934, referred to as the Exchange Act, and are subject to the
rules of the Financial Industry Regulatory Authority, or FINRA.
When we act as a subadvisor, we may be subject to the oversight
by regulators of another advisor. We may be affected by any
regulatory examination of that plan provider.
29
In addition, our subadvisory arrangements are structured to
follow Advisory Opinion
2001-09A,
a
Department of Labor opinion provided to SunAmerica Retirement
Markets. Although an advisory opinion provides guidance about
the Department of Labors interpretation of ERISA, it is
directly applicable only to the entity to whom it is issued.
SunAmerica Retirement Markets is an entity unrelated to us or
the plan providers to whom we act as subadvisor. We could be
adversely affected if the Department of Labor increases
examination of these subadvisory arrangements or changes the
interpretive positions described in the Advisory Opinion. We
could be adversely affected if ERISA is amended in a way that
overturns or materially changes the Department of Labors
position in Advisory Opinion
2001-09A,
such as the imposition of additional requirements relating to
conflicts of interest on the plan providers to whom we act as a
subadvisor. Future legislation or regulation could impose
additional requirements relating to conflicts of interest on
some of the plan providers to whom we act as a subadvisor. These
plan providers may not be able to comply with these
requirements, and we may therefore not be able to continue to
provide our services on a subadvised basis. In such event, we
could incur additional costs to transition our services for
affected plan providers and their plan sponsors to another
structure. Legislation has been introduced in Congress and there
have been several Congressional hearings addressing these
issues, although final versions of these bills have not been
adopted and signed into law, and the final scope and wording of
the legislation, or the implementing rules and regulations, are
not yet known.
If government
regulation of the Internet or other areas of our business
changes or if consumer attitudes toward use of the Internet
change, we may need to change the manner in which we conduct our
business or incur greater operating expenses.
The adoption, modification or interpretation of laws or
regulations relating to the Internet or other areas of our
business could adversely affect the manner in which we conduct
our business or the overall popularity or growth in use of the
Internet. Such laws and regulations may cover sales and other
procedures, tariffs, user privacy, data protection, pricing,
content, copyrights, distribution, electronic contracts,
consumer protection, broadband residential Internet access and
the characteristics and quality of services. It is not clear how
existing laws governing issues such as property ownership, sales
and other taxes, libel and personal privacy apply to the
Internet. If we are required to comply with new regulations or
legislation or new interpretations of existing regulations or
legislation, this compliance could cause us to incur additional
expenses, make it more difficult to renew subscriptions
automatically, make it more difficult to attract new subscribers
or otherwise alter our business model. Any of these outcomes
could have a material adverse effect on our business, financial
condition or results of operations.
Our business
will suffer if we do not keep up with rapid technological
change, evolving industry standards or changing requirements of
plan sponsors and plan participants.
We expect technological developments to continue at a rapid pace
in our industry. Our success will depend, in part, on our
ability to:
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continue to develop our technology expertise;
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recruit and retain skilled investment and technology
professionals;
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enhance our current services;
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develop new services that meet changing plan sponsor and plan
participant needs;
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advertise and market our services; and
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influence and respond to emerging industry standards and other
technological changes.
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In addition, we must continue to meet changing plan provider and
plan sponsor expectations and requirements, including addressing
plan complexities and meeting plan provider and plan sponsor
demands for specific features and delivery dates. We must
accomplish all of these tasks in a timely
30
and cost-effective manner and our failure to do so could harm
our business, including materially reducing our revenue and
operating results. Further, a key aspect of our growth strategy
is to expand our investment research capabilities and introduce
new services. In both the year ended December 31, 2008 and
the nine months ended September 30, 2009, our research and
development expense represented 19% of our total revenue. We
expect that our research and development expense will continue
to represent a meaningful percentage of our revenue in the
future. A viable market for our new service offerings may not
exist or develop, and our offerings may not be well received by
potential plan sponsor customers or individual plan participants
or investors.
Risks Related to
this Offering and our Common Stock
Our share
price may be volatile and you may be unable to sell your shares
at or above the offering price.
Prior to this offering, there has not been a public market for
our common stock. We cannot predict the extent to which a
trading market will develop or how liquid that market might
become. The initial public offering price for our shares will be
determined by negotiations between us and representatives of the
underwriters and may not be indicative of prices that will
prevail in the trading market. The market price of shares of our
common stock could be subject to wide fluctuations in response
to many risk factors listed in this section and others beyond
our control, including:
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actual or anticipated fluctuations in our financial condition
and operating results;
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changes in the economic performance or market valuations of
other companies engaged in providing portfolio management
services, investment advice and retirement help;
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loss of a significant amount of existing business;
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actual or anticipated changes in our growth rate relative to our
competitors;
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actual or anticipated fluctuations in our competitors
operating results or changes in their growth rates;
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issuance of new or updated research or reports by securities
analysts;
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our announcement of actual results for a fiscal period that are
higher or lower than projected results or our announcement of
revenue or earnings guidance that is higher or lower than
expected;
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regulatory developments in our target markets affecting us, our
plan sponsors or our competitors;
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fluctuations in the valuation of companies perceived by
investors to be comparable to us;
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share price and volume fluctuations attributable to inconsistent
trading volume levels of our shares;
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sales or expected sales of additional common stock;
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terrorist attacks or natural disasters or other such events
impacting countries where we or our plan sponsors have
operations; and
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general economic and market conditions.
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Furthermore, the stock markets have experienced extreme price
and volume fluctuations that have affected and continue to
affect the market prices of equity securities of many companies.
These fluctuations often have been unrelated or disproportionate
to the operating performance of those companies. These broad
market and industry fluctuations, as well as general economic,
political and market conditions such as recessions, interest
rate changes or international currency fluctuations, may cause
the market price of shares of our common stock to decline. If
the market price of shares of our common stock after this
offering does not exceed the initial public offering price, you
may not
31
realize any return on your investment in us and may lose some or
all of your investment. In the past, companies that have
experienced volatility in the market price of their stock have
been subject to securities class action litigation. We may be
the target of this type of litigation in the future. Securities
litigation against us could result in substantial costs and
divert our managements attention from other business
concerns, which could seriously harm our business.
If securities
or industry analysts do not publish research or reports about
our business, or if they change their recommendations regarding
our stock adversely, our stock price and trading volume could
decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us or our business. If one or more of the analysts
who cover us downgrade our stock, our stock price would likely
decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could
cause our stock price or trading volume to decline.
Substantial
future sales of our common stock in the public market could
cause our stock price to fall.
Additional sales of our common stock in the public market after
this offering, or the perception that these sales could occur,
could cause the market price of our common stock to decline.
Upon completion of this offering, we will
have shares
of common stock outstanding. All shares sold in this offering
will be freely transferable without restriction or additional
registration under the Securities Act of 1933. The remaining
32,784,581 shares of common stock outstanding after this
offering will be available for sale as follows:
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Number of Shares
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Date of Availability for
Sale
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163 days after the date of this prospectus, subject to
extension as described below, due to the release of the lock-up
agreements these stockholders have with the underwriters.
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At some point after 163 days after the date of this
prospectus, subject to extension as described below, and subject
to vesting requirements and the requirements of Rule 144
(subject, in the case of affiliates, to volume limitations) or
Rule 701.
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Our directors, executive officers and substantially all of our
stockholders have agreed, with limited exceptions, that they
will not sell any shares of common stock owned by them without
the prior written consent of Goldman, Sachs & Co., on
behalf of the underwriters, for a period of 163 days from
the date of this prospectus; provided, however, that if
(1) during the last 17 days of the initial
lock-up
period, we release earnings results or announce material news or
a material event or (2) prior to the expiration of the
initial
lock-up
period, we announce that we will release earnings results during
the
15-day
period following the last day of the initial
lock-up
period, then in each case the
lock-up
period will be automatically extended until the expiration of
the
17-day
period beginning on the date of release of the earnings results
or the announcement of the material news or material event, as
applicable, unless Goldman, Sachs & Co. waives, in
writing, such extension. As a result, the maximum possible
lock-up
period is 180 days beginning on the date of this
prospectus. At any time and without public notice, Goldman,
Sachs & Co. may in its sole discretion release some or
all of the securities from these
lock-up
agreements. As resale restrictions end, the market price of our
common stock could decline if the holders of those shares sell
them or are perceived by the market as intending to sell them.
In addition, after this offering, the holders of approximately
23,596,952 shares of common stock will be entitled to
rights to cause us to register the sale of those shares under
the Securities Act. All of these shares are subject to the
163-day
lock-up.
Registration of these shares
32
under the Securities Act would result in these shares becoming
freely tradable without restriction under the Securities Act
immediately upon the effectiveness of the registration.
We intend to file a registration statement under the Securities
Act
covering shares
of common stock reserved for issuance under our stock plans.
This registration statement is expected to be filed soon after
the date of this prospectus and will automatically become
effective upon filing. Accordingly, shares registered under this
registration statement will be available for sale in the open
market unless those shares are subject to vesting restrictions
with us or the contractual restrictions described above.
As a new
investor, you will experience immediate and substantial
dilution.
Purchasers in this offering will immediately experience
substantial dilution in net tangible book value. Because our
common stock has been sold in the past at prices substantially
lower than the initial public offering price that you will pay,
you will suffer immediate dilution of
$ per share in net tangible book
value, based on an assumed initial offering price of
$ per share of common stock. The
exercise of outstanding options, may result in further dilution.
In addition, we may raise additional capital through public or
private equity or debt offerings, subject to market conditions.
To the extent that additional capital is raised through the sale
of equity or convertible debt securities, the issuance could
result in further dilution to our stockholders.
Management may
apply our net proceeds from this offering to uses that do not
increase our market value or improve our operating
results.
We intend to use our net proceeds from this offering for general
corporate purposes, including as yet undetermined amounts
related to working capital and capital expenditures, as well as
to repay our term loan. Our management will have considerable
discretion in applying our net proceeds and you will not have
the opportunity, as part of your investment decision, to assess
whether we are using our net proceeds appropriately. Until the
net proceeds we receive are used, they may be placed in
investments that do not produce income or that lose value. We
may use our net proceeds for purposes that do not result in any
increase in our results of operations, which could cause the
price of our common stock to decline.
Delaware law
and our corporate charter and bylaws will contain anti-takeover
provisions that could delay or discourage takeover attempts that
stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws, that
we intend to adopt before the completion of this offering, may
have the effect of delaying or preventing a change of control or
changes in our management. These provisions include the
following:
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the right of the board of directors to elect a director to fill
a vacancy created by the expansion of the board of directors;
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the classification of our board of directors so that only a
portion of our directors are elected each year, with each
director serving a three-year term;
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the requirement for advance notice for nominations for election
to the board of directors or for proposing matters that can be
acted upon at a stockholders meeting;
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the ability of the board of directors to alter our bylaws
without obtaining stockholder approval;
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the ability of the board of directors to issue, without
stockholder approval, up to 10,000,000 shares of preferred
stock with rights set by the board of directors, which rights
could be senior to those of common stock;
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the required approval of holders of at least two-thirds of the
shares entitled to vote at an election of directors to adopt,
amend or repeal our bylaws or amend or repeal the provisions of
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33
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our certificate of incorporation regarding the election and
removal of directors and the ability of stockholders to take
action by written consent; and
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the elimination of the right of stockholders to call a special
meeting of stockholders and to take action by written consent.
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In addition, because we will be incorporated in Delaware before
the completion of this offering, we will be governed by the
provisions of Section 203 of the Delaware General
Corporation Law. These provisions may prohibit or restrict large
stockholders, in particular, those owning 15% or more of our
outstanding voting stock, from merging or combining with us.
These provisions in our certificate of incorporation and bylaws
and under Delaware law could discourage potential takeover
attempts and could reduce the price that investors might be
willing to pay for shares of our common stock in the future and
result in our market price being lower than it would without
these provisions.
We do not
currently intend to pay dividends on our common stock and,
consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our
common stock.
We have never declared or paid any cash dividends on our common
stock and do not currently intend to do so for the foreseeable
future. We currently intend to invest our future earnings, if
any, to fund our growth. In addition, the provisions of our term
loan prohibit us from paying cash dividends. Therefore, you are
not likely to receive any dividends on your common stock for the
foreseeable future and the success of an investment in shares of
our common stock will depend upon any future appreciation in
their value. There is no guarantee that shares of our common
stock will appreciate in value or even maintain the price at
which our stockholders have purchased their shares.
34
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
risks and uncertainties. The forward-looking statements are
contained principally in the sections entitled Prospectus
Summary, Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Business. In some cases, you
can identify forward-looking statements by terms such as
may, might, will,
objective, intend, should,
could, can, would,
expect, believe, design,
estimate, predict,
potential, plan, or the negative of
these terms, and similar expressions intended to identify
forward-looking statements. These statements reflect our current
views with respect to future events and are based on assumptions
and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements. Forward-looking statements include,
but are not limited to, statements about:
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anticipated trends and challenges in our business and the
markets in which we operate;
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the capabilities, benefits and effectiveness of our services;
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our plans for future services and enhancements of existing
services;
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our expectations regarding our expenses and revenue;
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our anticipated cash needs and our estimates regarding our
capital requirements and our needs for additional financing;
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our anticipated growth strategies;
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our ability to retain and attract customers;
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our regulatory environment;
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our legal proceedings;
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intellectual property;
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our expectations regarding competition;
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use of proceeds; and
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sources of new revenue.
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These statements involve known and unknown risks, uncertainties
and other factors which may cause our actual results,
performance or achievements to be materially different from any
future results, performances or achievements expressed or
implied by the forward-looking statements.
We discuss many of these risks in this prospectus in greater
detail under the heading Risk Factors. Also, these
forward-looking statements represent our estimates and
assumptions only as of the date of this prospectus. Unless
required by U.S. federal securities laws, we do not intend
to update any of these forward-looking statements to reflect
circumstances or events that occur after the statement is made.
You should read this prospectus and the documents that we
reference in this prospectus and have filed as exhibits to the
registration statement, of which this prospectus is a part,
completely and with the understanding that our actual future
results may be materially different from what we expect. We
qualify all of our forward-looking statements by these
cautionary statements.
35
USE OF
PROCEEDS
We estimate that we will receive net proceeds from this offering
of approximately $ million,
based on an assumed initial public offering price of
$ per share, the mid-point of the
range set forth on the cover of this prospectus, after deducting
the estimated underwriting discounts and commissions and
estimated offering expenses payable by us. A $1.00 increase
(decrease) in the assumed initial public offering price of
$ per share would increase
(decrease) the net proceeds to us from this offering by
approximately $ million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
The principal purposes for this offering are to increase our
working capital, create a public market for our common stock,
facilitate our access to the public capital markets and increase
our visibility in our markets.
We currently intend to use our proceeds from this offering to
prepay the outstanding indebtedness under our term loan. As of
September 30, 2009, the outstanding balance under this term
loan was $8.9 million. The interest rate currently
applicable to this term loan is equal to 1.50% above prime rate,
with a minimum prime rate of 4.00% per annum, resulting in a
minimum interest rate of 5.50% per annum. The indebtedness
outstanding under this term loan is scheduled to mature on
May 1, 2012.
We expect to use the remainder of our proceeds from this
offering for general corporate purposes, including working
capital and capital expenditures.
As of the date of this prospectus, however, we have not
determined all of the anticipated uses for the proceeds of this
offering or the amounts that we will actually spend on the uses
set forth above. The amount and timing of actual expenditures
may vary significantly depending upon a number of factors,
including the amount of cash generated from our operations,
competitive and technological developments and the rate of
growth, if any, of our business. Accordingly, our management
will have significant flexibility in applying the net proceeds
of this offering. Pending use of the net proceeds as described
above, we intend to invest the net proceeds of this offering in
short-term, interest-bearing, investment-grade securities.
We will not receive any proceeds from the sale of shares of
common stock by the selling stockholders.
DIVIDEND
POLICY
We have never declared or paid any cash dividends on our capital
stock. We expect to retain all of our earnings to finance the
expansion and development of our business and we do not
currently intend to pay any cash dividends on our capital stock
in the foreseeable future. We expect to retain future earnings,
if any, to fund the development and growth of our business. Our
board of directors will determine future dividends, if any. Our
term loan currently prohibits us from paying dividends. See the
section entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources.
36
CAPITALIZATION
The following table describes our capitalization as of
September 30, 2009:
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on an actual basis;
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on a pro forma basis to give effect to the issuance of
22,349,972 shares of common stock upon the conversion of
all of our outstanding shares of preferred stock and the filing
of our amended and restated certificate of incorporation upon
the completion of this offering; and
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on a pro forma as adjusted basis to give effect to the sale
of shares
of common stock in this offering at an assumed initial public
offering price of $ per share, the
mid-point of the price range set forth on the cover of this
prospectus, after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us
and the repayment of $8.9 million of indebtedness
outstanding under our term loan.
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You should read this table together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the related notes appearing elsewhere in this prospectus.
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As of September 30, 2009
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Pro Forma
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Actual
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Pro Forma
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As Adjusted
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(In thousands, except share data, unaudited)
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Cash and cash equivalents
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$
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15,798
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$
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15,798
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$
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Bank borrowings and note payable
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$
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8,889
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$
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8,889
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$
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Stockholders equity:
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Convertible preferred stock, $0.0001 par value per share;
24,100,000 shares authorized, 22,349,972 shares issued
and outstanding, actual; 5,000,000 shares authorized; no
shares issued or outstanding, pro forma; no shares issued or
outstanding, pro forma as adjusted
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2
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Common stock, $0.0001 par value per share;
47,650,000 shares authorized, 10,434,609 shares issued
and outstanding, actual; 32,784,581 shares issued and
outstanding, pro forma; 500,000,000 shares
authorized, shares
issued and outstanding, pro forma as adjusted
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1
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3
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Additional paid-in capital
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179,224
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179,224
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Deferred compensation
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(439
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)
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(439
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Accumulated deficit
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(161,370
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)
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(161,370
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Total stockholders equity
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17,418
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17,418
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Total capitalization
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$
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26,307
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$
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26,307
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$
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The actual, pro forma and pro forma as adjusted information set
forth in the table above:
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excludes 10,560,935 shares of common stock issuable upon
the exercise of options outstanding as of September 30,
2009, at a weighted average exercise price of $5.76 per share;
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excludes 108,290 shares of common stock issuable upon the
exercise of a warrant outstanding as of September 30, 2009,
at an exercise price of $9.23 per share;
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excludes 2,000,000 shares of common stock reserved for
future issuance under our 2009 Stock Incentive Plan following
the date of this offering; and
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37
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assumes no exercise of the option to purchase additional shares
granted to the underwriters.
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As of September 30, 2009, 1,167,331 shares remained
available for future issuance under our 1998 Stock Plan. Upon
the completion of this offering, no shares of our common stock
will remain available for future issuance under our 1998 Stock
Plan. Shares originally reserved for issuance under our 1998
Stock Plan, but which are not subject to outstanding options on
the effective date of our 2009 Stock Incentive Plan, and shares
subject to outstanding options under our 1998 Stock Plan on the
effective date of our 2009 Stock Incentive Plan that are
subsequently forfeited or terminated for any reason before being
exercised, up to a number of additional shares not to exceed
2,000,000, will become available for awards under our 2009 Stock
Incentive Plan.
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) the net proceeds to us from this
offering by approximately
$ million, or approximately
$ million if the underwriters
exercise their option to purchase additional shares of common
stock in full, assuming the number of shares offered by us, as
set forth on the cover page of this prospectus, remains the same
and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
38
DILUTION
Our pro forma net tangible book value as of September 30,
2009 was $5.5 million, or $0.17 per share of common stock.
Pro forma net tangible book value per share represents the
amount of our total tangible assets less total liabilities,
divided by the pro forma number of shares of common stock
outstanding, assuming the issuance of 22,349,972 shares of
common stock upon the conversion of all of our outstanding
shares of series A preferred stock, series B preferred
stock, series C preferred stock, series D preferred
stock, series E preferred stock and series F preferred
stock. Net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of
shares of common stock in this offering and the pro forma net
tangible book value per share of common stock immediately after
completion of this offering on a pro forma as adjusted basis.
After giving effect to the sale of
the shares
of common stock by us at an assumed initial public offering
price of $ per share, which is the
mid-point of the price range set forth on the cover of this
prospectus, and the application of our estimated net proceeds
from the offering, and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us, our net tangible book value as of
September 30, 2009 would have been
$ , or
$ per share of common stock. This
represents an immediate increase in net tangible book value of
$ per share of common stock to
existing common stockholders and an immediate dilution in net
tangible book value of $ per share
to new investors purchasing shares of common stock in this
offering. The following table illustrates this per share
dilution:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
|
|
Pro forma net tangible book value per share before this offering
|
|
$
|
0.17
|
|
|
|
|
|
Increase in pro forma net tangible book value per share
attributable to new investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share after this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share to new
investors
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) the net proceeds to us from this
offering by approximately
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
The following table summarizes as of September 30, 2009, on
the pro forma basis described above, the number of shares of
common stock purchased from us, the total consideration paid and
the average price per share paid by existing and new investors
purchasing shares of common stock in this offering, before
deducting the estimated underwriting discounts and commissions
and estimated offering expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per Share
|
|
|
Existing stockholders
|
|
|
32,784,581
|
|
|
|
|
%
|
|
$
|
165,101,314
|
|
|
|
|
%
|
|
$
|
5.04
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100.0
|
%
|
|
$
|
|
|
|
|
100.0
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above:
|
|
|
|
|
excludes 10,560,935 shares of common stock issuable upon
the exercise of options outstanding as of September 30,
2009, at a weighted average exercise price of $5.76 per share;
|
|
|
|
excludes 108,290 shares of common stock issuable upon the
exercise of a warrant outstanding as of September 30, 2009,
at an exercise price of $9.23 per share;
|
39
|
|
|
|
|
excludes 2,000,000 shares of common stock reserved for
future issuance under our 2009 Stock Incentive Plan following
the date of this offering; and
|
|
|
|
assumes no exercise of the option to purchase additional shares
granted to the underwriters.
|
To the extent that any outstanding options are exercised, there
will be further dilution to new investors. The warrant
outstanding as of September 30, 2009 expired in October
2009.
As of September 30, 2009, 1,167,331 shares remained
available for future issuance under our 1998 Stock Plan. Upon
the completion of this offering, no shares of our common stock
will remain available for future issuance under our 1998 Stock
Plan. Shares originally reserved for issuance under our 1998
Stock Plan, but which are not subject to outstanding options on
the effective date of our 2009 Stock Incentive Plan, and shares
subject to outstanding options under our 1998 Stock Plan on the
effective date of our 2009 Stock Incentive Plan that are
subsequently forfeited or terminated for any reason before being
exercised, up to a number of additional shares not to exceed
2,000,000, will again become available for awards under our 2009
Stock Incentive Plan.
Sales by selling stockholders in this offering will reduce the
number of shares of common stock held by existing stockholders
to
or approximately % of the total
number of shares of common stock outstanding after this offering
and will increase the number of shares of common stock held by
new investors
by
to approximately % of the total
number of shares of common stock outstanding after this offering.
40
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be
read together with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our audited consolidated financial statements and related
notes included elsewhere in this prospectus. The selected
consolidated balance sheet data as of December 31, 2007 and
2008, and the selected consolidated statements of operations
data for each of the years ended December 31, 2006, 2007
and 2008, have been derived from our audited consolidated
financial statements which are included elsewhere in this
prospectus. The selected consolidated balance sheet data as of
December 31, 2005 and 2006 and the selected consolidated
statements of operations data for the year ended
December 31, 2005 have been derived from our audited
consolidated financial statements not included in this
prospectus. The selected consolidated balance sheet data as of
December 31, 2004 and the selected consolidated statements
of operations data for the year ended December 31, 2004
have been derived from our unaudited consolidated financial
statements not included in this prospectus. The selected
consolidated balance sheet data as of September 30, 2009
and the selected statements of operations data for the nine
months ended September 30, 2008 and 2009 have been derived
from our unaudited condensed consolidated financial statements
which are included elsewhere in this prospectus. Historical
results are not necessarily indicative of the results to be
expected in the future, and results of interim periods are not
necessarily indicative of results for the entire year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Management
|
|
$
|
72
|
|
|
$
|
4,302
|
|
|
$
|
14,597
|
|
|
$
|
28,226
|
|
|
$
|
38,963
|
|
|
$
|
27,895
|
|
|
$
|
34,376
|
|
Platform
|
|
|
26,375
|
|
|
|
26,636
|
|
|
|
28,950
|
|
|
|
31,374
|
|
|
|
29,498
|
|
|
|
22,192
|
|
|
|
22,526
|
|
Other
|
|
|
7,865
|
|
|
|
7,887
|
|
|
|
4,686
|
|
|
|
3,750
|
|
|
|
2,810
|
|
|
|
2,177
|
|
|
|
1,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
34,312
|
|
|
|
38,825
|
|
|
|
48,233
|
|
|
|
63,350
|
|
|
|
71,271
|
|
|
|
52,264
|
|
|
|
58,847
|
|
Cost of revenue
|
|
|
9,607
|
|
|
|
12,990
|
|
|
|
15,691
|
|
|
|
20,602
|
|
|
|
27,588
|
|
|
|
20,511
|
|
|
|
21,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
24,705
|
|
|
|
25,835
|
|
|
|
32,542
|
|
|
|
42,748
|
|
|
|
43,683
|
|
|
|
31,753
|
|
|
|
37,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
12,660
|
|
|
|
11,732
|
|
|
|
14,233
|
|
|
|
14,643
|
|
|
|
13,663
|
|
|
|
10,296
|
|
|
|
11,366
|
|
Sales and marketing
|
|
|
14,080
|
|
|
|
15,728
|
|
|
|
18,807
|
|
|
|
19,871
|
|
|
|
21,157
|
|
|
|
16,059
|
|
|
|
16,689
|
|
General and administrative
|
|
|
4,460
|
|
|
|
5,257
|
|
|
|
5,557
|
|
|
|
6,663
|
|
|
|
6,613
|
|
|
|
4,927
|
|
|
|
5,359
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
Amortization of internal use software
|
|
|
1,644
|
|
|
|
1,756
|
|
|
|
2,499
|
|
|
|
3,070
|
|
|
|
2,258
|
|
|
|
1,680
|
|
|
|
2,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
32,844
|
|
|
|
34,473
|
|
|
|
41,096
|
|
|
|
44,247
|
|
|
|
46,722
|
|
|
|
32,962
|
|
|
|
35,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(8,139
|
)
|
|
|
(8,638
|
)
|
|
|
(8,554
|
)
|
|
|
(1,499
|
)
|
|
|
(3,039
|
)
|
|
|
(1,209
|
)
|
|
|
2,250
|
|
Interest expense
|
|
|
(15
|
)
|
|
|
(8
|
)
|
|
|
(317
|
)
|
|
|
(961
|
)
|
|
|
(799
|
)
|
|
|
(553
|
)
|
|
|
(514
|
)
|
Interest and other income, net
|
|
|
379
|
|
|
|
490
|
|
|
|
896
|
|
|
|
687
|
|
|
|
236
|
|
|
|
230
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(7,775
|
)
|
|
|
(8,156
|
)
|
|
|
(7,975
|
)
|
|
|
(1,773
|
)
|
|
|
(3,602
|
)
|
|
|
(1,532
|
)
|
|
|
2,040
|
|
Income tax expense
|
|
|
|
|
|
|
12
|
|
|
|
8
|
|
|
|
31
|
|
|
|
12
|
|
|
|
9
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(7,775
|
)
|
|
|
(8,168
|
)
|
|
|
(7,983
|
)
|
|
|
(1,804
|
)
|
|
|
(3,614
|
)
|
|
|
(1,541
|
)
|
|
|
1,681
|
|
Less: Preferred stock dividend
|
|
|
2,365
|
|
|
|
697
|
|
|
|
930
|
|
|
|
|
|
|
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of common stock
|
|
$
|
(10,140
|
)
|
|
$
|
(8,865
|
)
|
|
$
|
(8,913
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(5,976
|
)
|
|
$
|
(1,541
|
)
|
|
$
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income (loss) per share attributable to holders of common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.22
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
(1.22
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.05
|
|
Shares used to compute net income (loss) per share attributable
to holders of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,314
|
|
|
|
8,340
|
|
|
|
8,879
|
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
9,711
|
|
|
|
10,050
|
|
Diluted
|
|
|
8,314
|
|
|
|
8,340
|
|
|
|
8,879
|
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
9,711
|
|
|
|
34,648
|
|
Pro forma net income (loss) per share (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
$
|
0.05
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
$
|
0.05
|
|
Shares used to compute pro forma net income (loss) per share
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,117
|
|
|
|
|
|
|
|
32,400
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,117
|
|
|
|
|
|
|
|
34,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
As of December 31,
|
|
|
September 30,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,275
|
|
|
$
|
11,156
|
|
|
$
|
18,196
|
|
|
$
|
15,015
|
|
|
$
|
14,857
|
|
|
$
|
15,798
|
|
Working capital
|
|
|
12,925
|
|
|
|
5,715
|
|
|
|
13,268
|
|
|
|
16,390
|
|
|
|
2,490
|
|
|
|
12,075
|
|
Total assets
|
|
|
34,700
|
|
|
|
28,697
|
|
|
|
36,755
|
|
|
|
42,108
|
|
|
|
42,302
|
|
|
|
50,514
|
|
Bank borrowings and note payable
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
13,500
|
|
|
|
8,889
|
|
Total liabilities
|
|
|
18,261
|
|
|
|
16,951
|
|
|
|
28,988
|
|
|
|
30,594
|
|
|
|
31,033
|
|
|
|
33,096
|
|
Total stockholders equity
|
|
|
16,439
|
|
|
|
11,746
|
|
|
|
7,767
|
|
|
|
11,514
|
|
|
|
11,269
|
|
|
|
17,418
|
|
42
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read together with
Selected Consolidated Financial Data and our
consolidated financial statements and related notes appearing
elsewhere in this prospectus. In addition to historical
information, this discussion and analysis contains
forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a
variety of factors, including but not limited to, those set
forth under Risk Factors and elsewhere in this
prospectus.
Overview
We are a leading provider of independent, technology-enabled
portfolio management, investment advice and retirement help to
participants in employer-sponsored defined contribution
retirement plans, such as 401(k) plans. We use our proprietary
advice technology platform to provide our services to millions
of retirement plan participants on a cost-efficient basis. Our
business model is based on workplace delivery of our services.
We target three key constituencies in the retirement plan
market: plan participants, plan sponsors and plan providers.
We deliver our services to plan sponsors and plan participants
primarily through existing connections with eight retirement
plan providers. We target large plan sponsors across a wide
range of industries, and, as of September 30, 2009, had
signed contracts to make our services available through 107
Fortune 500 companies and seven Fortune 20 companies.
As of September 30, 2009, we were under contract to provide
either our full suite of services, including Professional
Management, Online Advice and Retirement Evaluation, or our
Online Advice service only, through more than 765 plan sponsors
with approximately 7.6 million plan participants whose
retirement savings represented more than $500 billion in
assets. Within this group, we provide our full suite of services
to 341 plan sponsors representing approximately 3.7 million
participants and approximately $242 billion in Assets Under
Contract, or AUC. As of September 30, 2009, we had
approximately $23.5 billion in Assets Under Management, or
AUM, and managed the accounts of approximately 383,000 members
who have delegated investment decision-making authority to us.
Financial Engines was co-founded in 1996 by Professor William F.
Sharpe, a recipient of the 1990 Nobel Prize in Economic Sciences
for his pioneering work on the theory of financial economics,
including how prices of financial assets are determined and the
link between risk and return, Professor Joseph A. Grundfest, a
former SEC commissioner and a professor of law at Stanford Law
School, and the late Craig Johnson, then Chairman of the Venture
Law Group. The company was founded to address the need for
independent investment advice. Traditionally, high quality,
personalized investment advice had been available only to large
institutions and the affluent. Professor Sharpes vision
was to leverage technology to make high quality independent
advice available to millions regardless of their wealth or
investment expertise.
A pioneer in our market, we introduced our Online Advice service
in 1998. Following the introduction of Online Advice, we focused
on expanding our service offerings to provide investors with
advice on multiple tax-deferred accounts and taxable
investments. Over the next five years, we made significant
investments in technology and usability of our platform that
allowed us to expand and enhance our service offerings,
including our Retirement Evaluation, a personalized printed
retirement assessment. In 2004, we launched our Professional
Management service to provide personalized and professional
portfolio management to retirement plan participants.
As part of our growth strategy, we plan to:
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increase penetration within our current plan sponsors that
provide our Professional Management service by increasing
enrollment in managed accounts and converting plans from Active
Enrollment to Passive Enrollment;
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43
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|
use our existing technology, expertise and plan provider
relationships to enhance and extend our services to include
assisting individual investors with IRA accounts and those who
are retired and draw income from their investments;
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expand the number of retirement plan sponsors through our
existing relationships with plan providers; and
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offer our Professional Management service to plan sponsors that
currently only provide our Online Advice service.
|
We benefit from a number of attributes of our business model,
such as:
|
|
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|
|
Subscription-Based Revenue.
The
majority of our revenue base in a given year consists of
recurring revenue earned from contracts in place prior to the
beginning of that year. Revenue from contracts in place as of
December 31, 2007 accounted for approximately 99% of our
total revenue for the year ended December 31, 2008. Our
contracts with plan providers generally have initial terms
ranging from three to five years, and have successive automatic
renewal terms of one year unless terminated in accordance with
prior notice requirements. Some of our plan provider agreements
are in, or will soon be in, renewal periods. In addition, our
contracts with plan sponsors typically have initial terms of
three years and evergreen clauses that extend the initial term
until terminated by either party after a specified notice
period. At any time during the initial term or thereafter, a
plan sponsor can cancel a contract for fiduciary reasons or
breach of contract. A plan sponsor can generally terminate a
contract after the initial term upon 90 days notice. Since
the launch of our Professional Management service in 2004, we
have retained over 97% of our plan sponsors each year.
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|
Favorable Cost Structure.
We provide
our services from a proprietary advice technology platform. In
addition, once we establish a relationship with a plan provider,
our ongoing costs to manage existing member accounts are
significantly lower and we are able to add new plan sponsors and
plan participants with less than pro rata incremental expenses.
|
In evaluating our results, we focus on several key operating and
financial data including AUC, enrollment rate, AUM, GAAP net
income, adjusted EBITDA and adjusted net income. Given our
business model, we believe AUC and enrollment rate are
indicators of our growth potential.
Revenue
We generate revenue primarily from management fees on AUM as
well as from platform fees by providing portfolio management
services, investment advice and retirement help to plan
participants of employer-sponsored retirement plans.
Professional Management.
We derive
Professional Management revenue from management fees paid by
plan participants for our Professional Management service. Our
Professional Management service is a discretionary investment
management service, which includes a Retirement Plan analyzing
investments, contribution rate and projected retirement income,
and a Retirement Checkup designed to help plan participants to
develop a strategy for closing the gap, if any, between the
participants retirement goal and current retirement income
forecast. The services are generally made available to plan
participants in a 401(k) plan by written agreements between
Financial Engines and the plan provider, plan sponsor and the
plan participant. The arrangement generally provides for
management fees based on the value of assets we manage for plan
participants, and is generally payable quarterly in arrears. Our
Professional Management revenue is generally the product of
managed accounts fee rates and the value of AUM at the end of
each quarter. Our AUM increases or decreases based on asset
enrollment rates, inflows or outflows of funds into accounts we
manage pursuant to our Professional Management service and
market fluctuations. Inflows or outflows are based on
contributions, rollovers and withdrawals by our members.
44
Platform.
We derive our platform
revenue from recurring, annual
subscription-based
platform fees for access to either our full suite of services,
including Professional Management, Online Advice and Retirement
Evaluation, or our Online Advice service only. Platform fees are
paid by the plan sponsor, plan provider or the retirement plan
itself, depending on the plan structure, and vary depending on
the type of service provided. Our Online Advice service is a
nondiscretionary Internet-based investment advisory service,
which includes features such as recommendations among the
investment alternatives available in the employer sponsored
retirement plan, a summary of the current value of the plan
account, a forecast of how much the plan account investments
might be worth at retirement, whether a change is recommended to
the contribution rate, risk and diversification
and/or
unrestricted employer stock holdings and a projection of how
much the participant may be able to spend at retirement. Plan
participants may use the service as frequently as they choose to
monitor progress toward their financial goals, receive forecasts
and investment recommendations and access educational content at
our website.
Other Revenue.
Other revenue includes
reimbursement for marketing and member materials from certain
subadvisory relationships, reimbursement for providing personal
statements to participants from a limited number of plan
sponsors and plan implementation fees. A small portion of other
revenue is derived from a defined benefit consulting business.
Costs and
Expenses
Employee compensation and related expenses represent our largest
expense. We allocate compensation and other related expenses,
including stock-based compensation, to our cost of revenue,
research and development, sales and marketing, general and
administrative as well as amortization of internal use software
expense categories. While we expect our headcount to increase
over time, we believe that the economies of scale in our
business model will allow us to grow our compensation and
related expenses at a lower rate than revenue.
Other costs and expenses include the costs of marketing
materials and postage, fees paid to plan providers for
facilitating the exchange of plan and plan participant data as
well as implementing our transaction instructions for member
account and amortization and depreciation for hardware and
software purchases.
The following summarizes our cost of revenue and certain
significant operating expenses:
Cost of Revenue.
Cost of revenue
includes expenses from portfolio management, operations, advisor
call center operations, technical operations, including
information technology, customer support, installation and
set-up
costs, data connectivity fees and printed materials costs for
certain subadvisory relationships for which we are reimbursed.
These expenses are shared across the different revenue
categories and we are not able to meaningfully allocate such
costs between separate categories of revenue. Consequently, all
costs and expenses applicable to our revenue are included in the
category cost of revenue in our statements of operations. Costs
in this area are primarily related to employee compensation and
related expenses, payments to third parties and purchased
materials.
Research and Development.
Research and
development expense includes costs associated with defining and
specifying new features and ongoing enhancement to our Advice
Engines and other aspects of our service offerings, financial
research, quality assurance, related administration and other
costs that do not qualify for capitalization. Costs in this area
are primarily related to employee compensation for our
investment research, product development and engineering
personnel and related expenses and, to a lesser extent, related
external consulting expenses.
Sales and Marketing.
Sales and
marketing expense includes costs associated with plan provider
and plan sponsor relationship management, marketing our
services, plan provider and plan sponsor marketing, direct
sales, printing of, and postage for marketing materials for,
direct advisory relationships and amortization of direct
response advertising. Costs in this area are primarily related
45
to employee compensation for sales and marketing personnel and
related expenses, which include commissions, printed materials
and general marketing programs.
General and Administrative.
General and
administrative expense includes costs for finance, legal,
compliance and administration. Costs in this area include
employee compensation and related expenses and fees for
consulting and professional services. Following this offering,
we expect that we will incur additional expenses as a result of
becoming a public company for, among other things, SEC reporting
and compliance, including compliance with the Sarbanes-Oxley Act
of 2002, director fees, insurance, transfer agent fees and other
similar expenses. General and administrative expenses are
expected to continue to increase due to incremental headcount
increases, the general growth of our business and the costs
associated with being a public company.
Amortization of Internal Use
Software.
Amortization expense includes
engineering costs associated with developing and enhancing our
service offering, including the website. Associated direct
development costs are capitalized and amortized using the
straight-line method over the estimated lives of the underlying
technology. Costs in this area include employee compensation and
related expenses and fees for external consulting services.
Critical
Accounting Policies and Significant Management
Estimates
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United
States, or GAAP. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue,
costs and expenses and related disclosures. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. In many instances, we could have reasonably used
different accounting estimates, and in other instances, changes
in the accounting estimates are reasonably likely to occur from
period to period. Accordingly, actual results could differ
significantly from the estimates made by our management. To the
extent that there are material differences between these
estimates and actual results, our future financial statement
presentation, financial condition, results of operations and
cash flows will be affected.
In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not
require managements judgment in its application, while in
other cases, managements judgment is required in selecting
among available alternative accounting standards that allow
different accounting treatment for similar transactions. We
believe that there are several accounting policies that are
critical to understanding our business and prospects for future
performance, as these policies affect the reported amounts of
revenue and other significant areas that involve
managements judgment and estimates.
These significant policies are:
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|
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Revenue recognition;
|
|
|
|
Deferred sales commissions;
|
|
|
|
Direct response advertising;
|
|
|
|
Valuation of long-lived assets;
|
|
|
|
Income taxes; and
|
|
|
|
Stock-based compensation.
|
These policies and our procedures related to these policies are
described in detail below. In addition, please refer to the
notes to consolidated financial statements for further
discussion of our accounting policies.
46
Revenue Recognition.
We recognize
revenue when all four of the following revenue recognition
criteria have been met:
|
|
|
|
|
persuasive evidence of an arrangement exists;
|
|
|
|
the product has been delivered or the service has been performed;
|
|
|
|
the fee is fixed or determinable; and
|
|
|
|
collectibility is reasonably assured.
|
Application of the various accounting principles in GAAP related
to the measurement and recognition of revenue requires the
company to make judgments and estimates. Specifically,
arrangements with nonstandard terms and conditions may require
significant contract interpretation to determine the appropriate
accounting, including whether the deliverables specified in a
multiple element arrangement should be treated as separate units
of accounting. Other significant judgments include determining
whether we are acting as the principal in a transaction and
whether separate contracts are considered part of one
arrangement.
Revenue recognition is also impacted by our judgment used in
determining allowances for uncollectible receivables. We
consider various factors, including a review of specific
transactions, the credit-worthiness of the customers, historical
experience and market and economic conditions when calculating
these provisions and allowances. Estimates are evaluated each
quarter to assess the adequacy of the amounts recorded.
We generate revenue through three primary sources: Professional
Management revenue, platform revenue and other revenue.
We generate Professional Management revenue on the value of
assets we manage for plan participants, which fees are generally
payable quarterly in arrears. Revenue derived from management
fees for our Professional Management service is recognized as
the services are performed. In certain instances, fees payable
by members are deferred for a specified period, and are waived
if the member cancels within the specified period. Effective
January 1, 2009, we commenced recognizing revenue during
certain of these fee deferral periods based on our estimate of
the expected retention and cancellation rates determined by
historical experience of similar arrangements. We currently only
recognize revenue for fee deferral periods of approximately
three months or less and where the member has actively enrolled
in our Professional Management service. If we use different
assumptions for expected retention and cancellation rates, or if
actual retention and cancellation rates differ materially from
our estimates, future revenue recognized may differ
significantly from what we have recorded in the current period
and could materially affect our operating income, net income and
earnings (loss) per share. As a result of recognizing revenue
during the fee deferral periods, our revenue during the nine
months ended September 30, 2009 was higher by approximately
$0.5 million compared to the nine months ended
September 30, 2008.
Platform revenue includes annual subscription-based platform
fees for access to either our full suite of services, including
Professional Management, Online Advice and Retirement
Evaluation, or our Online Advice service only. Platform fees are
paid by the plan sponsor, plan provider or the retirement plan
itself, depending on the plan structure, and vary depending on
the type of service provided. Subscription fees for our Online
Advice service are generally paid annually in advance and
recognized ratably over the term of the subscription period,
which is typically three to five years in length, beginning
after the completion of customer setup and data connectivity.
Other revenue is recognized as the related services are
performed, in accordance with the specific terms of the contract
with the customers.
Deferred revenue primarily consists of billings or payments
received in advance of revenue recognition generated by
subscription fees for our Online Advice service and
implementation service revenue described above. For these
services, we generally invoice our customers in annual or
quarterly installments payable in advance. Accordingly, the
deferred revenue balance does not
47
represent the total contract value of annual or multi-year,
noncancelable subscription contracts. Implementation service
revenue is recognized ratably over the estimated customer life,
which is usually three to five years.
Deferred Sales
Commissions.
We
defer certain commission payments to our sales force. Deferred
sales commissions consist of incremental costs paid to our
direct sales force associated with the execution of
noncancelable customer contracts. The deferred sales commission
amounts are recoverable through future revenue streams under the
noncancelable customer contracts. We believe this is the
preferable method of accounting as the commission charges are so
closely related to the revenue from the noncancelable customer
contracts that they should be recorded as an asset and charged
to expense over the life of the related noncancelable customer
contracts, which is typically three years. Amortization of
deferred sales commissions is included in sales and marketing
expense in the accompanying consolidated statements of
operations.
Direct
Response
Advertising.
Our
advertising costs consist primarily of print materials
associated with new customer solicitations. We account for our
advertising costs in accordance with Financial Accounting
Standards Board, or FASB,
Accounting Standards Codification,
or Codification or ASC,
340-20,
Capitalized Advertising Costs
(previously American
Institute of Certified Public Accountants Statement of Position
(SOP)
93-7,
Reporting on Advertising Costs
). Advertising costs that
do not qualify as direct response advertising are expensed to
sales and marketing at the first time the advertisement takes
place. Effective July 1, 2009, we commenced capitalization
of advertising costs associated with Active Enrollment campaigns
on a prospective basis as it was then determined that we had
sufficient and verifiable historical patterns over a reasonable
period to demonstrate probable future benefits of such campaigns.
ASC
340-20
requires the capitalization of direct response advertising only
if the primary purpose of the advertising is to elicit sales to
customers who could be shown to have responded specifically to
the advertising and the direct-response advertising results in
probable future benefits. The capitalized costs are amortized
over the period over which the future benefits are expected to
be received. Because of how we earn revenue from our
Professional Management service, demonstrating that the
direct-response advertising related to our direct advisory
active choice campaigns results in probable future benefits
requires us to make several assumptions about the gross revenues
we will earn and costs we will incur as a result of each
campaign.
We have developed forecasting methodologies that have a degree
of reliability sufficient to reasonably estimate the future
gross revenue stream associated with a given campaign. The
significant estimates and judgments we use in our forecasting
methodologies include average period of probable future
benefits, market movement, AUM cancellation rates and net
contribution rates. AUM cancellation rate is defined as the rate
at which assets will cancel out of Professional Management
program due to voluntary member terminations. A voluntary member
termination is when a member contacts Financial Engines and
terminates their membership in the Professional Management
service. Involuntary cancellations (such as employee
terminations, layoffs, etc.) are captured in the net
contribution rate. Net contribution rate is defined as the net
amount assets will increase as a result of new contributions in
to the 401(k) plan less the amount assets will decrease as a
result of disbursements from the 401(k) plan. We have estimated
the average period of probable future benefits to be three years
by analyzing our historical member retention rates and have
estimated AUM cancellation rates by analyzing our historical AUM
cancellation rates. In light of recent stock market volatility,
we currently have assumed no market movement and a zero net
contribution rate.
At September 30, 2009, $1.2 million of advertising
costs associated with Active Enrollment campaigns were reported
as assets. Advertising expense was $1.2 million,
$1.8 million and $2.6 million for the years ended
December 31, 2006, 2007 and 2008, respectively, of which
direct advised Active Enrollment campaign expense was
$1.2 million, $1.6 million and $2.5 million,
respectively. Advertising expense was $2.3 million and
$2.0 million for the nine months ended
48
September 30, 2008 and 2009, respectively, of which direct
advised Active Enrollment campaign expense was $2.2 million
and $1.8 million, respectively.
The table below evaluates the sensitivity of two of our most
significant estimates, namely average period of probable future
benefits and assumed market movement, on the realizability of
net capitalized direct response advertising costs as of
September 30, 2009. This sensitivity analysis considered
all campaigns that were eligible for capitalization under our
current assumptions of a three-year average period of probable
future benefits and 0% market movement per year.
Additional
Expense (Impairments) to be Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Market Movement*
|
|
|
|
(Per year)
|
|
|
|
(40)%
|
|
|
(20)%
|
|
|
(10)%
|
|
|
0%
|
|
|
8%
|
|
|
Average Period of Probable Future Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 year
|
|
$
|
173,000
|
|
|
$
|
133,000
|
|
|
$
|
114,000
|
|
|
$
|
92,000
|
|
|
$
|
|
|
2 years
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 years
|
|
|
44,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 years
|
|
|
46,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years
|
|
|
63,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Any percentage change to market movement, net contribution rate
and AUM cancellation rate would have a same relative impact on
the sensitivity analysis as they all directly impact member AUM.
|
The sensitivity table above indicates that we would have
recorded an impairment charge as of September 30, 2009 if
(a) the market was projected to decrease by 40% per year
over the estimated period of probable benefits or (b) the
estimated period of probable benefits was to decrease from three
years to one year.
Valuation of
Long-Lived
Assets.
Long-lived
assets, such as property, equipment and capitalized website
development costs subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset group may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset
group to estimated undiscounted future cash flows expected to be
generated by the asset group. If the carrying amount of an asset
group exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount
of the asset group exceeds the fair value of the asset group.
Management evaluates the useful lives of these assets on an
annual basis and tests for impairment whenever events or changes
in circumstances occur that could impact the recoverability of
these assets. There were no impairments to long-lived assets
during the years ended December 31, 2006, 2007 and 2008 and
the nine months ended September 30, 2009.
Income
Taxes.
We
are subject to income taxes in the U.S. Significant
judgments are required in determining the consolidated provision
for income taxes.
We use the asset and liability method to account for income
taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and net operating
loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. We record
a valuation allowance to reduce deferred tax assets to an amount
whose realization is more likely than not.
49
Effective January 1, 2007, we adopted the provisions of
FASB Interpretation 48, or FIN 48,
Accounting for
Uncertainty in Income Taxes
, codified into FASB ASC Topic
740,
Income Taxes
, which requires a two-step approach to
recognizing, derecognizing and measuring uncertain tax
positions. The adoption of FIN 48 had no impact on our
financial position, results of operations or cash flows. We
recognize accrued interest and penalties related to unrecognized
tax benefits as a component of income tax expense.
During the ordinary course of business, there are many
transactions and calculations for which the ultimate tax
determination is uncertain. As a result, we recognize tax
liabilities based on estimates of whether additional taxes and
interest will be due. These tax liabilities are recognized when,
despite the belief that our tax return positions are
supportable, we believe that certain positions may not be fully
sustained upon review by tax authorities. We believe that our
accruals for tax liabilities are adequate for all open audit
years based on our assessment of many factors including past
experience and interpretations of tax law. This assessment
relies on estimates and assumptions and may involve a series of
complex judgments about future events. To the extent that the
final tax outcome of these matters is different than the amounts
recorded, such differences will impact income tax expense in the
period in which such determination is made.
Significant judgment is also required in determining any
valuation allowance recorded against deferred tax assets. In
assessing the need for a valuation allowance, management
considers all available evidence including past operating
results, estimates of future taxable income and the feasibility
of ongoing tax planning strategies. In the event that we change
our determination as to the amount of deferred tax assets that
can be realized, we will adjust the valuation allowance with a
corresponding impact to income tax expense in the period in
which such determination is made. To the extent we become more
profitable in future periods, we expect that our valuation
allowance will decrease.
As of December 31, 2008, we had net operating loss
carryforwards for federal and state income tax purposes of
approximately $158 million and $77 million,
respectively, available to reduce future income subject to
income taxes. The federal net operating loss carryforwards
expire through 2027. The state net operating loss carryforwards
expire through 2019.
As of December 31, 2008, approximately $4.9 million of
the net operating losses will benefit additional paid in capital
when realized. As of December 31, 2008, we also had
research credit carryforwards for federal and California income
tax purposes of approximately $1.6 million and
$1.4 million, respectively, available to reduce future
income taxes. The federal research credit carryforwards expire
through 2028. The California research credit carries forward
indefinitely.
We are currently undergoing a federal tax audit for fiscal years
2006 and 2007. The outcome of this audit could reduce the value
of potential future tax benefits.
50
Stock-Based
Compensation.
Stock-based
compensation for stock awards is estimated at the grant date
based on the awards fair value as calculated by the
Black-Scholes option pricing model and is recognized as expense
over the requisite service period. The determination of the fair
value of stock-based awards on the date of grant using an option
pricing model is affected by our stock price as well as
assumptions regarding a number of complex and subjective
variables. These variables include our expected stock price and
related volatility over the expected term of the awards, actual
and projected employee stock option exercise behaviors,
risk-free interest rate, estimated forfeitures and expected
dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Expected life in years
|
|
|
6.99
|
|
|
|
6.08
|
|
|
|
6.06
|
|
|
|
6.07
|
|
Risk-free interest rate
|
|
|
4.66
|
%
|
|
|
4.46
|
%
|
|
|
2.58
|
%
|
|
|
2.54
|
%
|
Volatility
|
|
|
30
|
|
|
|
35
|
|
|
|
52
|
|
|
|
61
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 2007, we use the
simplified method in developing an estimate of
expected term of stock options as we expect our employee
exercise behavior to change resulting from our announced plans
for an initial public offering. We base the risk-free interest
rate on zero-coupon yields implied from U.S. Treasury
issues with remaining terms similar to the expected term on the
options. We estimate expected volatility based on a combination
of the historical and implied volatility of comparable companies
from a representative peer group based on industry and market
capitalization data. We do not anticipate paying any cash
dividends in the foreseeable future and therefore use an
expected dividend yield of zero in the option pricing model. We
are required to estimate forfeitures at the time of grant and
revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. If we use different
assumptions for estimating stock-based compensation expense in
future periods or if actual forfeitures differ materially from
our estimated forfeitures, future stock-based compensation
expense may differ significantly from what we have recorded in
the current period and could materially affect our operating
income, net income (loss) and net income (loss) per share.
Given the absence of an active market for our common stock, our
stock price at any given time is determined by our board of
directors. Our board of directors considers numerous objective
and subjective factors in determining the value of our common
stock at each option grant date, including the following factors:
|
|
|
|
|
prices for our preferred stock that we had sold to outside
investors in arms-length transactions, and the rights,
preferences and privileges of our preferred stock and our common
stock;
|
|
|
|
contemporaneous independent valuations performed at three to
four month periodic intervals;
|
|
|
|
secondary sales of shares of our common stock;
|
|
|
|
our actual financial condition and results of operations
relative to our operating plan during the relevant period;
|
|
|
|
forecasts of our financial results and overall market conditions;
|
|
|
|
the market value of the stock or other equity interests of
similarly situated companies whose value can be readily
determined through objective means;
|
|
|
|
hiring of key personnel; and
|
|
|
|
the likelihood of achieving a liquidity event for the shares of
common stock underlying the options, such as an initial public
offering or sale of the company, given prevailing market
conditions at the time of grant.
|
51
Our board of directors believe that the judgment required in
such efforts necessarily involve an element of subjectivity.
Our contemporaneous valuations were performed in accordance with
methods specified by the AICPA Practice Aid on
Valuation of Privately-Held Company Equity Securities
Issued as Compensation
. These contemporaneous
valuations of our common stock were performed as of
December 31, 2006, June 30, 2007, December 31,
2007, March 31, 2008, June 30, 2008, October 31,
2008, January 31, 2009, April 30, 2009 and
July 31, 2009. Our board of directors considered these
valuations in determining the fair market value of our common
stock during those periods. The valuations use the income
approach method. The income approach involves applying
appropriate risk-adjusted discount rates to estimated debt-free
cash flows, based on forecasted revenues and costs. The discount
rate applied to our cash flows was based on a weighted average
cost of capital, which represents the blended, after-tax costs
of debt and equity. The projections used in connection with this
valuation were based on our expected operating performance over
the forecast period. The valuations also considered the public
company market multiple method to evaluate the reasonableness of
the income approach. The public company market multiple method
focuses on comparing our company to similar publicly traded
entities. The valuations also considered differences between our
preferred and common stock with respect to liquidation
preferences, conversion rights, voting rights and other
features. We also considered appropriate adjustments to
recognize lack of marketability. In order to determine the value
of our common stock, we utilized the total enterprise value in
an option-based framework. Using this method, the common stock
value is viewed as a claim on the enterprises liquidation
or IPO proceeds after debt holders and preferred stockholders
have been paid their principal and interest or liquidation
preferences. This approach considers that the value associated
with the common shares is based on our performance relative to
the liquidation preferences of other share classes. There is
inherent uncertainty in the estimates used in our valuations. If
different discount rates, assumptions or weightings had been
used, the valuations would have been different.
52
Results of
Operations
Comparison of
the Nine Months Ended September 30, 2008 and
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Management
|
|
$
|
27,895
|
|
|
$
|
34,376
|
|
|
$
|
6,481
|
|
|
|
23
|
%
|
Platform
|
|
|
22,192
|
|
|
|
22,526
|
|
|
|
334
|
|
|
|
2
|
|
Other
|
|
|
2,177
|
|
|
|
1,945
|
|
|
|
(232
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
52,264
|
|
|
|
58,847
|
|
|
|
6,583
|
|
|
|
13
|
|
Cost of revenue
|
|
|
20,511
|
|
|
|
21,057
|
|
|
|
546
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
31,753
|
|
|
|
37,790
|
|
|
|
6,037
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
10,296
|
|
|
|
11,366
|
|
|
|
1,070
|
|
|
|
10
|
|
Sales and marketing
|
|
|
16,059
|
|
|
|
16,689
|
|
|
|
630
|
|
|
|
4
|
|
General and administrative
|
|
|
4,927
|
|
|
|
5,359
|
|
|
|
432
|
|
|
|
9
|
|
Amortization of internal use software
|
|
|
1,680
|
|
|
|
2,126
|
|
|
|
446
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
32,962
|
|
|
|
35,540
|
|
|
|
2,578
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,209
|
)
|
|
|
2,250
|
|
|
|
3,459
|
|
|
|
n/a
|
|
Interest expense
|
|
|
(553
|
)
|
|
|
(514
|
)
|
|
|
39
|
|
|
|
(7
|
)
|
Interest and other income, net
|
|
|
230
|
|
|
|
304
|
|
|
|
74
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(1,532
|
)
|
|
|
2,040
|
|
|
|
3,572
|
|
|
|
n/a
|
|
Income tax expense
|
|
|
9
|
|
|
|
359
|
|
|
|
350
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,541
|
)
|
|
$
|
1,681
|
|
|
$
|
3,222
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue increased 13% from $52.3 million in the nine
months ended September 30, 2008 to $58.8 million in
the nine months ended September 30, 2009. The increase was
primarily due to growth in Professional Management revenue of
$6.5 million. Professional Management revenue and platform
revenue comprised 58% and 38%, respectively, of total revenue in
the nine months ended September 30, 2009.
Professional
Management Revenue
Professional Management revenue increased 23% from
$27.9 million in the nine months ended September 30,
2008 to $34.4 million in the nine months ended
September 30, 2009. This increase was primarily due to an
increase in average AUM from $17.5 billion for the nine
months ended September 30, 2008 to $19.7 billion for
the nine months ended September 30, 2009. The increase in
Professional Management revenue was driven primarily by
increased enrollment resulting from marketing campaigns and
other ongoing member acquisitions.
Platform
Revenue
Platform revenue increased 2% from $22.2 million in the
nine months ended September 30, 2008 to $22.5 million
in the nine months ended September 30, 2009, due to an
increased number of plan participants employed by plan sponsors
who use one or more of our services.
53
Other
Revenue
Other revenue decreased 11% from $2.2 million in the nine
months ended September 30, 2008 to $1.9 million in the
nine months ended September 30, 2009. This decrease was
primarily due to a reduction in revenue related to the
reimbursement of personal evaluation expenses of
$0.6 million, partially offset by an increase of
$0.4 million in reimbursement for marketing and member
materials from certain subadvisory relationships.
Cost of
Revenue
Cost of revenue increased 3% from $20.5 million in the nine
months ended September 30, 2008 to $21.1 million in
the nine months ended September 30, 2009. This increase was
primarily due to an increase of $1.2 million in the fees
paid to plan providers to facilitate the exchange of plan and
plan participant data. This increase was offset partially by a
decrease of $0.3 million in personal evaluation expense
related to printed personal statements for employees of one plan
sponsor and recruiting expense of $0.2 million. As a
percentage of revenue, cost of revenue decreased from 39% in the
nine months ended September 30, 2008 to 36% in the nine
months ended September 30, 2009. The decrease as a
percentage of revenue was primarily due to slower increases in
payroll and employee-related expenses relative to the increase
in revenue during the same period.
Research and
Development
Research and development expense increased 10% from
$10.3 million in the nine months ended September 30,
2008 to $11.4 million in the nine months ended
September 30, 2009. This increase was primarily due to
higher stock-based compensation of $0.5 million and bonus
expense of $0.5 million. As a percentage of revenue,
research and development expense decreased from 20% in the nine
months ended September 30, 2008 to 19% in the nine months
ended September 30, 2009.
Sales and
Marketing
Sales and marketing expense increased 4% from $16.1 million
in the nine months ended September 30, 2008 to
$16.7 million in the nine months ended September 30,
2009. This increase was primarily due to higher stock-based
compensation of $0.8 million and bonus expense of
$0.7 million. This increase was partially offset by the
capitalization of direct response advertising costs of
$1.2 million in the third quarter of 2009, contributing to
a decrease of $0.4 million in participant communication
expense as compared to the nine months ended September 30,
2008, as well as a decrease of $0.3 million in consulting
expense due to a rebranding effort in 2008. As a percentage of
revenue, sales and marketing expense decreased from 31% in the
nine months ended September 30, 2008 to 28% in the nine
months ended September 30, 2009. The decrease as a
percentage of revenue was primarily due to the capitalization of
direct response advertising costs in the third quarter of 2009.
General and
Administrative
General and administrative expense increased 9% from
$4.9 million in the nine months ended September 30,
2008 to $5.4 million in the nine months ended
September 30, 2009. This increase was primarily due to
increased stock-based compensation expense of $0.8 million,
offset by $0.2 million in recruiting expense. As a
percentage of revenue, general and administrative expense
remained flat at 9% for the nine months ended September 30,
2008 and 2009.
Amortization of
Internal Use Software
Amortization expense increased 27% from $1.7 million in the
nine months ended September 30, 2008 to $2.1 million
in the nine months ended September 30, 2009. This increase
was primarily due to increased capitalized development costs in
late 2008. These costs include engineering costs associated with
developing and enhancing our service offerings.
54
Interest
Expense
Interest expense decreased 7% from $0.6 million in the nine
months ended September 30, 2008 to $0.5 million in the
nine months ended September 30, 2009. This decrease was due
to our entry into a $10.0 million term loan in April 2009
with an effective interest rate lower than our previously
outstanding $10.0 million promissory note.
Interest and
Other Income, Net
Interest and other income increased 32% from $0.2 million
in the nine months ended September 30, 2008 to
$0.3 million in the nine months ended September 30,
2009, as a result of other income of $0.2 million
associated with the payoff of our previously outstanding
$10.0 million note and $0.1 million related to
amortization of a warrant, offset by lower money market rates.
Taxes and Net
Loss
Taxes for the nine months ended September 30, 2008 were
de minimis, as compared to $0.4 million for the nine
months ended September 30, 2009. The income tax increase
was due to operating income generated in the nine months ended
September 30, 2009 as compared to a net loss in the nine
months ended September 30, 2008.
Comparison of
Years Ended December 31, 2007 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
|
2008
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Management
|
|
$
|
28,226
|
|
|
$
|
38,963
|
|
|
$
|
10,737
|
|
|
|
38
|
%
|
Platform
|
|
|
31,374
|
|
|
|
29,498
|
|
|
|
(1,876
|
)
|
|
|
(6
|
)
|
Other
|
|
|
3,750
|
|
|
|
2,810
|
|
|
|
(940
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
63,350
|
|
|
|
71,271
|
|
|
|
7,921
|
|
|
|
13
|
|
Cost of revenue
|
|
|
20,602
|
|
|
|
27,588
|
|
|
|
6,986
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
42,748
|
|
|
|
43,683
|
|
|
|
935
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
14,643
|
|
|
|
13,663
|
|
|
|
(980
|
)
|
|
|
(7
|
)
|
Sales and marketing
|
|
|
19,871
|
|
|
|
21,157
|
|
|
|
1,286
|
|
|
|
6
|
|
General and administrative
|
|
|
6,663
|
|
|
|
6,613
|
|
|
|
(50
|
)
|
|
|
(1
|
)
|
Withdrawn offering expense
|
|
|
|
|
|
|
3,031
|
|
|
|
3,031
|
|
|
|
n/a
|
|
Amortization of internal use software
|
|
|
3,070
|
|
|
|
2,258
|
|
|
|
(812
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
44,247
|
|
|
|
46,722
|
|
|
|
2,475
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,499
|
)
|
|
|
(3,039
|
)
|
|
|
(1,540
|
)
|
|
|
103
|
|
Interest expense
|
|
|
(961
|
)
|
|
|
(799
|
)
|
|
|
162
|
|
|
|
(17
|
)
|
Interest and other income, net
|
|
|
687
|
|
|
|
236
|
|
|
|
(451
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(1,773
|
)
|
|
|
(3,602
|
)
|
|
|
(1,829
|
)
|
|
|
103
|
|
Income tax expense
|
|
|
31
|
|
|
|
12
|
|
|
|
(19
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
(1,810
|
)
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue increased 13% from $63.4 million in 2007 to
$71.3 million in 2008. The increase was primarily due to
growth in Professional Management revenue of $10.7 million.
Professional
55
Management revenue and platform revenue comprised 55% and 41%,
respectively, of total revenue in 2008.
Professional
Management
Professional Management revenue increased 38% from
$28.2 million in 2007 to $39.0 million in 2008. This
increase was primarily due to an increase in average AUM from
$12.6 billion in 2007 to $17.1 billion in 2008. The
increase in AUM was driven primarily by increased enrollment
arising from marketing campaigns and other ongoing member
acquisitions.
Platform
Platform revenue decreased 6% from $31.4 million in 2007 to
$29.5 million in 2008, due to reduced setup fees of
$1.6 million primarily related to a one-time recognition of
revenue from a contract following completion of final
deliverables in 2007. An increased number of plan participants
at plan sponsors who use one or more of our services resulted in
an additional $0.4 million in platform revenue.
Other
Other revenue decreased 25% from $3.8 million in 2007 to
$2.8 million in 2008. This decrease was due primarily to
our decision to phase out a service directed to brokers and
other investment professionals offered in 2007 but not offered
in 2008, and which we do not currently expect to offer in
subsequent years, as well as a reduction in revenue related to
reimbursement of personal evaluation expenses of
$0.4 million.
Cost of
Revenue
Cost of revenue increased 34% from $20.6 million in 2007 to
$27.6 million in 2008. This increase was primarily due to
an increase of $3.0 million in fees paid to plan providers
to facilitate the exchange of plan and plan participant data as
well as implementing our transaction instructions for member
accounts, $2.0 million in employee-related expense
associated with an increase in the number of service delivery
employees, $1.3 million in costs associated with the
printing of, and postage for, member materials and
$0.7 million in depreciation, maintenance and hosting fees
associated with our data centers. As a percentage of revenue,
cost of revenue increased from 33% in 2007 to 39% in 2008.
Research and
Development
Research and development expense decreased 7% from
$14.6 million in 2007 to $13.7 million in 2008. This
decrease was primarily due to reduced bonus expense of
$1.3 million, partially offset by increased capitalization
of internal use software of $0.5 million. As a percentage
of revenue, research and development expense decreased from 23%
in 2007 to 19% in 2008.
Sales and
Marketing
Sales and marketing expense increased 6% from $19.9 million
in 2007 to $21.2 million in 2008. This increase was
primarily due to additional marketing material expense of
$0.9 million, selling and consulting expense of
$0.8 million associated with a marketing rebranding effort
in 2008 and $0.5 million in salary expense associated with
increased headcount. These increases were partially offset by a
reduction in bonus expense of $1.3 million. As a percentage
of revenue, sales and marketing expense decreased from 31% in
2007 to 30% in 2008.
56
General and
Administrative
General and administrative expense decreased 1% from
$6.7 million in 2007 to $6.6 million in 2008. This
decrease was primarily due to reduced stock-based compensation
of $0.6 million, bonus expense of $0.5 million and bad
debt expense of $0.3 million, partially offset by an
increase of $0.4 million in salary expense associated with
increased headcount and compensation, as well as increased legal
and audit fees of $0.3 and $0.2 million, respectively. As a
percentage of revenue, general and administrative expense
decreased from 11% in 2007 to 9% in 2008.
Withdrawn
Offering Expense
As of November 2008, we had incurred $3.0 million of costs
directly attributable to a planned initial public offering.
These costs were being deferred until the completion of the
offering. In the quarter ended December 31, 2008, these
costs were charged to expense as a result of our decision in
November 2008 to cease efforts to pursue an initial public
offering because of the disruption in the equity capital markets
and general adverse economic conditions present at that time.
Amortization of
Internal Use Software
Amortization expense decreased 26% from $3.1 million in
2007 to $2.3 million in 2008, primarily due to an increase
in the average life of capitalized development costs subject to
amortization. The increase in the average life was primarily
driven by our newer projects having a longer expected life than
our historical projects. These costs include engineering costs
associated with developing and enhancing our service offerings.
Interest
Expense
Interest expense decreased from $1.0 million in 2007 to
$0.8 million in 2008. This decrease was due to lower
interest rates associated with a $10.0 million promissory
note secured in September 2006 with a variable interest rate of
three-month
LIBOR plus 5% per annum and a maturity date of
September 29, 2009.
Interest and
Other Income, Net
Interest income decreased from $0.7 million in 2007 to
$0.2 million in 2008 as a result of generally lower money
market rates and cash balances.
Taxes and Net
Loss
Taxes remained low as a result of net losses for the year in
2007 and 2008. We were subject to state minimum tax in both
years as well as federal alternative minimum tax in 2007.
57
Comparison of
Years Ended December 31, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
Year Ended December 31,
|
|
|
(Decrease)
|
|
|
|
2006
|
|
|
2007
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Management
|
|
$
|
14,597
|
|
|
$
|
28,226
|
|
|
$
|
13,629
|
|
|
|
93
|
%
|
Platform
|
|
|
28,950
|
|
|
|
31,374
|
|
|
|
2,424
|
|
|
|
8
|
|
Other
|
|
|
4,686
|
|
|
|
3,750
|
|
|
|
(936
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
48,233
|
|
|
|
63,350
|
|
|
|
15,117
|
|
|
|
31
|
|
Cost of revenue
|
|
|
15,691
|
|
|
|
20,602
|
|
|
|
4,911
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
32,542
|
|
|
|
42,748
|
|
|
|
10,206
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
14,233
|
|
|
|
14,643
|
|
|
|
410
|
|
|
|
3
|
|
Sales and marketing
|
|
|
18,807
|
|
|
|
19,871
|
|
|
|
1,064
|
|
|
|
6
|
|
General and administrative
|
|
|
5,557
|
|
|
|
6,663
|
|
|
|
1,106
|
|
|
|
20
|
|
Amortization of internal use software
|
|
|
2,499
|
|
|
|
3,070
|
|
|
|
571
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
41,096
|
|
|
|
44,247
|
|
|
|
3,151
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,554
|
)
|
|
|
(1,499
|
)
|
|
|
7,055
|
|
|
|
(82
|
)
|
Interest expense
|
|
|
(317
|
)
|
|
|
(961
|
)
|
|
|
(644
|
)
|
|
|
203
|
|
Interest and other income, net
|
|
|
896
|
|
|
|
687
|
|
|
|
(209
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(7,975
|
)
|
|
|
(1,773
|
)
|
|
|
6,202
|
|
|
|
78
|
|
Income tax expense
|
|
|
8
|
|
|
|
31
|
|
|
|
23
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,983
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
6,179
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue increased 31% from $48.2 million in 2006 to
$63.4 million in 2007. The increase was primarily due to
growth in Professional Management revenue of $13.6 million.
Professional Management revenue and platform revenue comprised
45% and 50%, respectively, of total revenue in 2007.
Professional
Management
Professional Management revenue increased 93% from
$14.6 million in 2006 to $28.2 million in 2007. This
increase was primarily due to an increase in average AUM from
$5.7 billion in 2006 to $12.6 billion in 2007. The
increase in AUM was driven primarily by increased enrollment
arising from marketing campaigns and other ongoing member
acquisitions.
Platform
Revenue
Platform revenue increased 8% from $29.0 million in 2006 to
$31.4 million in 2007, due primarily to an increased number
of plan participants at plan sponsors who use one or more of our
services.
Other
Revenue
Other revenue decreased 20% from $4.7 million in 2006 to
$3.8 million in 2007. This decrease was due primarily to
our decision to phase out a service offered in 2007, but which
we do not currently expect to offer in subsequent years, as well
a decrease in consulting fees of $0.3 million, partially
offset by an increase in revenue related to reimbursement for
marketing and member materials of $1.0 million from certain
subadvisory relationships.
58
Cost of
Revenue
Cost of revenue increased 31% from $15.7 million in 2006 to
$20.6 million in 2007. This increase was primarily due to
an increase of $2.0 million in costs associated with the
printing of, and postage for, subadvisory marketing and member
materials, $1.5 million in increased payroll-related
expense, including $0.3 million in stock-based compensation
associated with an increase in the number of service delivery
employees and $1.1 million in fees paid to plan providers
to facilitate the exchange of plan and plan participant data, as
well as implementing our transaction instructions for member
accounts. As a percentage of revenue, cost of revenue remained
flat at 33% for both 2006 and 2007.
Research and
Development
Research and development expense increased 3% from
$14.2 million in 2006 to $14.6 million in 2007. This
increase was primarily due to increased payroll and
employee-related expenses of $1.1 million, including
stock-based compensation expense of $0.2 million, offset by
increased capitalization of website development costs of
$0.8 million. As a percentage of revenue, research and
development expense decreased from 30% in 2006 to 23% in 2007.
Sales and
Marketing
Sales and marketing expense increased 6% from $18.8 million
in 2006 to $19.9 million in 2007. This increase was
primarily due to increased payroll and employee-related expense
of $0.9 million and increased marketing materials for
direct advisory relationships of $0.7 million. As a
percentage of revenue, sales and marketing expense decreased
from 39% in 2006 to 31% in 2007.
General and
Administrative
General and administrative expense increased 20% from
$5.6 million in 2006 to $6.7 million in 2007. This
increase was primarily due to increased payroll and
employee-related expenses of $1.4 million, including
stock-based compensation expense of $1.0 million. As a
percentage of revenue, general and administrative expense
decreased from 12% in 2006 to 11% in 2007.
Amortization of
Internal Use Software
Amortization expense increased 23% from $2.5 million in
2006 to $3.1 million in 2007. This increase was primarily
due to an increase of capitalized development costs subject to
amortization. These costs include engineering costs associated
with developing and enhancing our service offerings.
Interest
Expense
Interest expense increased from $0.3 million in 2006 to
$1.0 million in 2007. This increase was due to a higher
effective interest rate on our $10.0 million promissory
note in 2007 as compared to 2006.
Interest and
Other Income, Net
Interest income decreased from $0.9 million in 2006 to
$0.7 million in 2007 largely as a result of generally lower
cash balances and money market rates.
Taxes and Net
Loss
Taxes remained low as a result of net losses for the year in
2006 and 2007. We were subject to state minimum tax in both
years as well as federal alternative minimum tax in 2007.
59
Quarterly Results
of Operations
The following table sets forth our unaudited quarterly condensed
consolidated statements of operations data for each of the eight
quarters ended September 30, 2009. The data have been
prepared on the same basis as the audited consolidated financial
statements and related notes included in this prospectus and you
should read the following tables together with such financial
statements. The quarterly results of operations include all
necessary adjustments, consisting only of normal recurring
adjustments that we consider necessary for a fair presentation
of this data. The results of historical periods are not
necessarily indicative of future results.
Our Professional Management revenue generally increased
sequentially in each of the quarters presented as a result of
AUM growth driven primarily by new rollouts and annual
campaigns. Professional Management revenue decreased in the
first quarter of 2008 and 2009 compared to the prior quarter,
primarily due to the fee structure with one of our plan
providers under which we recognize the difference between earned
revenue and minimum contractual revenue in the fourth quarter.
Platform revenue declined in the first quarter of 2008 compared
with the prior quarter primarily due to a one-time recognition
of revenue from a contract following completion of final
deliverables in the fourth quarter of 2007. Platform revenue has
otherwise generally increased quarter over quarter as a result
of new business, partially offset by the phase-out of services
related to investment guidance.
Cost of revenue generally increased in absolute dollars each
quarter presented as a result of higher data connectivity fees
and member materials incurred to support the increase in
revenue. Cost of revenue decreased in the fourth quarter of 2008
and the first quarter of 2009 due to a decrease in revenue
resulting from the decline in equity markets in the fourth
quarter of 2008. While cost of revenue increased in absolute
dollars, gross margin remained fairly consistent by quarter.
Total operating expenses have fluctuated both in absolute
dollars and percentage of revenue from quarter to quarter due
primarily to stock-based compensation, amortization of internal
use software, costs related to marketing campaigns and costs
associated with headcount across all functions.
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
Condensed Consolidated Statements of Operations Data:
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands, except per share data, unaudited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Management
|
|
$
|
9,556
|
|
|
$
|
8,964
|
|
|
$
|
9,018
|
|
|
$
|
9,913
|
|
|
$
|
11,068
|
|
|
$
|
9,593
|
|
|
$
|
11,137
|
|
|
$
|
13,646
|
|
Platform
|
|
|
8,495
|
|
|
|
7,351
|
|
|
|
7,343
|
|
|
|
7,498
|
|
|
|
7,306
|
|
|
|
7,220
|
|
|
|
7,704
|
|
|
|
7,602
|
|
Other
|
|
|
2,454
|
|
|
|
519
|
|
|
|
886
|
|
|
|
772
|
|
|
|
633
|
|
|
|
595
|
|
|
|
588
|
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
20,505
|
|
|
|
16,834
|
|
|
|
17,247
|
|
|
|
18,183
|
|
|
|
19,007
|
|
|
|
17,408
|
|
|
|
19,429
|
|
|
|
22,010
|
|
Cost of revenue
|
|
|
5,962
|
|
|
|
5,983
|
|
|
|
7,087
|
|
|
|
7,441
|
|
|
|
7,077
|
|
|
|
6,601
|
|
|
|
6,910
|
|
|
|
7,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
14,543
|
|
|
|
10,851
|
|
|
|
10,160
|
|
|
|
10,742
|
|
|
|
11,930
|
|
|
|
10,807
|
|
|
|
12,519
|
|
|
|
14,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,522
|
|
|
|
3,464
|
|
|
|
3,529
|
|
|
|
3,303
|
|
|
|
3,367
|
|
|
|
3,688
|
|
|
|
3,711
|
|
|
|
3,967
|
|
Sales and marketing
|
|
|
4,555
|
|
|
|
4,370
|
|
|
|
6,245
|
|
|
|
5,444
|
|
|
|
5,098
|
|
|
|
5,360
|
|
|
|
6,001
|
|
|
|
5,328
|
|
General and administrative
|
|
|
1,354
|
|
|
|
1,855
|
|
|
|
1,530
|
|
|
|
1,542
|
|
|
|
1,686
|
|
|
|
1,842
|
|
|
|
1,773
|
|
|
|
1,744
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of internal use software
|
|
|
659
|
|
|
|
685
|
|
|
|
536
|
|
|
|
459
|
|
|
|
578
|
|
|
|
638
|
|
|
|
673
|
|
|
|
815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
10,090
|
|
|
|
10,374
|
|
|
|
11,840
|
|
|
|
10,748
|
|
|
|
13,760
|
|
|
|
11,528
|
|
|
|
12,158
|
|
|
|
11,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
4,453
|
|
|
|
477
|
|
|
|
(1,680
|
)
|
|
|
(6
|
)
|
|
|
(1,830
|
)
|
|
|
(721
|
)
|
|
|
361
|
|
|
|
2,610
|
|
Interest expense
|
|
|
(246
|
)
|
|
|
(213
|
)
|
|
|
(162
|
)
|
|
|
(178
|
)
|
|
|
(246
|
)
|
|
|
(184
|
)
|
|
|
(171
|
)
|
|
|
(159
|
)
|
Interest and other income, net
|
|
|
213
|
|
|
|
114
|
|
|
|
73
|
|
|
|
43
|
|
|
|
6
|
|
|
|
27
|
|
|
|
232
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
4,420
|
|
|
|
378
|
|
|
|
(1,769
|
)
|
|
|
(141
|
)
|
|
|
(2,070
|
)
|
|
|
(878
|
)
|
|
|
422
|
|
|
|
2,496
|
|
Income tax expense (benefit)
|
|
|
31
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
(162
|
)
|
|
|
79
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
4,389
|
|
|
|
375
|
|
|
|
(1,772
|
)
|
|
|
(144
|
)
|
|
|
(2,073
|
)
|
|
|
(716
|
)
|
|
|
343
|
|
|
|
2,054
|
|
Less: Preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of common stock
|
|
$
|
4,389
|
|
|
$
|
375
|
|
|
$
|
(1,772
|
)
|
|
$
|
(144
|
)
|
|
$
|
(4,435
|
)
|
|
$
|
(716
|
)
|
|
$
|
343
|
|
|
$
|
2,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.46
|
|
|
$
|
0.04
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.03
|
|
|
$
|
0.20
|
|
Diluted net income (loss) per share
|
|
$
|
0.12
|
|
|
$
|
0.01
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
|
$
|
0.06
|
|
Liquidity and
Capital Resources
Sources of
Liquidity
Over the next 12 months, and in the longer term, we expect
that our cash and liquidity needs will be met by existing
resources and cash generated by our ongoing operations. We have
a $7.0 million revolving credit facility with an interest
rate of prime plus 0.75% that will expire as of April 19,
2012, and that we do not expect to draw upon in the next
12 months. In April 2009, we entered into a three-year,
$10.0 million term loan with a maturity date of May 1,
2012. Under the term loan, we can receive prime rate loans or
LIBOR rate loans. The interest rate for a prime rate loan is
1.50% above prime rate, with a minimum prime rate of 4.00% per
annum, resulting in a minimum interest rate of 5.50% per annum.
The interest rate for a LIBOR rate loan is 4.00% above the
three-month LIBOR measured on a
360-day
basis, with a minimum LIBOR rate of 1.50% per annum, resulting
in a minimum interest rate of 5.50% per annum. As of
September 30, 2009, the amount outstanding under our term
loan was $8.9 million. The interest rate currently
applicable to this term loan is equal to 1.50% above prime rate,
with a minimum prime rate of 4.00% per annum, resulting in a
minimum interest rate of 5.50% per annum. We intend to repay the
outstanding balance under this term loan using a portion of the
proceeds from this offering.
Since inception, our operations have been financed through cash
flows from operations, private sales of our capital stock and
our bank borrowings. Through September 30, 2009, we had
received net cash proceeds of $147.3 million through equity
financings and from the exercise of options to
61
purchase our common stock. At December 31, 2008, we had
total cash and cash equivalents of $14.9 million, compared
to $15.0 million at December 31, 2007.
Cash
Flows
The following table presents information regarding our cash
flows, cash and cash equivalents for the years ended
December 31, 2006, 2007 and 2008 and the nine months ended
September 30, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(1,662
|
)
|
|
$
|
770
|
|
|
$
|
3,188
|
|
|
$
|
(2,680
|
)
|
|
$
|
9,498
|
|
Net cash used in investing activities
|
|
|
(2,251
|
)
|
|
|
(4,986
|
)
|
|
|
(6,548
|
)
|
|
|
(5,281
|
)
|
|
|
(3,841
|
)
|
Net cash provided by (used in) financing activities
|
|
|
10,953
|
|
|
|
1,035
|
|
|
|
3,202
|
|
|
|
(603
|
)
|
|
|
(4,716
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
7,040
|
|
|
|
(3,181
|
)
|
|
|
(158
|
)
|
|
|
(8,564
|
)
|
|
|
941
|
|
Cash and cash equivalents, end of period
|
|
$
|
18,196
|
|
|
$
|
15,015
|
|
|
$
|
14,857
|
|
|
|
6,451
|
|
|
$
|
15,798
|
|
Operating
Activities
Net cash provided by operating activities in the nine months
ended September 30, 2009 was $9.5 million compared to
net cash used in operating activities of $2.7 million in
the nine months ended September 30, 2008. Net cash provided
by operating activities was a result of a net profit of
$2.3 million plus adjustments for non-cash expenses. These
non-cash adjustments include $4.6 million in amortization
of stock-based compensation expense, $2.1 million in
amortization of internal use software, a $3.7 million
increase in accrued compensation and a $3.0 increase in deferred
revenue offset by a $5.6 million increase in accounts
receivable and a $1.7 million increase in other assets. Net
cash used in operating activities in the nine months ended
September 30, 2008 included approximately $2.9 million of
offering costs. The offering costs were expensed during the
quarter ended December 31, 2008, as a result of our
decision in November 2008 to cease efforts to pursue an
initial public offering.
Net cash provided by operating activities in 2008 was
$3.2 million compared to net cash provided by operating
activities of $0.8 million in 2007. The difference in net
cash provided by operating activities was a result of a higher
net loss of $3.6 million in 2008 compared to a net loss of
$1.8 million in 2007, which was offset by adjustments to
net loss for non-cash expenses. These adjustments include
$3.6 million for amortization of stock-based compensation
expense, a $2.8 million decrease in accounts receivable,
$2.2 million of amortization of internal use software and
$1.6 million of depreciation expense, offset by a
$4.5 million decrease in accrued compensation and a
$1.5 million decrease in other assets. The decrease in
accounts receivable at the end of 2008 partially reflects
relatively flat AUM from 2007 to 2008 coupled with increased
collections efforts.
Net cash provided by operating activities in 2007 was
$0.8 million compared to net cash used by operating
activities of $1.7 million in 2006. The difference in net
cash provided by operating activities was a result of a lower
net loss of $1.8 million in 2007 compared to a net loss of
$8.0 million in 2006 and the adjustment of net loss for
non-cash expenses. These adjustments include $4.4 million
for amortization of stock-based compensation expense,
$3.0 million of amortization of internal use software and
$1.3 million of depreciation expense, partially offset by
an $8.2 million increase in accounts receivable and
$0.9 million decrease in other assets.
62
Investing
Activities
Net cash used in investing activities was $3.8 million in
the nine months ended September 30, 2009 compared to
$5.3 million in the nine months ended September 30 2008. In
the nine months ended September 30, 2009, we capitalized
$3.4 million of internal use software and website
development costs, compared to $3.3 million in the nine
months ended September 30, 2008. In the nine months ended
September 30, 2009, we used $0.5 million for the
purchase of property and equipment costs, compared to
$2.0 million in the nine months ended September 30,
2008.
Net cash used in investing activities was $6.5 million in
2008 compared to $5.0 million used in 2007. In 2008, we
capitalized $4.1 million of internal use software and
website development costs, compared to $3.6 million in
2007. In 2008, we used $2.5 million for the purchase of
property and equipment costs, compared to $1.4 million in
2007.
Net cash used in investing activities was $5.0 million in
2007 compared to $2.3 million used in 2006. In 2007, we
capitalized $3.6 million of internal use software and
website development costs, compared to $2.8 million in
2006. In 2007, we used $1.4 million for the purchase of
property and equipment costs, compared to $1.2 million in
2006.
Financing
Activities
Net cash used in financing activities was $4.7 million and
$0.6 million, in the nine months ended September 30,
2009 and 2008, respectively. Net cash provided by financing
activities was $3.2 million, $1.0 million and
$11.0 million and during 2008, 2007 and 2006, respectively.
In September 2006, we issued a $10.0 million promissory
note. In 2008, we borrowed $3.5 million against our
revolving credit facility. In the nine months ended
September 30, 2009, we repaid the then outstanding balance
under both our $3.5 million revolving credit facility and
our $10.0 million promissory note, and also began paying
down the $10.0 million term loan. In 2007, we generated net
cash proceeds of $909,000 from the exercise of options to
purchase common stock.
Contractual
Obligations
The following table describes our contractual obligations as of
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
Years
|
|
|
Years
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3
|
|
|
4-5
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Long-term debt obligations
(1)
|
|
$
|
8,889
|
|
|
$
|
3,333
|
|
|
$
|
5,556
|
|
|
$
|
|
|
|
$
|
|
|
Operating and capital
leases
(2)
|
|
|
7,179
|
|
|
|
1,954
|
|
|
|
3,748
|
|
|
|
1,265
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,068
|
|
|
$
|
5,287
|
|
|
$
|
9,304
|
|
|
$
|
1,265
|
|
|
$
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Term loan: $10.0 million term loan executed in April 2009
with a stated interest rate of prime rate plus 1.50% per annum,
with a minimum prime rate of 4.00% per annum, resulting in a
minimum rate of 5.50% per annum, and a maturity date of
May 1, 2012.
|
|
(2)
|
|
We lease facilities under noncancelable operating leases
expiring at various dates through 2015.
|
Off-Balance Sheet
Arrangements
We have no off-balance sheet arrangements.
63
Recent Accounting
Pronouncements
In October 2009, the FASB issued Accounting Standards Update, or
ASU,
2009-13
Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues
Task Force
, or ASU
2009-13.
ASU
2009-13
addresses how to measure and allocate arrangement consideration
to one or more units of accounting within a multiple-deliverable
arrangement. ASU
2009-13
modifies the requirements for determining whether a deliverable
can be treated as a separate unit of accounting by removing the
criteria that objective evidence of fair value exist for the
undelivered elements in order to account for those undelivered
elements as a single unit of accounting. ASU
2009-13
is
effective for us prospectively for revenue arrangements entered
into or materially modified beginning January 1, 2011.
Early adoption is permitted. We are currently evaluating the
impact adoption will have on our financial condition and results
of operations.
In June 2009, the FASB issued Statement 168,
The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles a replacement of FASB
Statement 162
, or SFAS 168, codified into FASB ASC
Topic 105,
Generally Accepted Accounting Principles.
The
FASB
Accounting Standards Codification,
or Codification
or ASC, will become the source of authoritative GAAP recognized
by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC
registrants. On the effective date of SFAS 168, the
Codification will supersede all then-existing non-SEC accounting
and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will
become non-authoritative. SFAS 168 is effective for
financial statements issued for interim and annual periods
ending after September 15, 2009.
In May 2009, the FASB issued FASB Statement 165,
Subsequent
Events
, or SFAS 165, codified into FASB ASC Topic 855,
Subsequent Events
. SFAS 165 requires an entity to
recognize in the financial statements the effects of all
subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet. For
unrecognized subsequent events that must be disclosed to keep
the financial statements from being misleading, an entity will
be required to disclose the nature of the event as well as an
estimate of its financial effect or a statement that such an
estimate cannot be made. In addition, SFAS 165 requires an
entity to disclose the date through which subsequent events have
been evaluated. SFAS 165 is effective for interim and
annual periods ending after June 15, 2009 and is to be
applied prospectively. Our adoption of SFAS 165 did not
have a material impact on our financial position, results of
operations and cash flows.
In June 2008, the FASB ratified EITF Issue
07-05,
Determining Whether an Instrument (or an Embedded Feature) is
indexed to an Entitys Own Stock
, or
EITF 07-5,
codified into FASB ASC Subtopic
815-40,
Contracts in Entitys Own Equity
.
EITF 07-5
provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including
evaluating the instruments contingent exercise and
settlement provisions.
EITF 07-5
is effective for fiscal years beginning after December 15,
2008. On adoption of
EITF 07-5
effective January 1, 2009, we recorded a warrant liability
for approximately $144,000 and a corresponding charge of
$1.0 million to the accumulated deficit to reflect the
cumulative effect of this change in accounting principle. The
warrant is thereafter recorded at its fair value on each
reporting date.
Quantitative and
Qualitative Disclosure about Market Risk
Market
Risk.
Our
exposure to market risk is directly related to our role as an
investment advisor for the managed accounts for which we provide
portfolio management services. 55% of our revenue for the year
ended December 31, 2008, was derived from fees based on the
market value of AUM. We expect this percentage to increase over
time. A decrease in the aggregate value of AUM may cause our
revenue and income to decline.
64
Interest Rate
Risk.
Interest
payable on the $10.0 million term loan we entered into as
of April 2009 is variable. We may borrow up to
$10.0 million under our term loan as either a prime rate
loan or a LIBOR rate loan. The interest rate with respect to a
prime rate loan is equal to 1.50% above prime rate, with a
minimum prime rate of 4.00% per annum, resulting in a minimum
interest rate of 5.50% per annum. The interest rate with respect
to a LIBOR loan is 4.00% above the three-month LIBOR measured on
a 360-day basis, with a minimum LIBOR rate of 1.50% per annum,
resulting in a minimum interest rate of 5.50% per annum.
Interest rate changes will therefore affect the amount of our
interest payments, future earnings and cash flows. A portion of
the proceeds from this offering will be used to repay the
outstanding indebtedness under this term loan, and, as such, we
expect this risk to no longer be a factor after this offering.
65
BUSINESS
Retirement
Industry Overview
The United States retirement savings industry is large and
growing. Although Social Security is perhaps the best-known
source of retirement assets, there are significant sources of
retirement assets beyond Social Security. According to Cerulli
Associates 2008 Retirement Markets Update, non-Social Security
retirement assets grew from approximately $9.4 trillion in 2002
to approximately $15.8 trillion in 2007, representing a compound
annual growth rate of 10.9%, and are anticipated to be
approximately $18.0 trillion by 2013. Retirement assets fall
primarily into two categories: defined benefit plans and defined
contribution plans. In defined benefit plans, such as corporate
or government pension plans, participants receive specified
monetary distributions upon retirement. In most cases,
professional asset managers, rather than individual investors,
make investment decisions for defined benefit plans. In defined
contribution plans, such as 401(k), 403(b) and 457 plans, which
we collectively refer to as 401(k) plans, participants
contribute a specified dollar amount into the plan on a regular
basis by means of payroll deductions and, upon retirement, can
draw from the amount of money resulting from these contributions
and, in some cases, company matching contributions and the
investment return of the contributions and company match. Unlike
defined benefit plans, individual investors, rather than
professional asset managers, are generally responsible for
making investment decisions in defined contribution plans.
Individual Retirement Accounts, or IRAs, are personal savings
accounts that are typically directed by the individual and are
not sponsored by a corporate or governmental employer.
Cerulli Associates estimates that private defined contribution
assets, excluding IRAs, were approximately $4.2 trillion and
constituted more than 25% of total retirement assets in the
United States, excluding Social Security, in 2007, with
approximately 57 million 401(k) plan participants as of
December 31, 2007. Cerulli Associates also estimates a
compound annual growth rate of 7.3% for 401(k) assets from 2009
to 2013. This compares to an estimated 6.3% compound annual
growth rate for total retirement assets over the same time
period.
Actual and
Estimated Retirement Market Assets by Segment 2002
2013E
|
|
Source:
|
Cerulli Associates 2008 Retirement Markets Update. Excludes
Federal Thrift Savings Plan Assets and Social Security.
|
66
Retirement
Industry Trends
Shifting
Demographics Drive a Growing Need for Retirement
Assistance.
The
ongoing growth in retirement assets, especially 401(k) assets,
is driven in part by individuals seeking to supplement
retirement funds they expect to receive from Social Security and
corporate defined benefit plans. Defined contribution assets,
including 401(k) assets, are not evenly distributed by age.
According to data contained in the Federal Reserve Boards
Survey of Consumer Finances for 2007, households headed by
individuals age 45 through 64 represented 45% of all
retirement account holders but account for 56% of the assets in
retirement accounts. Members of the Baby Boomer generation,
which refers to individuals born between 1946 and 1964, will
start to reach traditional retirement age in 2011. However,
studies suggest that many Baby Boomers are not financially
prepared to support themselves in retirement. The Employee
Benefits Research Institute, or EBRI, 2009 Retirement Confidence
Survey indicates that approximately 36% of the workers
age 45 through 54, and approximately 30% of workers age 55
or older, report total savings and investments, excluding the
value of their primary residence and any defined benefit plans,
of less than $10,000. A study published in October 2009 by EBRI
and the Investment Company Institute estimated that the median
401(k) balance was approximately $12,655 at year-end 2008.
Despite the increased reliance on defined contribution plans, we
believe many investors are not equipped to adequately formulate
an investment strategy for their retirement assets. As a result,
we believe investors face significant risk and potentially
inappropriate market exposure and asset allocations. According
to research by the Investment Company Institute and EBRI, the
average 401(k) account lost 24.3% in value over the course of
2008. As a result, we believe individuals across all age groups
need assistance with investing their 401(k) assets and making
other adjustments to their retirement plan to help them retire
with sufficient income.
Growing
Reliance on Defined Contribution
Plans.
As
employer-sponsored retirement plans continue to shift from
defined benefit plans to defined contribution plans, the
responsibility for making retirement investment decisions shifts
from professional pension fund managers to individual investors.
According to Cerulli Associates, the number of corporate defined
benefit plans has declined from nearly 59,500 in 1997 to an
estimated 46,000 in 2007, with 169 additional defined benefit
plans in Fortune 1000 companies being terminated or frozen
during 2008. When a defined benefit plan is frozen to all
employees or closed to new employees, the benefit level will no
longer rise based on future service or salary increases, or new
employees do not participate in these plans at all. Of the
workers surveyed in EBRIs 2009 Retirement Confidence
Survey, 42% estimate that a major source of their retirement
funds will come from
employer-sponsored
retirement savings plans. The 2009 Retirement Confidence Survey
suggests that workers between the ages of 25 and 34 are even
less likely than older workers to rely on income from Social
Security. As a result, we believe that these workers will need
to accumulate greater savings amounts outside of defined benefit
plans for retirement.
Changing Legal
and Regulatory
Framework.
As
the burden of retirement investing shifts to the individual, we
believe that there is an increasing need for assistance and
guidance on how to manage retirement wealth. However, according
to a 2009 survey by Hewitt Associates, the primary reason cited
by plan sponsors for not making investment advice available to
employees has been the fear of increased fiduciary or legal
risk. We believe the Pension Protection Act of 2006 and
subsequent Department of Labor regulations can reduce these
concerns. In addition to providing specific guidelines for plan
sponsors to automatically enroll employees into qualified plans
and accelerate contributions on an annual basis, the Pension
Protection Act of 2006 further supports the existing foundation
for professional asset management of 401(k) accounts. Adherence
to these guidelines provides specific safeguards to plan
sponsors from fiduciary and legal risk. As a result, we
anticipate that the Pension Protection Act will continue to
accelerate demand for advisory services.
The Pension Protection Act of 2006 also mandated that the
Department of Labor define what are known as Qualified Default
Investment Alternatives, or QDIAs. QDIAs are default investment
67
options to which a plan sponsor can direct participants
ongoing contributions when automatically enrolling employees
into 401(k) plans. The Department of Labor defines three
qualified default investment options as QDIAs: professionally
managed accounts, balanced funds and lifecycle funds. A plan
sponsor that elects to automatically default plan participant
contributions into a QDIA in accordance with the regulation
receives a fiduciary safe harbor protecting the plan sponsor
from potential liability that arises from adoption of automatic
enrollment. We believe that the designation of managed accounts,
such as our Professional Management service, as a QDIA will
continue to increase demand for managed accounts.
Automatic
401(k).
As
a result of the Pension Protection Act of 2006 and Department of
Labor guidelines, more plan sponsors are now actively seeking
automatic retirement savings solutions for their employees.
According to a 2009 401(k) plan survey conducted by Hewitt
Associates, the percentage of employers that automatically
enroll new participants increased from 19% in 2005 to 58% in
2009. Similarly, automatic contribution escalation, where
employees contribution rates are automatically increased
over time unless the employee affirmatively elects otherwise,
increased from 9% in 2005 to 44% in 2009. A 2006 report by the
Retirement Security Project estimates that the automatic 401(k)
could increase net national saving by about 0.34% of gross
domestic product per year, or approximately $44 billion per
year. A growing trend within the automatic 401(k) is changing
the default investment option to a target-date fund or managed
account and re-enrolling existing plan participants into the new
default investment option.
Automatic 401(k)
Enrollment
1997-2009E
Note: Percentage of employers who automatically enrolled
new employees into 401(k) plans.
Source: Hewitt Associates Survey Findings: Trends and Experience
in 401(k) Plans 2009.
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Greater Use of
Managed Accounts Among
Near-Retirees.
A
2009 study by EBRI, based on 2007 data, reported that workers
under the age of 30, with lower incomes, less time on the job
and with few assets are significantly more likely to have assets
invested in target-date funds than are older workers. The study
found that almost 44% of participants under 30 had assets in a
target-date fund, compared with 27% of those 60 or older.
Target-date funds and managed accounts can complement each other
within 401(k) plans because they can appeal to different
participants with different needs. We believe that younger
workers are more likely to utilize target-date funds and
near-retirees, who generally hold outside assets and are looking
for more retirement planning help, are more likely to use
managed accounts.
Our
Company
We are a leading provider of independent, technology-enabled
portfolio management services, investment advice and retirement
help to participants in employer-sponsored defined contribution
plans, such as 401(k) plans. We help investors plan for
retirement by offering personalized plans for saving and
investing, as well as by providing assessments of retirement
income needs and readiness, regardless of personal wealth or
investment account size. We use our proprietary advice
technology platform to provide our services to millions of
retirement plan participants on a cost-efficient basis. We
believe that our services have significantly lowered the cost
and increased the accessibility to plan participants of
independent, personalized portfolio management services,
investment advice and retirement help.
Our business model is based on workplace delivery of our
services. We target three key constituencies in the retirement
plan market: plan participants (employees of companies offering
401(k) plans), plan sponsors (employers offering 401(k) plans to
their employees) and plan providers (companies providing
administrative services to plan sponsors). We provide the
following benefits for each of these constituencies:
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For retirement plan participants, we provide personalized,
unconflicted advice and management services unique to each
individuals specific investment needs and goals, using the
investment options available through their employer-provided
plan. We offer three principal services:
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Professional Management
is a discretionary managed
account service designed for plan participants who want
affordable, personalized and professional portfolio management
services, investment advice and retirement help from an
independent investment advisor without the conflicts of interest
that can arise when an advisor offers proprietary products. Our
investment recommendations are limited to the investment
alternatives available in a 401(k) plan as determined and
approved by a plan fiduciary other than us, although we do take
into account other identified holdings of the plan sponsor or
the plan participant when offering investment advice. With the
exception of employer stock, if any, included as an investment
alternative, we do not provide advice on or manage
single-company securities. We do not consult with, or make
recommendations, to the plan sponsor regarding which investment
alternatives to make available in a participant plan. With this
service, individuals delegate investment decision-making and
trading authority to us, which is referred to as discretionary
authority. The Professional Management service is our fastest
growing service, with Assets Under Management, or AUM, growing
at a compound annual growth rate of approximately 93% since
December 31, 2004 to approximately $23.5 billion as of
September 30, 2009. Plan sponsors choosing to make our
Professional Management service available typically also make
available our Online Advice service. In some cases, we provide
this service by acting as a subadvisor to a plan provider acting
as the investment manager to plan participants.
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Online Advice
is a nondiscretionary Internet-based
service designed for plan participants who wish to take a more
active role in personally managing their portfolios and offers
personalized advice for retirement portfolios. With this
service, plan participants may elect to follow the online advice
without delegating investment decision-making and trading
authority to us, making this a nondiscretionary service. In some
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cases, we provide this service by acting as a subadvisor to a
plan provider acting as the investment advisor to plan
participants.
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Retirement Evaluation
is a retirement readiness
assessment provided to plan participants upon rollout and
generally annually thereafter, together with a Professional
Management enrollment form. Retirement Evaluations highlight
specific risks in a plan participants retirement account
and assess the likelihood of achieving the plan
participants retirement income goals. The assessment also
provides guidance on how to reduce these highlighted risks and
introduces our services as a means of obtaining help in
addressing these issues.
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For retirement plan sponsors, our services are designed to
improve employee satisfaction and reduce fiduciary and business
risk by evaluating, disclosing and addressing poor investment
and savings decisions by plan participants.
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For retirement plan providers, our services represent a
cost-effective method of providing personalized, independent
investment advice that is an attractive and increasingly
necessary service for the largest plan sponsors. Providing these
services helps plan providers compete more effectively in the
large plan market.
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We deliver our services to plan sponsors and plan participants
primarily through connections to eight retirement plan
providers. In addition, we have connectivity with Charles Schwab
to support one plan sponsor. We target large plan sponsors
across a wide range of industries. As of September 30,
2009, we had signed contracts to make our services available
through 107 Fortune 500 companies and seven Fortune
20 companies. As of September 30, 2009, we were under
contract to provide either our full suite of services, including
Professional Management, Online Advice and Retirement
Evaluation, or our Online Advice service only, through more than
765 plan sponsors with approximately 7.6 million plan
participants whose retirement savings represented more than
$500 billion in assets. Within this group, we provide our
full suite of services to 341 plan sponsors representing
approximately 3.7 million participants and approximately
$242 billion in AUC. As of September 30, 2009, we had
approximately $23.5 billion in AUM, and managed the
accounts of approximately 383,000 members who have delegated
investment decision-making authority to us. Our AUC does not
include assets in plans where we have signed contracts, but for
which we have not yet rolled out our Professional Management
service. As of September 30, 2009, we had 24 plan sponsors,
representing approximately 870,000 plan participants, with whom
we had signed contracts but for whom we had not yet rolled out
our Professional Management service.
Our business model is characterized by subscription-based,
recurring revenue. Our contracts with plan sponsors typically
have initial terms of three years and evergreen clauses that
extend the initial term until terminated by either party after a
specified notice period. Our revenue is derived from both
management fees and platform fees. The management fees we earn
are based on the value of the assets that we manage for plan
participants who have delegated investment decision-making
authority to us or to a plan provider for whom we act as a
subadvisor. The platform fees we earn are derived through annual
subscriptions paid by the plan sponsor, plan provider or the
retirement plan itself, depending on the plan structure, and are
based on the number of eligible employees in the plan. We
generated Professional Management revenue of $34.4 million
for the nine months ended September 30, 2009, an increase
of 23% from $27.9 million for the nine months ended
September 30, 2008. We generated platform revenue of
$22.5 million for the nine months ended September 30,
2009, an increase of 2% from $22.2 million for the nine
months ended September 30, 2008.
The key steps associated with delivering our Professional
Management service are as follows:
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Contract with Plan Sponsor.
First, we sign a
contract to provide our Professional Management service to a
plan sponsors employees.
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Plan Rollout.
Second, we obtain plan and plan
participant data, set up the plan on our systems and make
services available to plan participants. Upon completion of
rollout, our
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services are available to all eligible participants of that
plan. As of September 30, 2009, we had approximately
$242 billion in AUC.
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Encourage Enrollment in Our Professional Management
Service.
Once the plan has been rolled out, we
deliver to plan participants retirement evaluations and
enrollment materials, either through the plan provider or
directly to plan participants, and with the support of plan
sponsors. As of September 30, 2009, our asset enrollment
rate for plans actively rolled out at least 14 months was
approximately 11.0% and our participant enrollment rate for
plans actively rolled out at least 14 months was
approximately 11.8%.
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Manage Assets.
Once a plan participant enrolls
in our Professional Management service, the retirement assets of
that plan participant count toward our AUM. As of
September 30, 2009, we had approximately $23.5 billion
of AUM. At this point, the plan participants 401(k) assets
are allocated pursuant to the participants investment
objectives and investment options available.
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We launched our Professional Management service in September
2004. From December 31, 2004 to September 30, 2009, we
had a compound annual growth rate, or CAGR, of 93% for AUM and
98% for membership. As of September 30, 2009, we had AUM of
approximately $23.5 billion and approximately 383,000
members, compared to AUM of approximately $15.6 billion and
approximately 322,000 members at December 31, 2008. Our
total revenue for the nine months ended September 30, 2009
was $58.8 million, compared to $52.3 million for the
nine months ended September 2008, an increase of 13%. Of these
amounts, Professional Management revenue represented 58% in 2009
and 53% in 2008.
The following tables illustrate the increase in our AUM and
membership, and the corresponding CAGR, from December 31,
2004 to September 30, 2009.
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Assets
Under Management
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Total
Members
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All data are shown as of December
31 of the applicable year except 2009, for which the data are
shown as of September 30.
The following table illustrates the number of plan sponsors
where Professional Management in available, and the
corresponding CAGR. The data below includes plan sponsors where
no members had yet enrolled.
Total
Plan Sponsors
All data are shown as of December
31 of the applicable year except 2009, for which the data are
shown as of September 30.
71
Company
History
Financial Engines was co-founded in 1996 by Professor William F.
Sharpe, a recipient of the 1990 Nobel Prize in Economic Sciences
for his pioneering work on the theory of financial economics,
including how prices of financial assets are determined and the
link between risk and return, Professor Joseph A. Grundfest, a
former SEC commissioner and a professor of law at Stanford Law
School, and the late Craig Johnson, then Chairman of the Venture
Law Group. The company was founded to address the need for
independent investment advice. Traditionally, high quality,
personalized investment advice had been available only to large
institutions and the affluent. Professor Sharpes vision
was to leverage technology to make high quality independent
advice available to millions regardless of their wealth or
investment expertise.
A pioneer in our market, we introduced our Online Advice service
in 1998. Following the introduction of Online Advice, we focused
on expanding our service offerings to provide investors with
advice on multiple tax-deferred accounts and taxable
investments. Over the next five years, we made significant
investments in technology and usability of our platform that
allowed us to expand and enhance our service offerings,
including our Retirement Evaluation, a personalized printed
retirement assessment. In 2004, we launched our Professional
Management service to provide personalized and professional
portfolio management to retirement plan participants.
Our Market
Opportunity
We believe shifting retirement industry trends present us with
an opportunity to help plan sponsors provide independent
portfolio management services, investment advice and retirement
help to plan participants while working within the parameters of
ERISA, the Pension Protection Act and recent Department of Labor
regulations. Based on data published by Cerulli Associates,
research indicates that legislation and regulation over the past
several years will increase plan sponsor demand for portfolio
management and investment advisory services. Furthermore, the
market downturn in 2008 has highlighted the need for providing
employees with retirement help. We have the capability to
provide portfolio management services, investment advice and
retirement help to plan participants who previously did not have
access to these services, and we believe we can leverage our
advice technology platform to cost-effectively serve the
fragmented plan participant market.
72
Our Competitive
Strengths
We believe that our leading market position results from the
following key competitive strengths:
Independent
and Unconflicted
Advice.
We
believe that many plan participants value an investment advisor
that is independent and free from potential conflicts of
interests. We also believe that many plan fiduciaries value
making independent and unconflicted advice available to their
plan participants. We do not receive differential compensation
based on the investments we recommend. We offer no proprietary
investment products and are free from the conflicts or the
perception of conflicts of interest that can arise for
competitors who offer such products. We do not hold assets in
custody or execute trades. Our investment recommendations are
limited to the investment alternatives available in a 401(k)
plan as determined and approved by a plan fiduciary other than
us, although we do take into account other identified holdings
of the plan sponsor or the plan participant when offering
investment advice. With the exception of employer stock, if any,
included as an investment alternative, we do not provide advice
on or manage single-company securities. We do not consult with,
or make recommendations to, the plan sponsors regarding which
investment alternatives to make available in a particular plan.
We are not associated with or controlled by any broker-dealer,
registered investment company, insurance company or financial
services organization. We believe our independence ensures that
our recommendations are based only on the best interests of
individual plan participants. We base our investment advice on
quantitative criteria applied through a computerized model that
is consistently applied through plan participants, plan
sponsors, plan providers and investment choices.
Proprietary
Investment Advice
Technology.
Our
technology-based investment process is based on a number of
methodologies pioneered by our co-founder and Nobel Laureate,
Professor William F. Sharpe, that are used by large
institutional investors, including pension funds and endowments.
We have applied and extended this core methodology to service
the needs of a wide range of individual investors while
achieving economies of scale.
Our technology-based investment approach incorporates the
following:
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Our Optimization Engine allows us to make personalized
investment recommendations chosen from the investment options
available within each plan, with consideration of the plan
participants individual circumstances including investment
horizon, existing investment allocations and characteristics of
his or her 401(k) plan, as well as any anticipated benefits from
other employer plans, such as cash balance or defined benefit
plans. Our Optimization Engine also considers other assets in a
plan participants household portfolio, allowing the advice
provided to adjust for the risks and correlations of other
financial assets, as well as the participants risk
tolerance. In addition, we provide personalized savings
recommendations to help participants reach their retirement
objectives.
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Our Simulation Engine allows us to model the characteristics of
more than 30,000 securities, including retail mutual funds,
stocks, employee stock options, institutional funds, guaranteed
investment contracts and stable value funds, exchange-traded
funds and fixed-income securities, taking into consideration
factors such as asset class exposures, expenses, turnover,
manager performance, active management risk, stock specific risk
and the securitys tax-efficiency. This allows our Advice
Engines to generate high quality recommendations over almost any
investment universe.
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Our Advice Engines ability to manage a plan
participants employer stock holdings is an attractive
feature to plan sponsors seeking to reduce the risk of fiduciary
liability that can arise when employer stock is included in a
401(k) plan. The advice produced by our Advice Engines also
generally reduces plan participants undiversified exposure
to the equity risk that results from holding an overly-high
concentration in employer stock. Managed accounts are the only
QDIA under the recent Department of Labor regulations that
provide a fiduciary safe harbor for plan sponsors that include
employer stock in their plans.
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Our Advice Engines are able to provide advice that takes into
consideration the impact of personal tax rates, unrealized gains
and losses, asset placement across taxable and tax-deferred
accounts and the tax efficiency of specific investments.
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Scalable
Technology
Platform.
Historically,
providing high quality investment advice to low balance
investors had been cost-prohibitive. We believe that our advice
technology platform allows us to cost-effectively service the
needs of individual investors with low asset balances and
provide sophisticated, personalized investment advice that
addresses the needs of millions of individual investors, many of
whom are underserved by the financial services industry.
Traditional advisors and asset managers have typically focused
on investors with financial assets of several hundred thousand
dollars or more. As of September 30, 2009, approximately
46% of our Professional Management members had less than $20,000
of retirement assets in their accounts. The ability to serve
these low balance plan participants
cost-effectively
is a key advantage of our business model.
Significant
Invested
Capital.
Our
services are based on our proprietary technology, which we
developed over a number of years and in which we have invested
significant financial and personnel resources. We believe that
any potential competitor will face significant challenges in
terms of the human capital, time, money and technology required
to develop a competitive offering. Furthermore, the technology
interfaces that we have established with our retirement plan
providers and plan sponsors are complex and would be
time-consuming and costly for our plan providers and plan
sponsors to replicate.
Established
Relationships and Data Connections with Retirement Plan
Providers.
Effectively
managing plan participant accounts requires relationships and a
data connection with the recordkeeping systems of those
retirement plans. We have built data transfer and retrieval,
transaction processing and fee deduction interfaces with a
number of retirement plan providers, including these eight
primarily: ACS, Fidelity, Hewitt, ING, JPMorgan, Mercer, T. Rowe
Price and Vanguard. Based on information from Pensions and
Investments, as of March 31, 2009, and one plan provider,
we estimate that these eight plan providers collectively service
plan sponsors representing more than $1.5 trillion in plan
assets, or more than 80% of the assets contained in plans with
more than 10,000 participants. In addition, we have connectivity
with Charles Schwab to support one plan sponsor. Building these
connections are major technical projects that we believe provide
us with a significant advantage over companies wishing to
provide retirement plan managed accounts. In addition, our
connections and arrangements with plan providers allow for
direct deduction of our fees from plan participant accounts,
with the approval of the plan sponsor.
Large,
Industry-Leading Retirement Plan Sponsor
Clients.
As
of September 30, 2009, we were under contract to provide
either our full suite of services, including Professional
Management, Online Advice and Retirement Evaluation, or our
Online Advice service only, through more than 765 plan
sponsors with approximately 7.6 million plan participants
whose retirement savings represented more than $500 billion
in assets. Within this group, we were under contract to make
available our full suite of services to more than 341 plan
sponsors representing approximately 3.7 million
participants and approximately $242 billion in AUC as of
September 30, 2009. We believe our brand recognition and
experience serving plan sponsors from a wide variety of
industries provide us with a competitive advantage. Our strategy
of serving large plan sponsors with complex plans has led us to
develop a set of product features, processes and organizational
knowledge that is attractive to other large plan sponsors that
have similar plan complexities. Companies with more than
5,000 employees account for 3% of all 401(k) plans and 56%
of all 401(k) assets as of 2007, according to Cerulli
Associates. We believe that among discretionary managed account
providers, we have the largest installed base of plan sponsors
that have more than 10,000 participants. As of
September 30, 2009, we had signed contracts to make our
services available through 107 Fortune 500 and seven Fortune
20 companies. We believe the quality and quantity of our
plan sponsor customer base further enhances our position as an
acknowledged leader in our markets. Furthermore, we believe that
many plan sponsors that contemplate switching plan providers
consider the availability of our services on alternative plan
74
provider platforms in making their decisions. We believe that
this in turn provides incentives to plan providers to maintain
ongoing relationships with Financial Engines.
Our Business
Model
Recurring and
Resilient Revenue
Base.
We
believe our business model has structural advantages that allow
us to demonstrate resiliency in difficult environments. We
currently serve investors with 401(k) accounts that, unlike
non-retirement investment accounts, generally receive consistent
automatic contributions from participants and have adverse tax
treatment on early withdrawals. We create portfolios with a
diversified mix of equity and fixed income exposure designed to
reduce volatility. Our investment methodology also avoids market
timing biases that can increase volatility for investors. In
addition, our contracts with plan sponsors typically have
initial terms of three years and evergreen clauses that extend
the initial term until terminated by either party after a
specified notice period. Our technological connectivity with
plan providers and plan sponsors results in low sponsor turnover
and high switching costs should a competitor try to win these
accounts. In a given year, our Professional Management revenue
consists of recurring revenue earned from contracts in place
prior to the beginning of that year. Revenue from contracts in
place as of December 31, 2007 accounted for approximately
99% of our total revenue for the year ended December 31,
2008.
While market declines may affect the value of our AUM, we
believe our business model may mitigate the effects of market
declines. From December 31, 2007 to December 31, 2008,
our AUM declined approximately 4%. This was a challenging time
for the equity markets, as shown by a decline in the S&P
500 of approximately 38% over the same period. We believe the
effect on our AUM during this period was mitigated as a result
of new business, ongoing participant contributions and less
volatile investment performance among other factors. From
December 31, 2008 to September 30, 2009, our AUM
increased 51%.
The table below illustrates the level of the S&P 500 and
our AUM, measured as of the last day of the quarter in each of
the past four quarters. Changes in AUM reflect ongoing
enrollment from new members and ongoing contributions into
member accounts. Factors that may cause our AUM to fluctuate
include, but are not limited to, the performance of financial
markets globally, new enrollments and participant contributions
or cancellations. This table does not reflect our prediction or
belief as to how our AUM will perform in relation to the
S&P 500 in future periods or on future dates.
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Percentage
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Percentage
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Change from
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AUM*
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Change from
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Quarter
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S&P 500*
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Prior Quarter
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(in billions)
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Prior Quarter
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Q4 2008
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903
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(23
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$
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15.6
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Q1 2009
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798
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(12
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)%
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$
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16.1
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3
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%
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Q2 2009
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919
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15
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%
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$
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19.5
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22
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%
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Q3 2009
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1057
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15
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%
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$
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23.5
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20
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%
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Measured as of the last day of the applicable quarter.
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Attractive
Economic
Model.
We
believe the scalability of our technology platform results in
attractive
per-member
economics. We incur significant up front expenses to establish
connectivity with plan provider and plan sponsor platforms.
Thereafter, our ongoing costs to manage existing member accounts
are significantly lower. In the years following the acquisition
of a new member, we experience relatively high contribution
margins. As a result, we are able to add new plan sponsors and
plan participants with less than pro rata incremental expenses.
Sole Access
and Customer
Retention.
Our
business model enjoys a number of structural advantages that
result in sole access to plan participants and high plan sponsor
retention levels. The 341 plan sponsors representing
approximately $242 billion in AUC who make available our
Professional Management service have each made us the sole
provider of these services to their
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plans. We believe this reflects the desire of plan sponsors to
avoid inconsistent methodologies, to simplify choices for plan
participants and to avoid building new data connections with
multiple investment advice vendors.
Since the launch of our Professional Management service in
September 2004, we have retained over 97% of our plan sponsor
clients each year. We believe this reflects the desire of plan
sponsors to maintain continuous and consistent provision of
investment advisory services for their employees. In addition,
we have been largely unaffected if a plan sponsor changes its
underlying recordkeeping platform or the investment alternatives
available to its employees because of the breadth of our data
connections and our independent investment methodology.
Significant
Growth Opportunity Within Our Existing Customer
Base.
We
believe our business has a significant opportunity for growth
from our existing customer base. As of September 30, 2009,
we had approximately $23.5 billion in AUM and approximately
383,000 members, while our Professional Management services were
available to employees representing approximately
$242 billion in AUC and approximately 3.7 million
potential members. This implies a participant enrollment rate,
or the percentage of plan participants who use our Professional
Management service, across all plans where Professional
Management is available, including plans where enrollment
campaigns are not concluded or have not yet been commenced, of
approximately 10.3%. The growth from ongoing contributions,
market returns and AUM penetration of existing sponsors will
provide us with the ability to increase our revenue and net
income. With our scalable technology, we will be able to use our
existing infrastructure to serve additional members without
significantly increasing servicing costs. We believe we can
increase our revenue and net income by increasing our
participant enrollment rate within our existing client base.
Our Growth
Strategy
Increase
Penetration Within Our Existing Professional Management Plan
Sponsors.
We
believe we have a significant opportunity for growth within our
existing plan sponsor base that offers our Professional
Management service to plan participants by increasing enrollment
rates for our Professional Management service. Our focus is to
encourage enrollment in our Professional Management service in
order to help employees reach their retirement goals and plan
sponsors execute their duties as prudent plan fiduciaries. As of
September 30, 2009, we managed approximately 11.0% of plan
assets in plans to which our Professional Management service has
been actively rolled out for at least 14 months. We plan to
increase enrollment by both continuing to promote our services
to participants in Active Enrollment campaigns and encouraging
plan sponsors to initiate Passive Enrollment campaigns. Active
Enrollment campaigns require that plan participants proactively
sign up for our services. Passive Enrollment campaigns
automatically enroll some or all of a plan sponsors plan
participants into our Professional Management service unless the
individual participant declines or opts-out of the
service.
Over time, we believe that we can increase our enrollment rate
in Active Enrollment campaign plans through annual enrollment
campaigns, direct marketing to plan participants and other
promotional activities. Our past experience has shown that in
cases where a plan sponsor used Passive Enrollment, the
enrollment rate of plan assets was higher and achieved at lower
acquisition cost per member than in cases where a plan sponsor
used Active Enrollment. We believe Passive Enrollment is
attractive to plan sponsors due to the lower fees payable by
plan participants who are passively enrolled, the fiduciary
protection afforded to plan sponsors by participants having to
affirmatively elect not to receive professional advice and the
relatively higher number of participants likely to be enrolled
and receiving professional management upon rollout. We believe
that the adoption of Passive Enrollment among more plan sponsors
will likely increase our AUM as a result of the higher
enrollment rates that these campaigns historically generate.
Depending on the proportion of the plans participants who
are passively enrolled, we eliminate or reduce our platform
fees, as well as reducing the fees payable by plan participants.
76
We measure enrollment in our Professional Management service by
members as a percentage of plan participants, and by AUM as a
percentage of AUC, in each case across all plans where
Professional Management is available, including plans where
enrollment campaigns are not yet concluded or have not been
commenced. In addition to measuring enrollment in all plans that
have been rolled out, we measure enrollment in plans that have
been actively rolled out for at least 14 months and in
plans that have been actively rolled out for at least
26 months. We consider a plan to be actively rolled out
upon mailing of initial enrollment materials. We measure
enrollment in plans that have been rolled out for at least
14 months and at least 26 months because we generally
seek to commence annual campaigns 12 months after the start
of the prior campaign, and each campaign typically lasts
45-60 days.
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Members as a
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AUM as a
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Percentage of
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Percentage of
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As of September 30, 2009
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Eligible Participants
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AUC
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All plans rolled out
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10.3
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%
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9.7
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%
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All plans actively rolled out 14 months or more
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11.8
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%
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11.0
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%
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All plans actively rolled out 26 months or more
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11.7
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%
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11.9
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%
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Enhance and
Extend Our Services as Baby Boomers Enter
Retirement.
While
the financial services industry has largely focused on helping
Baby Boomers accumulate assets for retirement, we believe there
is a growing need for services to help convert their accumulated
retirement assets into stable lifetime income. According to data
contained in the Federal Reserve Boards Survey of Consumer
Finances for 2007, households headed by individuals age 45
through 64 represented 45% of all retirement account holders but
account for 56% of the assets in retirement accounts. While
accumulating enough assets for retirement is challenging for the
average investor, the calculation of how to spend retirement
assets is even more intimidating as individuals bear the risk of
outliving their assets. A McKinsey & Company report,
Redefining Defined Contribution (2007), indicated
that 85% of the consumers concerned or extremely concerned about
not having a sufficient income for retirement are interested in
seeking advice on how to guarantee sufficient income for
retirement.
We have plans to extend our services to help investors turn
those retirement assets into stable lifetime income. With many
Baby Boomers now reaching traditional retirement age, we believe
there is an opportunity for us to expand our services to offer
cost-effective, objective and convenient solutions to help
retirees safely convert their accumulated assets into stable
lifetime income. We believe our established investment
methodology, technology, communications and access to our
Investment Advisor Representatives can form the basis of an
attractive service for individuals who need payouts from their
retirement account. We believe our existing relationships with
retirement plan providers, plan sponsors and plan participants
provide us with an opportunity to extend our services to help
manage the complex challenge of turning retirement investments
into retirement income. More than 40% of our current
Professional Management members are over the age of 50 and
represent 61% of assets in our Professional Management program
as of September 30, 2009.
IRA Rollover Market.
We also intend to expand
our services to help members of our Professional Management
program who roll over their 401(k) into an IRA account available
through the plan provider. We believe that our pre-existing
relationships with many 401(k) participants will provide an
advantage as we expand into the IRA rollover market. We also
plan to help other individual IRA investors manage and draw down
income from their IRAs. We believe that the existing technology,
distribution relationships and operational scale we have
developed will be directly applicable to serving millions of IRA
investors cost-effectively. According to Cerulli Associates, the
IRA market, with more than $4.7 trillion in assets as of
December 31, 2007, and a five-year compound annual growth
rate approaching 13.4% per year, is larger and estimated to grow
faster than any other part of the retirement market, due largely
to retirees rolling their assets from a 401(k) plan to an IRA.
77
Increase Defined Contribution Market
Penetration.
We also plan to expand our services
to more fully serve the defined contribution market. We
currently focus our sales and marketing efforts on large,
corporate defined contribution plans, or 401(k) plans, and have
little penetration into public defined contribution plans such
as 403(b) and 457 plans. We believe that the existing
technology, distribution relationships and operational scale we
have developed will be directly applicable to serving millions
of 403(b) and 457 investors cost-effectively, as well as
participants at employers with fewer employees.
Expand Number
of Retirement Plan
Sponsors.
We
deliver our services to plan sponsors and plan participants
primarily through existing connections with eight retirement
plan providers. Based on information from Pensions and
Investments, as of March 31, 2009, and one plan provider,
we estimate that these eight plan providers collectively service
plan sponsors representing more than $1.5 trillion in plan
assets, or more than 80% of the assets contained in plans with
more than 10,000 participants. As of September 30, 2009, we
had approximately $242 billion in AUC. We intend to sell
our services to other plan sponsors that are not current clients
but are serviced by plan providers with whom we have
relationships. We also plan to create data connections with
additional plan providers to access defined contribution plans
of educational institutions as well as non-profit organizations
and government entities.
Offer
Professional Management Service to Online Only Plan
Sponsors.
As
of September 30, 2009, we provided our Online Advice
service to more than 400 of our plan sponsor customers, but do
not offer our Professional Management service to them. We plan
to pursue growth by seeking to convert a number of the largest
of these plan sponsors to our full suite of services, including
Professional Management, Online Advice and Retirement
Evaluation. As of September 30, 2009, we were under
contract to provide our full suite of services through more than
765 plan sponsors with approximately 7.6 million plan
participants whose retirement savings represented more than
$500 billion in assets. More than one million participants
had accepted our online services agreement. We believe that
successfully converting a portion of the 401(k) assets in our
online-services-only plans into AUC, and then into AUM, will
likely increase future revenue because we would earn fees based
on AUM as well as the flat fee paid by the plan sponsor.
Products and
Services
We provide individuals with personalized portfolio management
services, investment advice and retirement help to plan
participants through plan providers. Our services address some
of the most important questions and concerns faced by plan
participants as they prepare for retirement, including:
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How much will I need when I retire?
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Will I have enough money to retire?
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How should I invest my money?
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When can I retire and how much can I spend when I do?
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Professional
Management.
Our
Professional Management service, a discretionary managed account
service launched in 2004, is designed for 401(k) participants
who want affordable, personalized and professional portfolio
management, investment advice and retirement help from an
independent investment advisor with no conflicts of interest.
With this service, plan participants delegate investment
decision-making and trading authority to us, which is referred
to as discretionary authority. We developed our Professional
Management service to reach a large number of plan participants
on a cost-effective basis and assist them on the path to a
secure retirement. When plan participants enroll in our
Professional Management service, we use our Advice Engines to
create personalized, diversified portfolios and provide ongoing
Professional Management.
Members enrolled in the Professional Management service receive
a Retirement Plan, which analyzes their investments,
contribution rate and projected retirement income. The
Retirement Plan
78
provides advice on their annual contribution amount, shows how
we propose to allocate their investments and forecasts their
retirement income relative to a retirement goal. Members are
encouraged to provide their desired retirement age, risk
preference, employer stock holding preference and information
regarding certain other assets that they hold outside of their
401(k) account. Any personal information provided is used to
customize a new portfolio allocation that is reflected in a
revised Retirement Plan. Each member portfolio is reviewed every
three months and transactions are executed, if necessary, to
reallocate the investments. The member also receives a quarterly
Retirement Update that shows how they are progressing towards
their retirement goals and describes any changes that we have
made to their investment allocations.
Members can, at any time, call one of our registered Investment
Advisor Representatives or log in to a website to check their
progress or further tailor their portfolio to their personal
circumstances. Our registered Investment Advisor
Representatives, and certain call center personnel of the plan
providers with whom we work, have access to the Financial
Engines Professional Advisor, our proprietary client
relationship management application, enabling the advisor to
change or add to the personal information used to manage the
members account and explain to the member the impact of
any changes on the members projected future 401(k)
balance. Registered Investment Advisor Representatives can
modify member inputs but not Advice Engine outputs and
recommendations. As members approach retirement, they are
offered a Retirement Checkup, which is a phone-based
consultation with an Investment Advisor Representative. During
the Retirement Checkup, the Investment Retirement Representative
confirms the participants retirement goal, reviews the
participants retirement income forecast and helps the
participant close the gap, if any, by exploring alternatives,
such as the impact of increasing savings or adjusting the
participants retirement age. As of September 30,
2009, we had 16 Investment Advisor Representatives. We
additionally rely on supervisors and other trained employees and
personnel when call volumes are high. We expect to increase
modestly the number of Investment Advisor Representatives to
support Retirement Checkups and outbound calling initiatives.
Online Advice.
Our Online Advice
service, launched in 1998, is a nondiscretionary Internet-based
service designed for plan participants who wish to take a more
active role in personally managing their portfolio. With this
service, plan participants may elect to follow the online advice
without delegating investment decision-making and trading
authority to us, making this a nondiscretionary service. This
Internet-based service includes interactive access to simulation
and portfolio optimization technologies through our Advice
Engines. Plan participants see a forecast that shows how likely
they are to reach their desired retirement goals, get
recommendations on which investments to buy or sell and simulate
how their portfolios might perform under a wide variety of
economic scenarios. They can also explore different levels of
investment risk, savings amounts and retirement horizons, as
well as get tax-efficient advice on accounts other than their
401(k). The Online Advice service is integrated with single
sign-on to the plan providers 401(k) website, which
enables data pre-population and, typically, the ability to
initiate transactions directly from the Online Advice service. A
version of the service is also available to retail investors
directly through our website.
Retirement Evaluation.
When our full
suite of services is being offered in a plan, we send each
eligible plan participant a Retirement Evaluation or similar
retirement readiness assessment upon rollout and generally
annually thereafter, together with a Professional Management
enrollment form. Retirement Evaluations highlight specific risks
in a plan participants retirement account, provide an
assessment of the likelihood of achieving the plan
participants retirement income goal, provide guidance on
how to reduce those risks and introduce our services as a means
of obtaining help in addressing these issues. Retirement
Evaluations are based on data provided by the plan provider and
include an evaluation of how well the plan participant is
investing and saving in the retirement plan. Specifically, the
evaluation considers the individual plan participants
risk, diversification, employer stock concentration and 401(k)
contribution rate.
79
Investment
Process and Methodology
Our goal is to apply investment techniques traditionally
available only to large, sophisticated investors to help small,
individual investors achieve their retirement goals. Our advice
services incorporate several of the methodologies developed by
our co-founder and economics Nobel Laureate, Professor William
F. Sharpe. We use Monte Carlo simulation and proprietary
optimization techniques to provide plan participants with
cost-effective, sophisticated, personalized and unconflicted
advice. Monte Carlo simulation is widely used in investment
management and is a statistical technique in which many
simulations of an uncertain quantity are run to model the
distribution of possible outcomes.
We model more than 30,000 securities, including retail mutual
funds, stocks, employee stock options, institutional funds,
guaranteed investment contracts and stable value funds,
exchange-traded funds and fixed-income securities on an ongoing
basis. When providing simulations and investment
recommendations, our methodology evaluates a variety of factors
that impact investment returns, including: fees, portfolio
turnover, management performance, tax-efficiency, a funds
investment style where we identify the underlying asset class
exposures and active management risk associated with asset
allocation changes by a fund manager in response to market
conditions and decisions to weight specific security holdings
differently than comparable indices. By modeling the
characteristics of specific investment alternatives, we are able
to provide quantitative estimates of possible future outcomes
and make investment recommendations. We are able to model the
complexities found in large retirement plans and to provide
investment advice to plan participants that can be implemented
within the limits of a given plans available options.
Unlike traditional advisory services, we do not rely on the
subjective evaluation of each plan participants portfolio
by a human investment advisor. Instead, our services rely on
Advice Engines that accept inputs on available investment
choices along with a variety of personal information including:
risk tolerance, investment horizon, age, savings, outside
personal assets, investor preferences and tax considerations.
This approach results in a consistent, systematic and objective
investment methodology in which the advice generation is
distinct from the method of delivery, which may be online, via
printed materials or through phone conversations with our
registered Investment Advisor Representatives or the call center
representatives of certain plan providers with whom we have
relationships. The representatives who are available by phone to
speak with Professional Management members have the ability to
change or add to the personal information used to manage the
members account and explain to the member the impact of
any changes on the members projected future 401(k)
balance. Registered Investment Advisor Representatives can
modify member inputs but not Advice Engine outputs and
recommendations. This process is designed to ensure that the
advice is personalized and consistent regardless of the asset
balance of the plan participant, or the channel through which
the plan participant receives our advice. This process also
ensures that the investment recommendations are consistent
across plan providers, plan sponsors and plan participants.
Finally, this approach enables a detailed audit trail of the
recommendations provided to each plan participant over time to
assist with regulatory responsibilities.
To maintain the quality of our investment recommendations, our
Advice Engines incorporate a wide variety of automated checks
and validation procedures. These processes are overseen by
multiple groups within our Investment Management and Service
Delivery organizations. These processes help verify that the
data inputs into our systems are timely and accurate, and that
the resulting investment recommendations reflect the correct
application of our investment methodology. We devote substantial
ongoing product development to the maintenance and development
of these data and advice validation procedures.
Our investment recommendations are limited to the investment
alternatives available in a 401(k) plan as determined and
approved by a plan fiduciary other than us, although we do take
into account other identified holdings of the plan participant
when offering investment advice. With the exception of employer
stock, if any, included as an investment alternative, we do not
provide advice on or manage
80
single-company securities. We do not consult with, or make
recommendations to, the plan sponsor regarding which investment
alternatives to make available in a particular plan.
We offer no proprietary investment products. We are free of the
conflicts of interest, or the perceptions of conflicts of
interest, that can arise for competitors who offer such
products. We do not receive differential compensation based on
the investments we recommend. We do not hold assets in custody
or execute trades.
We maintain an ongoing research program to improve and extend
our investment methodologies and our portfolio management and
investment advisory services. We conduct research into the needs
of retirees, publishing new findings in academic and
practitioner journals. Recent research has included a behavioral
finance study of the demand for annuities, efficient methods for
addressing longevity risk and efficient methods for generating
retirement income. This research can form the basis of
extensions to our current investment methodology that can enable
services that allow our Professional Management program to help
participants generate stable retirement income from accumulated
defined contribution assets. We believe that these extensions
can expand the opportunity to manage assets for participants
both within existing sponsored plans as well as in IRA rollover
accounts.
Investment
Performance
Historical investment performance is one factor that plan
sponsors evaluate when deciding whether to offer our
Professional Management service to their employees and when
monitoring the investment manager selected. Because each of our
Professional Management portfolios is personalized to the
members specific financial circumstances, there is no one
representative portfolio from which to calculate investment
performance. Unlike a traditional investment fund, there is no
single benchmark that would be appropriate to measure the
relative performance of member portfolios. In order to provide
investment performance and benchmarking information to plan
sponsors, we have aggregated members into cohort
portfolios corresponding to specific anticipated
retirement dates. While the member allocations within these
cohort portfolios differ according to the specific financial
circumstances of each individual member, they share a common
investment horizon and often have similar risk levels. This
makes it possible to benchmark the cohort portfolios against the
investment performance of similar strategies. For instance, the
performance of cohort portfolios can be compared against the
performance of target maturity funds with similar retirement
horizons.
We believe the historical investment performance of cohort
portfolios compares favorably to target-date fund benchmarks
with similar time horizons and risk-return objectives. Our
investment methodology emphasizes using market consensus
expectations (i.e., no market timing), investing in lower cost
funds and selecting managers with consistent performance over
long time periods. We believe that this methodology can result
in lower volatility and more predictable results for
Professional Management members relative to the strategies
employed by most target-date funds.
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Financial Engines
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Target-Date Fund
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Performance
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Professional Management*
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Composite Benchmark
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Difference
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|
(Net of Fees)
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(Net of Fees)
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|
(Net of Fees)
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Annualized Since Program Inception (June 30, 2005
through September 30, 2009)
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2010 Portfolio
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|
|
3.28
|
%
|
|
|
|
2.55
|
%
|
|
|
|
0.73
|
%
|
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|
|
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|
2020 Portfolio
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|
2.35
|
%
|
|
|
|
1.93
|
%
|
|
|
|
0.42
|
%
|
|
|
|
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|
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|
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2030 Portfolio
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|
1.79
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%
|
|
|
|
1.27
|
%
|
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|
|
0.52
|
%
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*
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Includes management on an advised and subadvised basis.
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The performance shown for the member cohort portfolios reflect
asset weighted performance, net of all Professional Management
fees, across all members in retirement plans that had the
requisite
81
data and were retiring in a specified target year, plus or minus
one year. For example, the 2010 Portfolio includes members
retiring in years 2009, 2010 and 2011. Cohort portfolios
therefore do not include results of all program members in the
reported plans. We net out fees on the basis of the maximum fee
schedule applicable to any cohort member. The requisite
data qualification is in regard to members who are through
the transition period and who had account balances at some time
during the measured time period. In a small number of cases, we
excluded certain member accounts because they included
investments in closed or private funds for which performance
data is not available or is not able to be derived, based on
asset class, or we may not include multiple accounts. Starting
on January 1, 2010, the cohort portfolios will reflect
performance across all members in plans that had such requisite
data and were retiring in a specified target year, plus or minus
two years, subject to a retired member cohort portfolio
adjustment. A retired member cohort portfolio shall be
established and consist of all members in plans that had such
requisite data and were retiring, or retired, within one year
from the then current calendar year. For example, in 2011, the
retired member cohort portfolio shall consist of members
targeted to retire in 2012 and all other previous periods. No
cohort portfolios contain results of members who cancelled out
of the program. Because daily participant contribution and
withdrawal information is generally not available, we derive
performance by attributing the performance of each investment
held to plan accounts in the proportions held at the start of
the period.
The target-date fund composite benchmark is an equally weighted
average performance of the top five target-date funds by assets,
currently the target-date funds of Fidelity, Vanguard, T. Rowe
Price, Principal Investments and BlackRock (formerly Barclays
Global Investors). Changes are made in the composite on a
forward basis, and prior composites are available upon request.
For some target years, a fund family did not offer a specific
target horizon fund and in those cases the return was
interpolated using the returns of the existing target-date funds.
Historical performance, particularly short-term performance, is
not a guarantee of future returns. The target-date fund
composite is provided as a benchmark, but is not illustrative of
any particular investment. An investment cannot be made in the
benchmark as a single investment.
Investment
Technology
We believe portfolio management services in the workplace should
be offered to all eligible plan participants regardless of
wealth. Achieving that objective requires significant
scalability to achieve an affordable cost to the investment
manager. The scalability of our technology has been tested and
continues to deliver flexibility and results as our business has
grown. As of September 30, 2009, we were managing nearly
383,000 separate portfolios with a total AUM value of
approximately $23.5 billion. As of September 30, 2009,
approximately 46% of our Professional Management members have
less than $20,000 of retirement assets in their accounts. We
believe this technology advice platform and delivery mechanism
allows us to normally operate, on average, with a ratio of one
registered Investment Advisor Representative for approximately
every 10,000 members who are served by our advisors. We believe
this is a more favorable ratio than that of the typical
traditional broker or investment advisor.
Our Advice Engines consist of two main components: a Simulation
Engine and an Optimization Engine. In the course of our
development, we have received nine U.S. patents that apply
to various parts of our Advice Engines.
Simulation Engine.
We have developed a
Monte Carlo Simulation Engine that provides plan participants
with a view of the potential range of future values of their
retirement investments. The Simulation Engine helps plan
participants reach informed decisions about the appropriate
level of risk, savings and time horizon to improve the
likelihood of achieving financial goals. Our Simulation Engine
is capable of:
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modeling more than 30,000 securities, including retail mutual
funds, stocks, employee stock options, institutional funds,
guaranteed investment contracts and stable value funds, exchange-
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82
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|
traded funds and fixed-income securities while considering tax
implications, expenses, redemption fees, loads and distributions;
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considering security-specific characteristics such as investment
style, expenses, turnover, manager performance,
security-specific and industry risk;
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forecasting the total household portfolio, including
tax-deferred and taxable accounts;
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incorporating social security, pension income and other
retirement benefits; and
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presenting outcomes in terms of portfolio value or retirement
income.
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Optimization Engine.
We use our
Optimization Engine to construct personalized portfolios. We do
not rely on generic, model portfolios that are unable to
accommodate many real-world complexities. As of
September 30, 2009, more than 73% of the portfolios
generated by our Advice Engines for our members had investment
allocations that were not identical to any other members
portfolio in their plan. We believe individuals prefer
personalized investment recommendations that consider their
personal preferences and financial circumstances over model
portfolios.
Our Optimization Engine takes into consideration the costs,
quality and investment styles of the specific investment
alternatives available to a plan participant. Specifically, our
investment recommendations take into consideration for each fund
the mix of asset class exposures, fund expenses, turnover,
fund-specific risk due to active management, manager performance
and consistency, user imposed constraints and tax efficiency,
where applicable, to construct a personalized portfolio
recommendation for each client. The calibration of this model is
based on more than a decade of research into the factors that
influence investment performance. Our approach does not rely on
market timing or tactical asset allocation strategies. Our
models are designed and calibrated on an ongoing basis to
reflect the consensus market expectations built into the
observed asset holdings of the market as a whole. We believe
this approach increases the probability that our recommendations
are consistent with current market conditions and are free from
subjective or market timing biases that can arise from
traditional optimization models. Our platform has been employed
to provide portfolio management services, investment advice and
retirement readiness assessments to millions of investors over
the last 11 years.
When constructing a portfolio, our Optimization Engine:
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supports real-time, specific, product-level buy and sell
recommendations for Online Advice, which can be readily
executed, and automated transactions for Professional Management;
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creates recommended portfolios from the available investment
alternatives, such as retail mutual funds, institutional funds
and employer stock, in the case of a 401(k) plan, or from either
the entire universe of more than 15,000 retail mutual funds, or
a subset thereof, in the case of taxable or other
tax-deferred
accounts;
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creates recommendations across multiple taxable and
tax-deferred
accounts;
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takes into consideration investor risk preferences, restricted
positions, redemption fees, investor constraints and outside
account information provided to us to create personalized
investment recommendations;
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for assets held in taxable accounts, considers the impact of
personal tax rates, unrealized capital gains and losses, the tax
efficiency of specific investment options including the
propensity to distribute capital gains and income distributions
and the benefit of optimal asset placement to maximize after-tax
investment returns; and
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enables real-time interaction with plan participants allowing
them to partially override recommendations and immediately
receive updated advice reflecting these constraints.
|
Our systems assess a plan participants portfolio through a
variety of market conditions including variation in inflation,
interest rates, dividends and the performance of 15 different
asset classes. We
83
are able to simulate an individual investment portfolios
performance across a wide variety of scenarios in a fraction of
a second, illustrating the possible outcomes for a given
strategy. This technology underlies the interactive user
experience available to users online or through call center
sessions. The platform enables us to provide a financial
forecast of a plan participants current or target
portfolio, showing the impact of a wide variety of potential
market scenarios on their investment performance.
Customers and Key
Relationships
We provide personalized portfolio management services,
investment advice and retirement help to plan participants and
reach them through plan sponsors whose retirement plans are
administered by plan providers.
Retirement Plan Participants.
We define
plan participants as employees participating in retirement plans
who have access to our Professional Management or Online Advice
services. As of September 30, 2009, approximately
7.6 million plan participants, whose retirement savings
represented more than $500 billion in aggregate plan
assets, had access to our services. As of September 30,
2009, we managed portfolios for approximately 383,000 members
with an average balance of $61,000 in their 401(k) accounts,
collectively representing approximately $23.5 billion in
AUM. More than one million participants have accepted our online
services agreement.
Retirement Plan Sponsors.
We define
plan sponsors as employers across a range of industries who
offer defined contribution plans to employees. As of
September 30, 2009, we were under contract to provide
either our full suite of services, including Professional
Management, Online Advice and Retirement Evaluation, or our
Online Advice service only, through more than 765 plan sponsors.
No more than 5% of our revenue was associated with any one plan
sponsor in 2008. Since the launch of our Professional Management
service in 2004, we have retained over 97% of our sponsors each
year. Our plan sponsor agreements are typically for an initial
three-year term and continue thereafter unless terminated. At
any time during the initial term or thereafter, a plan sponsor
can cancel a contract for fiduciary reasons or breach of
contract. A plan sponsor can generally terminate a contract
after the initial term upon 90 days notice.
Retirement Plan Providers.
We define
plan providers as the administrators and recordkeepers of
defined contribution plans. In consultation with plan sponsors,
plan providers make available a range of investment alternatives
through retirement plans to individual participants. We work
with plan providers to make available portfolio management and
investment advisory services to the participants in the defined
contribution plans of plan sponsors. We deliver our services to
plan sponsors and plan participants primarily through existing
connections with eight retirement plan providers. Our contracts
with plan providers generally have terms ranging from three to
five years, and have successive automatic renewal terms of one
year unless terminated in accordance with prior notice
requirements. Certain of the plan provider agreements are in or
will soon be in renewal periods. In addition, a plan provider
may terminate its contract with us at any time for specified
breaches. We maintain two types of relationships with our plan
providers:
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Subadvisory Relationships.
In these
relationships, the plan provider is the primary advisor and plan
fiduciary and we act in a subadvisory capacity. Our contract is
with the plan provider and not the plan sponsor. We receive full
sales support from the plan provider and offer our co-branded
services under the plan providers brand, with the services
identified as powered by Financial Engines. Revenue
is collected by the plan provider who then pays a subadvisory
fee to us. We have subadvisory relationships with ING, JPMorgan
and Vanguard.
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Direct Advisory Relationships.
In these
relationships, we are the primary advisor and a plan fiduciary.
Data is shared between the plan providers and us via data
connections. In addition, our sales teams directly engage plan
sponsors, although, in some cases, we have formed and are
executing a joint sales and collaborative marketing strategy
with the plan provider. We have separate contracts with both the
plan sponsor and plan provider and pay fees to the plan
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provider for facilitating the exchange of plan and plan
participant data as well as implementing our transaction
instructions for member accounts. Plan providers with whom we
have direct advisory relationships are ACS, Charles Schwab (for
one plan sponsor), Fidelity, Hewitt, Mercer and T. Rowe Price.
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In 2008, 18%, 17% and 11% of our total revenue was attributable
to JPMorgan, ING and Vanguard, respectively. Revenue
attributable to these three plan providers includes subadvisory
fees they pay to us directly, as well as revenue from certain
plan sponsors that work with these plan providers but pay us
directly. In 2008, these plan providers worked with 67, 78 and
130 plan sponsors to whom we provided our services,
respectively. JPMorgan, Vanguard and ING directly accounted for
approximately 17%, 11% and 10% of our total revenue,
respectively, during 2008. No other plan provider or plan
sponsor accounted for more than 10% of our total revenue during
2008.
85
The following table describes the key constituents within the
retirement plan process, their specific role in the retirement
plan process and our relationship with each constituent.
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Role in Retirement
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Role of Financial
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Financial Engines
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Constituents
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Plan Process
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Engines
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Reaches
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Plan Participants
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Invest in personal retirement plan by
making ongoing contributions through payroll deduction.
In the absence of a managed account
provider, select investments from options available within
plan.
Seek retirement portfolio management
services, investment advice and retirement help.
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Provide plan participants with
independent portfolio management services, investment advice and
retirement help.
We refer to plan participants who enroll
in our Professional Management service as members. Members
delegate investment decision-making to us.
Participants in plans with Active
Enrollment campaigns must proactively sign up for our
Professional Management service. Participants in plans with
Passive Enrollment campaigns are automatically enrolled into our
Professional Management service unless they decline the service.
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As of September 30, 2009, we had
approximately 383,000 members, and approximately 7.6 million
plan participants, whose retirement savings represented more
than $500 billion in aggregate plan assets, had access to our
services.
As of September 30, 2009, 26% of our
approximately 383,000 Professional Management members were
passively enrolled.
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Plan Sponsors
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Make 401(k) plan and payroll deductions
available to employees.
Choose investment alternatives available
to employees.
Focus on increasing retirement plan
participation, increasing plan participant contributions and
improving plan participant asset allocation.
Make services available to assist plan
participants with retirement investing.
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Provide plan sponsors with a mechanism
to facilitate fulfillment of fiduciary responsibilities.
Coordinate with plan sponsors to make
advice and management services available to their plan
participants.
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As of September 30, 2009, we provided
our services to plan participants at more than 765 plan
sponsors, including 107 Fortune 500, 30 Fortune 100 and seven
Fortune 20 companies.
As of September 30, 2009, we provide our
full suite of services, including Professional Management,
Online Advice and Retirement Evaluation, to 341 plan sponsors
representing approximately 3.7 million participants and
approximately $242 billion in AUC.
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Plan Providers
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Provide recordkeeping and administrative
services to retirement plans.
Process investment transactions and
payroll deductions for plan participants.
Collaborate with us on sales, marketing,
product integration and branding.
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Offer an independent advisory service
valued by plan sponsors to complement the plan providers
existing platform.
Subadvisory plan provider relationships
include ING, JPMorgan and Vanguard.
Direct advisory plan provider
relationships include ACS, Charles Schwab (for one plan
sponsor), Fidelity, Hewitt, Mercer and T. Rowe Price.
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As of September 30, 2009, we delivered
our services to plan sponsors and plan participants primarily
through existing connections with eight retirement plan
providers. We estimate that these eight providers collectively
service plan sponsors representing more than $1.5 trillion in
plan assets, or more than 80% of the assets contained in plans
with more than 10,000 participants.
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Sales and
Marketing
Increasing the number of plan participant accounts and assets we
manage requires establishing relationships and data connections
with plan providers, obtaining contracts with plan sponsors to
make our services available to their plan participants and
conducting direct marketing and other promotional activities to
encourage plan participants to use our Online Advice service or
to enroll in our Professional Management service.
86
Establishing Relationships and Connections with Plan
Providers
. We rely on direct sales to create
contractual relationships with plan providers. Following
contract signing, technical teams from Financial Engines and the
plan provider initiate a data connection project that typically
takes between four months and one year to complete. Once we have
incurred this
one-time,
up-front
cost to establish a relationship and connection with a plan
provider, we are able to roll out our services for any plan
sponsor of that plan provider with modest time and effort.
Obtaining Contracts with Plan
Sponsors.
Either Financial Engines or, in the
case of a subadvisory relationship, the plan provider, must
obtain a contract with a plan sponsor before we can make
available our Professional Management or Online Advice services
to that plan sponsors participants. We market our services
to plan sponsors in the following manner:
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Sell through the Retirement Plan
Provider.
Where we have a subadvisory
relationship with the plan provider, we provide a combination of
primary and secondary sales and marketing support depending on
the plan sponsor opportunity. Together with the plan provider,
we develop a joint sales and rollout plan in which our
relationship managers and direct sales team support the plan
provider. This distribution model enables us to reach plan
sponsors efficiently, while providing consistent and independent
investment advice to plan participants.
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Direct to Plan Sponsor.
In the case of direct
advisory relationships, we pursue a direct sales strategy with
plan sponsors. Our direct sales teams efforts are
supported by a client services team that engages in sales
efforts with existing plan sponsors and that coordinates sales
activities directed at new plan sponsors with our plan provider
partners. The direct sales and client services teams are
supported by a channel marketing team that seeks to generate
demand for our services through public relations, industry
events, plan provider specific marketing programs and sales
support in the field.
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Direct Marketing to Plan
Participants.
Once a retirement plan has been
set up on our systems and our services have been made available
to plan participants, we conduct direct marketing and other
promotional activities to encourage use of our Online Advice
service and enrollment in our Professional Management service.
These efforts typically include printed Retirement Evaluations,
email notifications and website integration. These campaigns are
usually conducted at the time of rollout and annually
thereafter. Plan sponsors can choose an Active Enrollment
campaign, in which a plan participant must affirmatively sign up
for the Professional Management service, or a Passive Enrollment
campaign, in which a plan participant will become a member of
the Professional Management service unless they decline the
service. Passive Enrollment campaigns achieve higher enrollment
results at lower acquisition cost per member than do Active
Enrollment campaigns. We believe Passive Enrollment is
attractive to plan sponsors due to the lower fees payable by
plan participants who are passively enrolled, the fiduciary
protection afforded to plan sponsors by participants having to
affirmatively elect to not receive professional advice and the
relatively higher number of participants who will be enrolled
and receiving professional management upon rollout. Depending on
the proportion of the plans participants who are passively
enrolled, we eliminate or reduce our platform fees, as well as
reducing the fees payable by plan participants.
Service Delivery
and Systems
Our Service Delivery team is responsible for the rollout,
operation and support of our Professional Management and Online
Advice services. As of September 30, 2009, we had rolled
out our Professional Management service at 341 plan sponsors
with approximately 383,000 members enrolled in this service. In
addition, the Service Delivery team supports the availability of
the service to approximately 7.6 million plan participants
who have access to our Online Advice service.
Our Client Implementations team is responsible for project
management and the steps involved in setting up and rolling out
our services to a plan sponsor. This includes learning the
specifics of each plan sponsors plan(s), including the
fund lineup, fees, matching rules, associated defined benefit
and non-qualified and other plans, configuring the plan
specifics using our plan sponsor configuration
87
tool, verifying the implementation and approving the
commencement of enrollment efforts. The team also oversees the
preparation and production of enrollment materials for each
participant in the plan. Once a sponsor is set up and rolled
out, our Client Implementations Team is also responsible for
maintenance of each sponsors ongoing plan updates as
directed by our account managers.
The Operations team is responsible for data processing and
validation of prospect data for new sponsor rollouts and annual
campaigns, as well as the ongoing servicing of members in the
Professional Management service. These member servicing
responsibilities include member data load and verification, the
coordination and oversight of all printed materials, such as
Welcome Kits and quarterly Retirement Updates, transaction
processing and reconciliation, fee processing and reconciliation
and quarterly sponsor report generation.
Our advisor call center is staffed with registered Investment
Advisor Representatives. These advisors service participants
through phone and email channels by providing guidance to plan
participants regarding the operation of the program, enrollment
and personalization of the participants financial profile.
Our registered Investment Advisor Representatives and certain
call center personnel of the plan providers with whom we work
have access to the Financial Engines Professional Advisor, our
proprietary client relationship management application, which
enables the advisor to change or add to the personal information
used to manage the members portfolio allocation.
Registered Investment Advisor Representatives can modify member
inputs but cannot modify Advice Engine outputs and
recommendations.
Our services are deployed using a centrally hosted,
web-based
architecture built on
industry-standard
hardware and software. We have off-site
back-up
facilities for our database and network equipment, a disaster
recovery plan and on-going third-party security audits to ensure
the integrity of our systems. We evaluate and improve our
systems based on measures of availability, system response time
and processing capacity.
Competition
We operate in a competitive industry, with many investment
advice providers competing for business from individual
investors, financial advisors and institutional customers.
Direct competitors who offer independent portfolio management
and investment advisory services to plan participants in the
workplace include Morningstar, GuidedChoice and ProManage. Plan
providers that offer directly competing portfolio management and
investment advisory services to investors in the workplace
include Fidelity and Merrill Lynch. We currently have a
relationship with Fidelity that allows us to provide our
services to plan sponsors, for whom Fidelity is the plan
provider, who elect to hire us. We also face indirect
competition from products that could potentially be substitutes
for our portfolio management services, investment advice and
retirement help, most notably target-date retirement funds.
Target-date funds are offered by multiple financial
institutions, such as BlackRock (formerly Barclays Global
Investors), Fidelity and Vanguard. These funds provide generic
asset allocation based solely on the investment horizon of the
investor. Among the plan sponsors to whom we offer our
Professional Management service and that offer lifecycle funds,
approximately 81% offer retail-priced target-date retirement
funds. Target-date funds, managed account and balance funds have
been granted QDIA status by the Department of Labor.
We believe the competitive factors in our industry include:
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ability to provide systemic portfolio management, investment
advice and retirement help based on widely recognized financial
economic theory without conflicts of interest;
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established investment methodology and technology;
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quality, breadth and convenience of advisory services;
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established relationships with plan providers and plan sponsors;
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reputation and experience serving plan sponsors and plan
participants; and
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price.
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We believe we compete favorably with respect to these factors.
Regulation
Our investment advisory and management business is subject to
extensive complex and rapidly changing federal and state laws
and regulations. Financial Engines Advisors L.L.C., a subsidiary
of Financial Engines, Inc., is registered as an investment
advisor with the SEC and is subject to examination by the SEC.
The Investment Advisers Act and related regulations impose
numerous obligations and restrictions on registered investment
advisers including fiduciary duties, record keeping
requirements, operational requirements, marketing requirements
and disclosure obligations.
The SEC is authorized to institute proceedings and impose fines
and sanctions for violations of the Investment Advisers Act,
including the power to limit, restrict or prohibit a registered
investment adviser from carrying on its business in the event
that it fails to comply with applicable laws and regulations.
Our failure to comply with the requirements of the Investment
Advisers Act or the related SEC rules and interpretations, or
other relevant legal provisions could have a material adverse
effect on us. We believe we are in compliance in all material
respects with SEC requirements and all material laws and
regulations. We were last inspected by the SEC in 2000. At the
end of that examination the SEC staff sent the firm a letter
indicating that the examination was concluded without findings,
typically referred to as a no-further action letter
or no deficiencies letter. These findings do not
indicate that the SEC staff concluded that we were in compliance
with federal securities laws or other applicable laws and
regulations, but only that no deficiencies or violations came to
the attention of the SEC staff during the course and scope of
their examination.
In 2008, we derived nearly all of our revenue from Financial
Engines Advisors L.L.C.s investment advisory and
management services through our contracts with plan providers,
plan sponsors and plan participants. As an Investment Advisor,
Financial Engines Advisors L.L.C. is not permitted to assign any
investment advisory contract without the relevant clients
consent. The term assignment is broadly defined and
includes direct assignments as well as assignments that may be
deemed to occur, under certain circumstances, upon the transfer,
directly or indirectly, of a controlling interest in Financial
Engines Advisors L.L.C. The initial public offering of Financial
Engines, Inc.s common stock will not constitute an
assignment for these purposes. Accordingly, we do not intend to
seek approvals from our clients in connection with this offering.
Some of our executives and other employees are registered
Investment Adviser Representatives with various states through
the Investment Adviser Registration Depository and are subject
in some states to examination requirements.
Financial Engines Advisors L.L.C. is subject to ERISA and the
regulations promulgated thereunder, with respect to investment
advisory and management services provided to participants in
retirement plans covered by ERISA, and is also subject to state
laws applicable to retirement plans not covered by ERISA. ERISA
and applicable provisions of the Internal Revenue Code of 1986,
as amended, referred to as the Code, impose certain duties on
persons who are fiduciaries under ERISA and prohibit certain
transactions involving ERISA plan clients. We rely on certain
regulatory interpretations and guidance in connection with our
current business model, including regulations and guidance
allowing us to passively enroll participations into our
Professional Management service. We provide subadvisory services
to plan participants pursuant to the Department of Labors
Advisory Opinion
2001-09A.
The failure of Financial Engines Advisors L.L.C. to comply with
these requirements could have a material adverse effect on us.
We are also subject to state and federal regulations related to
privacy, data use and security. These rules require that we
develop, implement and maintain written, comprehensive
information security programs including safeguards that are
appropriate to our size and complexity, the nature and
89
scope of our activities and the sensitivity of any customer
information at issue. In recent years, there has been a
heightened legislative and regulatory focus on data security,
including requiring consumer notification in the event of a data
breach. Legislation has been introduced in Congress and there
have been several Congressional hearings addressing these
issues. Congress is considering legislation establishing
requirements for data security and response to data breaches
that, if implemented, could affect us by increasing our costs of
doing business. In addition, several states have enacted
security breach legislation requiring varying levels of consumer
notification in the event of a security breach. Several other
states are considering similar legislation. Further, the SEC has
issued a proposed rule expanding current requirements for
safeguarding and disposing of customer information. The proposed
rule also adds a requirement to notify customers in the event of
a data security breach. Adoption of this rule will also increase
our costs of doing business.
In recent years, there has been a heightened legislative and
regulatory focus on the financial services industry, including
proposals that call for creation of a self-regulatory framework
for investment advisors similar to the regulatory structure that
currently exists for broker-dealers through FINRA, elimination
of pre-dispute arbitration clauses, additional fee disclosures,
and the imposition of additional qualification requirements on
investment advisors providing services to ERISA plan clients.
Included in the financial reform legislation currently pending
in Congress are various proposals that may affect investment
advisers, including Financial Engines Advisors L.L.C. Although
the final versions of these bills have not been adopted and
signed into law, and the final scope and wording of the
legislation, or the implementing rules and regulations are not
yet known, it is expected that the compliance costs and
liability risks for investment advisers will increase.
Rigorous legal and compliance analysis of our business is
important to our culture. Our General Counsel supervises our
compliance group, which is responsible for addressing all
regulatory and compliance matters that affect our activities.
Intellectual
Property
We rely on a combination of trademark, copyright, patent and
trade secret protection laws to protect our proprietary
technology and our intellectual property. We seek to control
access to and distribution of our proprietary information. We
enter into confidentiality agreements with our employees,
consultants, vendors, plan sponsors and plan providers that
generally provide that any confidential or proprietary
information developed by us or on our behalf be kept
confidential. We have proprietary know-how in software
development, implementation and testing methodologies. We also
pursue the registration of certain of our trademarks and service
marks in the United States and other countries. We have
registered the mark Financial Engines in the United
States, Australia, Switzerland, China, the European Community,
Hong Kong, Japan, Taiwan and Tunisia and have registered a sun
and clouds design mark in these same countries. We have
registered the marks Adviceserver and
Forecaster in Japan and FinEng in
Tunisia. We have registered our corporate logo and the marks
Investor Central, The Power to Shape the
Future, Financial Engines Investment Advisor,
Retirement Help for Life, and We Make it
Personal in the United States. Advice Light is
also a trademark owned by Financial Engines, Inc. which we use
to notify an online user that we have advice on his or her
account. In addition, we have registered our domain name,
www.FinancialEngines.com. We have nine issued U.S. patents:
three have been issued on our user interface, four relate to
outcomes-based investing, including our financial advisory
system, our pricing module and load-aware optimization and two
have been issued on advice palatability. We also have seven
pending U.S. patent applications. In addition, we also have
issued patents and pending applications in foreign jurisdictions.
We have established a system of security measures to protect our
computer systems from security breaches and computer viruses. We
have employed various technology and process-based methods, such
as clustered and multi-level firewalls, intrusion detection
mechanisms, vulnerability assessments, content filtering,
antivirus software and access control mechanisms. We also use
90
encryption techniques. We control and limit access to
customer-specific project areas, particularly at our data
centers based on a need to know basis.
Employees
At September 30, 2009, we employed 256 full-time
equivalent employees, including 102 combined in investment
research, product development and engineering, 70 in sales and
marketing, 59 in service delivery and 25 in general and
administrative management. We consider relations with our
employees to be good and have never experienced a work stoppage.
None of our employees are either represented by a labor union or
subject to a collective bargaining agreement.
Facilities
We currently lease our principal executive offices in Palo Alto,
California under a lease that expires on August 31, 2012.
We also lease office space in Phoenix, Arizona, primarily for
our operations and call center, under a lease that expires on
May 31, 2015, with an option to extend the lease until
May 31, 2020. We sublease office space in Boston,
Massachusetts, under a lease that expires on January 30,
2015. We believe that current facilities are sufficient to meet
our needs for the foreseeable future.
Legal
Proceedings
We are currently not party to any material legal proceedings. We
may from time to time become involved in litigation relating to
claims arising from our ordinary course of business. These
claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.
91
MANAGEMENT
Executive
Officers and Directors
The following table shows information about our executive
officers and directors, and their ages as of September 30,
2009:
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Name
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Age
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Position(s)
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Jeffrey N. Maggioncalda
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40
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President, Chief Executive Officer and Director
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Raymond J. Sims
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58
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Executive Vice President and Chief Financial Officer
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Christopher L. Jones
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42
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Executive Vice President, Investment Management and Chief
Investment Officer
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Lawrence M. Raffone
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46
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Executive Vice President, Sales and Client Services
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Garry W. Hallee
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48
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Executive Vice President, Technology and Service Delivery
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Kenneth M. Fine
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41
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Executive Vice President, Marketing
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Anne S. Tuttle
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48
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Executive Vice President, General Counsel and Secretary
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Deborah J. Behrman
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52
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Vice President, Human Resources
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Paul G. Koontz
(2)
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49
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Chairman
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E. Olena Berg-Lacy
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59
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Director
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Heidi Fields
(1)
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54
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Director
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Joseph A. Grundfest
(1)(3)
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58
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Director
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C. Richard Kramlich
(1)(2)(3)
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74
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Director
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Mark A. Wolfson
(1)
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57
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Director
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(1)
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Member of the audit committee.
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(2)
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Member of the compensation committee.
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(3)
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Member of the nominating and corporate governance committee.
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Jeffrey N. Maggioncalda
has served as our President and
Chief Executive Officer since August 1996 and as a director
since March 1997. From June 1991 to August 1994, he served as an
associate at Cornerstone Research, an economic and financial
consulting firm. Mr. Maggioncalda received an MBA from the
Stanford Graduate School of Business and a bachelors
degree in economics and English from Stanford University.
Raymond J. Sims
has served as our Executive Vice
President and Chief Financial Officer since August 1999. Before
joining us, Mr. Sims served at Raychem Corporation, a
technology company, as senior vice president, chief financial
officer and treasurer from 1993 to 1999, as vice president and
treasurer from 1985 to 1993 and as director, internal audit from
1982 to 1984. Mr. Sims received an MBA from the Harvard
Business School and a bachelors degree in business and
economics from Lehigh University.
Christopher L. Jones
has served as our Executive Vice
President, Investment Management and Chief Investment Officer
since January 2006, our Executive Vice President, Investment
Management from May 2001 until January 2006, and as our Vice
President, Financial Research & Strategy, from January
1998 until May 2001. Prior to joining us, Mr. Jones served
as a consultant at Cornerstone Research, an economic and
financial consulting firm. Mr. Jones received masters
degrees in business technology and engineering-economic systems
and a bachelors degree in economics from Stanford
University.
Lawrence M. Raffone
has served as our Executive Vice
President, Sales and Client Services since January 2001. Prior
to joining us, Mr. Raffone served as the executive vice
president of Fidelity
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Investments Institutional Brokerage Group, a division of
Fidelity Investments. Mr. Raffone received an MBA from
Babson College and a bachelors degree in marketing from
Bryant University.
Garry W. Hallee
has served as our Executive Vice
President of Technology and Service Delivery since December 2009
and served as our Executive Vice President, Technology from June
1999 to December 2009. He also served as acting Executive Vice
President, Service Delivery, from December 2007 to May 2008.
Prior to joining us, Mr. Hallee served as the executive
vice president of research and development for Vantive
Corporation, a customer relationship management software
company, from October 1996 to August 1998. From May 1984 to
September 1996, Mr. Hallee co-founded and served as the
chief technology officer of Aion Corporation, a computer
software company. Mr. Hallee received a masters degree and
a bachelors degree in electrical engineering/computer
systems from Stanford University.
Kenneth M. Fine
has served as our Executive Vice
President, Marketing since January 2006 and served as our
Executive Vice President, Product and Channel Marketing from May
2005 until January 2006. Prior to joining us in 1997 as our
Director, Product Marketing, Mr. Fine served as a Naval
Officer and engineer from July 1990 to August 1995.
Mr. Fine received a masters degree in systems engineering
from Virginia Polytechnic Institute, an MBA from the Stanford
Graduate School of Business and a bachelors degree in
mechanical engineering from Rensselaer Polytechnic Institute.
Anne S. Tuttle
has served as our Executive Vice
President, General Counsel and Secretary since March 2009.
Ms. Tuttle joined us in November 2003 as Director and
Associate General Counsel and served as our Director, Acting
General Counsel and Secretary from August 2005 to March 2006 and
as our Vice President, General Counsel and Secretary from March
2006 to March 2009. Prior to joining us, she served as Vice
President and Assistant General Counsel at Loomis
Sayles & Company, L.P., a federally registered
investment advisor, overseeing a
12-person
compliance team, from April 2000 to October 2003.
Ms. Tuttle received a juris doctorate from Boston
University School of Law and a bachelors degree in
economics from Yale University.
Deborah J. Behrman
has served as our Vice President,
Human Resources since April 2007. Prior to joining us,
Ms. Behrman served as President and Principal Consultant at
Dragonfly Consultants, a human resources and services consulting
firm, from July 2001 to April 2007 and as senior director, human
resources at Neoforma, a provider of supply chain management
services for healthcare from November 2003 to March 2007.
Ms. Behrman received a bachelors degree in psychology
from the University of California at Davis.
Paul G. Koontz
has served as our Chairman since February
2003 and has been a director since March 1997. Mr. Koontz
has been a general partner at Foundation Capital, a venture
capital firm, since 1996. Mr. Koontz currently serves on
the board of directors of Envestnet, Babycare (in Beijing) and
eBates. Mr. Koontz received a masters degree in engineering
management from Stanford University and a bachelors degree
in engineering from Princeton University.
E. Olena Berg-Lacy
has served as a director since
July 1998 and as a consultant from July 1998 until December 2007
and from October 2009 through the present. Ms. Berg-Lacy
has been a partner with Fiduciary Benchmarks, Inc. since
September 2007. Ms. Berg-Lacy has been a member of the
Board of Trustees for the GM/UAW Trust for Retiree HealthCare
since March 2006 and the UAW Trust for Retiree Health Benefits
since January 2009. Prior to this, she served as Assistant
Secretary of the United States Department of Labor, a position
she held from June 1993 to June 1998. She received an MBA with
honors from Harvard Business School and a bachelors degree
in English literature from California State University at Chico.
Heidi Fields
has served as a director since November 2008
and has served as executive vice president and chief financial
officer of Blue Shield of California since September 2003. Prior
to joining Blue Shield of California, she served as executive
vice president and chief financial officer of Gap, Inc. from
1999 to January 2003. From 1995 to 1999, Ms. Fields served
as the chief financial officer of ITT Industries, Inc. She has
also held senior financial management positions at General
Motors
93
Corporation, including vice president and treasurer during her
16-year tenure from 1979 to 1995. Ms. Fields has served as
a director of Agilent Technologies Inc. since 2000.
Ms. Fields received an MBA in finance/accounting from
Columbia Business School and a bachelors degree in Russian
language from Georgetown University.
Joseph A. Grundfest
is one of our founders and has served
as a director since our inception in June 1996.
Mr. Grundfest joined the faculty of Stanford Law School in
January 1990 where he is the William A. Franke Professor of Law
and Business. He also is the
co-director
of the Arthur and Toni Rembe Rock Center for Corporate
Governance at Stanford University, and
co-director
of Directors College, a venue for the continuing
professional education of directors of publicly traded
corporations. Prior to joining Stanford Law School,
Mr. Grundfest was a commissioner of the
U.S. Securities and Exchange Commission from 1985 to 1990.
Mr. Grundfest received a juris doctorate from Stanford Law
School and a bachelors degree in economics from Yale
University.
C. Richard Kramlich
has served as a director since
January 1997 and has been a general partner at New Enterprise
Associates since co-founding the venture capital firm in 1978.
Mr. Kramlich currently serves as a director on the board of
directors of Sierra Monitor Corporation, a developer of
monitoring technology, Zhone Technologies Inc., a developer of
communications networking environmental sensing and measuring,
and SVB Financial Group, a provider of commercial banking
products and services. Mr. Kramlich received an MBA from
Harvard Business School and a bachelors degree in history
from Northwestern University.
Mark A. Wolfson
has served as a director since January
2000 and has served as a managing partner of Oak Hill Capital
Management, LLC, a private equity firm, since 1998, and is a
founding managing partner of Oak Hill Investment Management,
L.P. Mr. Wolfson has been on the faculty of the Stanford
University Graduate School of Business since 1977, has served as
its associate dean, and has held the title of consulting
professor since 2001. He has been a research associate of the
National Bureau of Economic Research and serves on the executive
committee of the Stanford Institute for Economic Policy
Research. Mr. Wolfson is a director of eGain Communications
Corporation, a publicly held provider of multi-channel customer
service and knowledge management software, Conversus Asset
Management, LLC, which manages the portfolio of Conversus
Capital, L.P., a publicly traded portfolio of third-party
private equity funds and Accretive Health, Inc., a leading
provider of healthcare revenue cycle management services. He is
also an advisor to the investment committee of the William and
Flora Hewlett Foundation. Mr. Wolfson holds a Ph.D. in
accounting from the University of Texas, Austin and a
bachelors and masters degree in accounting and finance
from the University of Illinois.
Board of
Directors
Our bylaws provide for a board of directors consisting of not
fewer than five nor more than 15 members. Our board of directors
currently consists of seven members. The authorized number of
directors may be changed by resolution of the board. Vacancies
on the board can be filled by resolution of the board of
directors. Currently, our directors are elected annually to
serve until the next annual meeting of stockholders, until their
successors are duly elected and qualified, or until their
earlier death, resignation, disqualification or removal. Upon
the completion of this offering, the board of directors will be
divided into three classes, each serving staggered, three-year
terms:
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Our Class I directors will be Jeffrey N. Maggioncalda and
C. Richard Kramlich and their terms will expire at the first
annual meeting of stockholders following the date of this
prospectus;
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Our Class II directors will be Mark A. Wolfson and E. Olena
Berg-Lacy and their terms will expire at the second annual
meeting of stockholders following the date of this
prospectus; and
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Our Class III directors will be Joseph A. Grundfest, Heidi
Fields and Paul G. Koontz and their terms will expire at the
third annual meeting of stockholders following the date of this
prospectus.
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94
As a result, only one class of directors will be elected at each
annual meeting of stockholders, with the other classes
continuing for the remainder of their respective terms. This
classification of the board of directors may delay or prevent a
change in control of Financial Engines.
Our directors are elected by a plurality standard. However, in
an election of directors, if the majority of votes cast for a
director are marked as against or
abstain, and notwithstanding the valid election of
such director, our bylaws provide that such director will
voluntarily tender his or her resignation for consideration by
our nominating and corporate governance committee. Our board of
directors will determine whether to accept the resignation of
such director, taking into account the recommendation of the
nominating and corporate governance committee. With limited
exceptions, our board of directors is required to have a
majority of independent directors at all times.
Director
Emeritus
Professor William F. Sharpe is one of our founders and served as
a director since our inception in June 1996 until retiring from
our board of directors at age 75 in April 2009. Professor
Sharpe was also chairman of our board of directors from June
1996 to February 2003. Professor Sharpe is currently a director
emeritus. Professor Sharpe does not receive any compensation for
his service as a director emeritus and does not have any voting
rights with respect to any board matters. He is currently the
STANCO 25 professor of finance, emeritus, at the Stanford
Graduate School of Business and originally joined the Stanford
faculty in 1970. Professor Sharpe received the Nobel Prize in
Economic Sciences in 1990. He received his Ph.D., masters and
bachelors degrees in economics from the University of
California at Los Angeles. Professor Sharpe is also a recipient
of a Doctor of Humane Letters, Honoris Causa from DePaul
University, Doctor Honoris Causa from the University of Alicante
in Spain, Doctor Honoris Causa from the University of Vienna,
Austria, Doctor of Science, Economics, Honoris Causa from the
London Business School and of the UCLA Medal from the University
of California at Los Angeles, the institutions highest
honor.
Corporate
Governance
We believe our corporate governance initiatives comply with the
Sarbanes-Oxley Act of 2002 and the rules and regulations of the
SEC adopted thereunder. In addition, we believe our corporate
governance initiatives comply with the rules of The NASDAQ Stock
Market. After this offering, our board of directors will
continue to evaluate our corporate governance principles and
policies.
Our board of directors also adopted a code of business conduct
that applies to each of our directors, officers and employees.
The code addresses various topics, including:
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compliance with laws, rules and regulations;
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conflicts of interest;
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insider trading;
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corporate opportunities;
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competition and fair dealing;
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equal employment and working conditions;
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record keeping;
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confidentiality;
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protection and proper use of company assets; and
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payments to government personnel.
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Our board of directors also adopted a code of ethics for senior
financial officers applicable to our chief executive officer,
president, chief financial officer, controller and other key
management
95
employees addressing ethical issues. Upon completion of this
offering, the code of business conduct and the code of ethics
will each be posted on our website. The code of business conduct
and the code of ethics can be amended only by the approval of a
majority of the board of directors. Any waiver to the code of
business conduct for an executive officer or director or any
waiver of the code of ethics may be granted only by the board of
directors or the nominating and corporate governance committee
and must be timely disclosed as required by applicable law. We
also implemented whistleblower procedures that establish formal
protocols for receiving and handling complaints from employees.
Any concerns regarding accounting or auditing matters reported
under these procedures will be communicated promptly to the
audit committee.
Board
Committees
We have established an audit committee, a compensation committee
and a nominating and corporate governance committee. We believe
that the composition of these committees meet the criteria for
independence under, and the functioning of these committees
complies with the applicable requirements of, the Sarbanes-Oxley
Act of 2002, the current rules of The NASDAQ Stock Market and
SEC rules and regulations. We intend to comply with future
requirements as they become applicable to us. The board of
directors has determined that Heidi Fields, Joseph A. Grundfest,
C. Richard Kramlich and Mark A. Wolfson are each an audit
committee financial expert, as defined by the rules promulgated
by the Securities and Exchange Commission. Each committee has
the composition and responsibilities described below:
Audit Committee.
Heidi Fields, Joseph
A. Grundfest, C. Richard Kramlich and Mark A. Wolfson
serve on the audit committee. Ms. Fields is chairperson of
this committee. The audit committee assists the board of
directors in fulfilling its legal and fiduciary obligations in
matters involving our accounting, auditing, financial reporting,
internal control and legal compliance functions by approving the
services performed by our independent accountants and reviewing
their reports regarding our accounting practices and systems of
internal accounting controls. The audit committee also oversees
the audit efforts of our independent accountants and takes
actions as it deems necessary to satisfy itself that the
accountants are independent of management. The audit committee
is also responsible for monitoring the integrity of our
financial statements and our compliance with legal and
regulatory requirements as they relate to financial statements
or accounting matters.
Compensation Committee.
Paul G. Koontz
and C. Richard Kramlich serve on the compensation committee.
Mr. Koontz is chairperson of this committee. The
compensation committee assists the board of directors in meeting
its responsibilities with regard to oversight and determination
of executive compensation and assesses whether our compensation
structure establishes appropriate incentives for officers and
employees. The compensation committee reviews and makes
recommendations to the board of directors with respect to our
major compensation plans, policies and programs. In addition,
the compensation committee reviews and makes recommendations for
approval by the independent members of the board of directors
regarding the compensation for our executive officers,
establishes and modifies the terms and conditions of employment
of our executive officers, and administers our stock option
plans.
Nominating and Corporate Governance
Committee.
Joseph A. Grundfest and C. Richard
Kramlich serve on the nominating and corporate governance
committee. Mr. Grundfest is chairperson of this committee.
The nominating and corporate governance committee is responsible
for making recommendations to the board of directors regarding
candidates for directorships and the size and composition of the
board. In addition, the nominating and corporate governance
committee is responsible for overseeing our corporate governance
guidelines, and reporting and making recommendations to the
board concerning corporate governance matters.
Compensation
Committee Interlocks and Insider Participation
Paul G. Koontz and C. Richard Kramlich served as members of the
compensation committee during 2008. None of the members of our
compensation committee is or has in the past served as an
96
officer or employee of our company. None of our executive
officers currently serves, or in the past year has served, as a
member of the board of directors or compensation committee of
any entity that has one or more executive officers serving on
our board of directors or compensation committee.
Compensation of
Directors
Currently, our directors do not receive any fees for their
service on our board of directors, except for E. Olena Berg-Lacy
and Heidi Fields. In addition, for a description of our
compensation arrangements with Jeffrey N. Maggioncalda, see
Executive Compensation.
On January 12, 2009, we agreed to pay each of
Ms. Berg-Lacy and Ms. Fields an annual retainer of
$30,000 and Ms. Fields an additional annual retainer of
$15,000 for her services as chairperson of our audit committee.
In addition, we reimburse each of Ms. Berg-Lacy and
Ms. Fields for reasonable
out-of-pocket
and travel expenses in connection with attendance at the board
of directors meetings and committee meetings. We also agreed
that at the first meeting of our board of directors held after
January 12 of each year, beginning in 2010, we will grant to
each of Ms. Berg-Lacy and Ms. Fields an option to
purchase 10,000 shares of our common stock subject to the
terms and conditions of our form of stock option agreement in
place at such time, assuming Ms. Berg-Lacy or
Ms. Fields, as the case may be, has provided continuous
service on our board of directors during the prior year.
Following completion of this offering, our non-employee
directors will receive an annual retainer of $30,000, prorated
for partial service in any year. Members of our audit committee,
compensation committee and nominating and corporate governance
committee, other than the chairpersons of those committees, will
receive an additional annual retainer of $5,000. The chairperson
of the audit committee will receive an additional annual
retainer of $15,000 and the chairpersons of the compensation
committee and nominating and corporate governance committee will
each receive an additional annual retainer of $10,000.
In addition, non-employee directors will receive
nondiscretionary, automatic grants of nonstatutory stock options
under our 2009 Stock Incentive Plan. A non-employee director
will be automatically granted an initial option to purchase
50,000 shares upon becoming a member of our board of
directors. The initial option will vest and become exercisable
over four years, with the first 1/4th of the shares subject
to the initial option vesting on the first anniversary of the
date of grant and the remainder vesting monthly thereafter over
the subsequent three years. On the first business day following
each of our regularly scheduled annual meetings of stockholders,
each non-employee director will be automatically granted a
nonstatutory option to purchase 10,000 shares of our common
stock, provided the director has served on our board of
directors for at least six months. These options will vest and
become exercisable on the first anniversary of the date of grant
or immediately prior to our next annual meeting of stockholders,
if earlier. The options granted to non-employee directors will
have a per share exercise price equal to 100% of the fair market
value of the underlying shares on the date of grant and will
become fully vested if a change in control occurs. See
Employee Benefit Plans 2009 Stock Incentive
Plan.
Joseph A. Grundfest will receive the compensation described
above effective upon the completion of this offering, with the
annual retainer of $30,000 prorated for the remainder of 2010.
In addition, he will receive an annual retainer of $10,000 and
$5,000 for his service as chairperson of the nominating and
corporate governance committee and as a member of the audit
committee, respectively, which will be prorated for the
remainder of 2010. He also will be eligible to receive the
option to purchase 10,000 shares of our common stock
following each annual meeting of stockholders after the
completion of this offering. Paul G. Koontz, C. Richard Kramlich
and Mark A. Wolfson also will receive the compensation described
above once a stockholder meeting for the election of directors
has been held after the date of this prospectus, which will be
prorated for partial service during the year. However,
Messrs. Grundfest, Koontz, Kramlich and Wolfson will not
receive the initial option to purchase 50,000 shares of our
common stock referenced above.
97
2008 Director
Compensation
In 2008, we granted to each of E. Olena Berg-Lacy and Heidi
Fields an option to purchase 50,000 shares of our common
stock with an exercise price of $6.51 per share, which vests as
to
1/4th of
the shares on the one-year anniversary of December 17,
2008, the vesting commencement date, with 1/48th of the shares
subsequently vesting on each monthly anniversary thereafter. Our
other non-employee directors did not receive compensation for
their service as a member of our board of directors except as
described below. We also reimbursed Ms. Berg-Lacy for her
reasonable
out-of-pocket
costs and travel expenses in connection with her attendance at
board and committee meetings.
The following table sets forth the compensation paid or accrued
by us to our directors during fiscal 2008. The table excludes
Jeffrey N. Maggioncalda, who did not receive any additional
compensation from us for his role as a director because he is
our chief executive officer.
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Fees Earned or
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Option
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Name
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Paid in Cash
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Awards
(1)(2)
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Total
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E. Olena Berg-Lacy
(3)
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$
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$
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3,255
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$
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3,255
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Heidi Fields
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$
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$
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3,255
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$
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3,255
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(1)
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Amounts listed in this column represent the stock-based
compensation expense of awards recognized by us for fiscal year
2008, rather than amounts paid to or realized by the named
individual. Our assumptions with respect to the calculation of
stock-based compensation expense are set forth above in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Significant Management
Estimates Stock-Based Compensation. There can
be no assurance that options will be exercised (in which case no
value will be realized by the individual) or that the value on
exercise will approximate the compensation expense recognized by
us.
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(2)
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See the outstanding equity awards table below for the details of
the option awards.
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The following table lists all outstanding equity awards held by
non-employee directors as of the end of fiscal 2008:
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Number of
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Number of
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Securities
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Securities
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Underlying
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Underlying
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Unexercised
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Unexercised
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Option
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Option
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Option
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Options
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Options
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Exercise
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Expiration
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Name
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Grant Date
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Exercisable
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Unexercisable
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Price
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Date
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E. Olena Berg-Lacy
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05/01/2002
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25,000
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$
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2.00
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05/01/2012
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05/01/2002
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25,000
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2.00
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05/01/2012
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04/26/2005
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10,000
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4.25
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04/26/2010
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01/27/2006
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50,000
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6.00
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01/27/2011
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12/17/2008
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50,000
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(a)
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6.51
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12/17/2018
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Heidi Fields
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12/17/2008
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50,000
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(a)
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6.51
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12/17/2018
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(a)
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The grant date fair value of this option award was $174,500.
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(3)
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This amount does not reflect a reversal of the stock-based
compensation expense of $10,263 that we recognized in 2008 for
the options granted in connection with Ms. Berg-Lacys
consulting agreement.
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EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Executive
Summary
The following discussion provides information regarding our 2008
compensation program for our named executive officers, including
Jeffrey N. Maggioncalda, our Chief Executive Officer, Raymond J.
Sims, our Chief Financial Officer, Lawrence R. Raffone, our
Executive Vice President of Sales and Client Services,
Christopher L. Jones, our Executive Vice President of Investment
Management and Chief Investment Officer and Garry W. Hallee, our
Executive Vice President of Technology and Service Delivery.
Recommendations for executive compensation are made by our
compensation committee and approved by the board of directors,
except that compensation recommendations for our Chief Executive
Officer are approved by the non-employee members of the board of
directors. The primary components of compensation for the named
executive officers were base salary, cash incentive plan and
equity awards. In 2008, target level bonuses under our cash
incentive plan were payable at mid-year and at year-end upon
achievement of specified Company performance metrics. In 2009,
we eliminated the mid-year payment and instead based the cash
incentive plan on full-year Company performance and expect to
continue this practice going forward. Compensation decisions in
2008 also reflected the extremely difficult economic
environment, the impact of this environment on our financial
performance and the ability of our named executive officers to
address the challenges of the economic environment.
Compensation
Philosophy and Objectives
The primary objectives of our compensation and benefits programs
for executives are to attract and retain senior, skilled
executive management, to motivate their performance toward
achieving clearly defined corporate goals, and to align their
long term interests with those of our stockholders.
We have established a set of guiding principles that have
provided the foundation for all compensation programs for
executives and all employees. These principles include, but are
not limited to, taking a total rewards approach (which includes
all aspects of our compensation package, including cash
compensation, equity, Company-provided benefits and intangibles
such as Company culture and environment), paying consistently
within the markets in which we compete for talent, making
individual compensation decisions based on overall performance
and offering pay programs that allow employees at all levels to
share in Financial Engines success in a form that is
simple to explain and administer. We use these principles to
guide us in our compensation recommendations and decisions.
Each year our board of directors approves a set of goals and
objectives for the Company, including fiscal objectives. Our
executive incentive compensation is tied directly to the
achievement of clearly defined financial objectives. The
executive incentive program is designed to align executive
incentives with the Companys success and to recognize and
reward contributions of our executive officers to the
Companys performance but without encouraging unnecessary
risk-taking.
Role of the
Compensation Committee
The compensation committee is currently comprised of two
independent non-employee members of our board of directors. The
compensation committee determines and recommends to the
non-employee members of our board of directors for approval, the
Chief Executive Officers base salary, merit increases,
incentive compensation targets and equity award grants, without
the participation of the Chief Executive Officer. The
compensation committee is also responsible for reviewing the
performance of our Chief Executive Officer. With respect to our
other named executive officers, our Chief Executive Officer
meets with the compensation committee as needed, and provides
evaluations of our executives and other relevant information to
the committee and makes recommendations regarding appropriate
compensation for each executive, including merit increases,
changes to
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incentive compensation and grant of equity awards. The
compensation committee also approves our incentive compensation
plan for all employees and approves sales compensation programs
in principle.
Our Chief Financial Officer and Vice President, Human Resources,
from time to time, provide market data and other information to
assist the compensation committee in determining appropriate
compensation levels for executives. In 2008, the compensation
committee did not retain a compensation consultant with respect
to the review, recommendation or determination of executive
compensation. However, we have retained a human resources
consultant to assist with various human resources activities,
including survey entry and data analysis. In this capacity, the
consultant may from time to time provide us with general
background and information regarding executive compensation
practices but does not review or make specific recommendations
with respect to our executive compensation. The human resources
consultant analyzes compensation practices and provides
information on industry trends for use by us in determining
appropriate compensation levels.
Competitive
Market Review for Fiscal 2008 and Fiscal 2009
For our cash compensation programs, generally, we target to be
within a range of the middle quartile of the market in which we
compete for talent. To determine our competitive position, we
use a number of surveys, including the McLagan Survey for our
financial services positions, and the Radford Survey for our
technology, marketing and other positions. We use these third
party surveys as we believe McLagan is considered to be the
industry leader in financial services and that Radford is
considered to be the industry leader in technology. From time to
time, we also utilize other surveys. In 2008, we used both the
McLagan and Radford surveys as input in establishing
compensation and equity levels for our executive officers.
Principal
Elements of Executive Compensation
Our executive compensation program consists of three main
elements: base salary, cash incentive program and equity awards.
There is both a threshold of Company financial performance below
which cash incentive payments are not made and a cap on cash
incentive payments.
Base
Salaries.
Base
salaries are intended to provide our executives with a degree of
financial certainty and stability that does not depend on our
performance. In determining the base salaries for our Chief
Executive Officer and other named executive officers, the
compensation committee reviews the overall scope of each
officers responsibilities while taking into account the
base salaries being paid by companies with which we compete for
talent. Historically, base salaries have not been reviewed
according to a pre-set schedule. Base salary adjustments are
based on market data, individual performance, our overall
financial results and performance, changes in job duties and
responsibilities and our overall budget for base salary
increases.
The compensation committee last approved base salary increases
of $50,000 for our Chief Executive Officer and $25,000 for each
of our named executive officers effective April 1, 2008.
The increases were based on three factors. The first factor was
the desire to bring executive pay more in line with the middle
quartile of executive pay at comparable companies, as determined
by market data provided by the compensation surveys described
above. The second factor was to ensure that we are competitive
as we fill key positions and as we go forward as a public
company. Third, the compensation committee observed that
executive performance warranted an increase in salaries based
upon achievement of department and Company goals, including
company financial metrics, as documented in annual performance
evaluations.
Cash Incentive
Plan.
Our
annual cash incentive program for our named executive officers
is designed principally to reward performance that furthers key
corporate goals, and has to date focused exclusively on annual
financial objectives, except in the case of our Executive Vice
President of Sales
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and Client Services, for whom a significant portion of his
incentive compensation is based on the achievement of specified
quarterly and annual sales objectives. In 2008, each of our
named executive officers received an annual cash incentive
payment based solely upon Company performance, with no addition
or decrement based on individual performance. For 2009, annual
cash incentive payments will continue to be awarded based upon
Company financial performance. In addition, the compensation
committee may award certain one-time incentive
payments to our executive officers in consideration of taking on
significant additional responsibility for an indefinite period
of time, or extraordinary performance significantly above and
beyond the norm. While rare, we expect to continue this practice
going forward as we believe having a flexible approach to our
incentive compensation program is essential to allow us to
consider and recognize performance against changing market or
industry dynamics. In 2008, we granted such an incentive payment
to our Executive Vice President, Technology and Service
Delivery, in the amount of $25,000 for managing an additional
department for more than six months.
At the beginning of each fiscal year, our compensation committee
sets threshold and target levels for certain Company financial
metrics for that fiscal year based upon the performance goals
established through the annual planning process of our full
board of directors. If the threshold is not met, no incentive
payments are made under the cash incentive plan. If the
threshold is met, each participating executive officer is
eligible to receive the cash incentive amount payable at the
level of Company financial performance achieved. If the target
level is exceeded, the actual cash incentive payments are
adjusted upward based upon the level of Company financial
performance achieved. We believe this structure is consistent
with our principle of ensuring that our employees share in our
success.
For fiscal year 2008, the target level cash incentive payment
was payable at mid-year and at year-end if we achieved certain
levels of New Management Fee Run Rate and Cash
Net Income as of June 30, 2008 and December 31,
2008. If the mid-year payment exceeded the amount payable based
on full-year performance, we did not require repayment of the
excess at year-end. In 2008, the mid-term payment was 58% of the
amount payable based on full-year performance. In 2009, we
eliminated the mid-year payment to increase focus on annual,
rather than quarterly, objectives and to more closely tie the
timing of incentive payments with the performance period being
measured. We currently expect to continue this practice going
forward. New Management Fee Run Rate represents estimated
annualized fees generated from certain new enrollees into our
Professional Management program during the relevant period. Cash
Net Income is defined as net earnings prior to the deduction for
taxes, depreciation, amortization and stock-based compensation
expense. The Cash Net Income target level will be adjusted for
any accounting changes, as well as for any unanticipated unusual
items approved by our board of directors, that cause the
calculation of actual Cash Net Income to differ from that used
in the development of the goal. We set cash incentive targets
based in part on New Management Fee Run Rates as we believe this
metric minimizes the impact of market performance on the actual
payments to our executive officers and awards our executive
officers for performance elements that are in their control and
for which they are responsible. We use Cash Net Income as an
incentive metric because we believe that it reasonably reflects
the elements of profitability that can be most directly impacted
by employees, and because it excludes certain expenses which
arise as a result of financing decisions and actions by our
board of directors. Both metrics are weighted equally and
together determine our Company Performance Factor.
101
Executive payments are determined by multiplying the Company
Performance Factor by the respective executives target
cash incentive amount. At the threshold plan achievement level,
payments are 50% of target payment amounts and scale linearly to
100% of target payment amounts at 100% plan achievement. If
Company performance exceeds the goals, payments scale linearly
from 100% payment at 100% plan achievement to 200% payment at
200% plan achievement, and are capped at 200% of target cash
incentive amounts. Target incentive levels are determined using
market data provided by the surveys discussed above.
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2008 Incentive
|
Name
|
|
Current Position(s)
|
|
Target
|
|
Jeffrey N. Maggioncalda
|
|
President, Chief Executive Officer and Director
|
|
$
|
150,000
|
|
Raymond J. Sims
|
|
Executive Vice President and Chief Financial Officer
|
|
$
|
75,000
|
|
Christopher L. Jones
|
|
Executive Vice President, Investment Management and Chief
Investment Officer
|
|
$
|
150,000
|
|
Lawrence M. Raffone
|
|
Executive Vice President, Sales and Customer Services
|
|
$
|
525,000
|
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Garry W. Hallee
|
|
Executive Vice President, Technology and Service Delivery
|
|
$
|
75,000
|
|
The target for New Management Fee Run Rate for fiscal year 2008
was $9.0 million for the first half of the year and
$24.0 million for the full year. The target for Cash Net
Income for fiscal year 2008 was $1.2 million for the first
half of the year and $9.0 million for the full year. The
mid-year payment was calculated by assessing actual Company
performance in comparison to target levels for the first half of
the year. The year-end incentive payment was calculated by
assessing actual Company performance in comparison to the target
levels for the entire year, less the mid-year payment.
New Management Fee Run Rate as of June 30, 2008 was
$8.5 million, as compared to our target of
$9.0 million and $14.0 million as of December 31,
2008, as compared to our target of $24 million. New
management fee run rate lagged plan primarily due to the effects
of the market decline in the fourth quarter of 2008 as well as
enrollment campaigns of certain large sponsors occurring later
than anticipated. Cash Net Income in the first half of the year
was $2.1 million, exceeding our target of
$1.2 million, and $3.9 million for the full year, less
than our $9.0 million goal. The shortfall in Cash Net
Income was primarily due to the $3.0 million of withdrawn
offering expenses incurred due to our decision to cease efforts
to pursue an initial public offering in 2008, and lower revenue
associated with unfavorable equity markets. Total goal
achievement for the first half of 2008 was 116% resulting in a
mid-year cash incentive payment for all eligible employees, and
51% of the target achievement level for the full year goals.
Once the mid-year payment was deducted from the annual
calculation, no additional cash incentive payments were made at
year-end.
For 2009, we eliminated the mid-year payment and instead based
the incentive plan on full-year Company performance. We
currently expect the cash incentive plan to remain substantially
the same going forward. The metrics used to determine the
threshold and target levels may vary slightly from
year-to-year
as our strategy and plans change. For fiscal year 2009, the two
financial performance metrics used for determining bonus
payments will continue to be Cash Net Income and New Management
Fee Run Rate. We believe Company performance is likely to exceed
the threshold performance levels that will make our named
executive officers eligible to receive a cash incentive payment
for 2009. In 2009, the compensation committee recommended, and
the board of directors approved, an advance payment of 20% of
target cash incentive payments for those employees who
participate in the cash incentive plan and were hired prior to
June 1, 2009. The advance payouts were recommended in
consideration of the Companys financial performance, lack
of a merit increase in 2009, suspension of the 401(k) Company
match, and the potential 18 month gap in any cash incentive
payments. The advance payouts were made in July 2009. The
advance payouts were a one-time occurrence and we do not
currently anticipate continuing this practice going forward.
Cash incentive payments for 2009 will be calculated in 2010
based on Company and, for non-executive employees, individual
performance, in accordance with the cash incentive plan and the
amount
102
previously advanced would be deducted. However, for employees
who remain with us as of the annual payout date, there would be
no recovery of advance amounts paid in the event actual cash
incentive targets were not achieved. We did reserve the right to
recover advances from employees who left us prior to the annual
payout date.
Equity
Awards.
We
grant stock options to our current and newly hired executive
officers to enable them to share in our success and to reinforce
a corporate culture that aligns employee interests with
shareholder interests. It has been our practice to periodically
grant stock options to employees, including executives, in
recognition of performance and as an incentive for retention
under the 1998 Stock Option Plan. The size of these grants are
based on a number of factors, including an executives
overall unvested share ownership, individual performance and
changes in the scope of the individuals position.
The size and terms of any initial option grants to new
employees, including executive officers, are based largely on
competitive conditions and our own internal guidelines
applicable to the specific position.
Since 2005, our practice has been to provide equity incentives
principally in the form of stock option grants that vest over
time, with 1/4th of the shares vesting on the one-year
anniversary of the vesting commencement date and 1/48th of the
shares subsequently vesting on each monthly anniversary
thereafter. Our compensation committee may consider alternative
forms of equity in the future, such as performance shares,
restricted stock units or restricted stock awards with
alternative vesting strategies based on the achievement of
performance milestones or financial metrics.
The following stock option awards were granted to our executive
officers in 2008:
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2008 Options
|
Name
|
|
Current Position(s)
|
|
Granted
|
|
Jeffrey N. Maggioncalda
|
|
President, Chief Executive Officer and Director
|
|
|
175,000
|
|
Raymond J. Sims
|
|
Executive Vice President and Chief Financial Officer
|
|
|
125,000
|
|
Christopher L. Jones
|
|
Executive Vice President, Investment Management and Chief
Investment Officer
|
|
|
125,000
|
|
Lawrence M. Raffone
|
|
Executive Vice President, Sales and Customer Services
|
|
|
150,000
|
|
Garry W. Hallee
|
|
Executive Vice President, Technology and Service Delivery
|
|
|
125,000
|
|
Stock option awards were based on a number of factors, including
market data, individual performance, internal equity and
retention potential. We intend to continue to offer stock
options to our employees to encourage ownership in the Company,
recognize outstanding individual performance and provide a
retention tool for key executives to the extent that stock
options and other equity awards are subject to vesting over
extended periods of time and provide for only a limited exercise
period following termination of employment. Prior to this
offering, we plan to adopt the 2009 Stock Incentive Plan,
pursuant to which we will grant equity compensation awards
following the offering. The 2009 Stock Incentive Plan permits
the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units, performance units,
performance shares and other stock-based awards.
Assessment of
Risk
Our compensation program for our executive officers is designed
such that it will not incentivize unnecessary risk-taking. The
base salary component of our compensation program is a fixed
amount and does not depend on performance. Our cash incentive
program takes into account multiple metrics, thus diversifying
the risk associated with any single performance metric, and we
believe it does not incentivize our executive officers to focus
exclusively on short-term outcomes. Our equity awards are
limited by the terms of our equity plans to a fixed maximum
specified in the plan, and are
103
subject to vesting to align the long-term interests of our
executive officers with those of our stockholders.
Annual Review
Process
Performance is reviewed semi-annually for named executive
officers, including performance relative to goals and objectives
for the first or second half of the year, depending on when in
the year the performance evaluation is occurring. The Chief
Executive Officer is responsible for evaluating the performance
of all executives on a regular basis.
In the first quarter of each year, our Chief Executive Officer
conducts an annual performance review of each executive officer.
This performance review includes performance for the previous
fiscal year. In addition, the Chief Executive Officer conducts a
mid-year review of performance relative to specific goals for
each executive officer. The performance reviews serve as one of
the considerations used by the compensation committee to
determine base salary increases. Performance reviews are
conducted around the time the board typically sets the incentive
bonus targets as part of finalizing the financial plan for the
next year. Our board of directors may further refine targets
early into the next fiscal year. We anticipate continuing to
review executive compensation and performance annually in the
first quarter of the year.
Supplemental
Benefits
We provide the following benefits to our executives on the same
basis as provided to all of our employees:
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health, dental and vision insurance;
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|
|
life insurance;
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|
medical and dependant care flexible spending account;
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|
short-and long-term disability, accidental death and
dismemberment;
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|
|
a 401(k) plan, with Company match and Professional Management
services; and
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|
employee assistance plan.
|
We believe these benefits are consistent with companies with
which we compete for employees. In 2009, in light of the
uncertain economic environment, we suspended our 401(k) matching
contributions. We expect to reinstate the matching contributions
in 2010.
Stock
Ownership Guidelines
There are currently no equity ownership requirements or
guidelines that any of our directors, named executive officers
or other employees must meet or maintain.
Policy
Regarding the Timing of Equity Awards
As a privately owned company, there has been no market for our
common stock. Accordingly, in 2008, we had no program, plan or
practice pertaining to the timing of stock option grants to
executive officers coinciding with the release of material
non-public information.
Policy
Regarding Restatements
We do not currently have a formal policy requiring a fixed
course of action with respect to compensation adjustments
following later restatements of financial results. Under those
circumstances, the board of directors or compensation committee
thereof would evaluate whether compensation adjustments were
appropriate based upon the facts and circumstances surrounding
the restatement.
104
Tax and
Accounting Treatment of Compensation
Under section 162(m) of the Code, we may be unable to
deduct as compensation amounts in excess of $1 million paid
in any one year to any named executive officer. Certain
performance-based compensation approved by stockholders may not
be subject to this limitation. As we are not currently publicly
traded, our board of directors has not previously taken the
deductibility limitation imposed by Section 162(m) into
consideration in making compensation decisions. We expect that
following this offering, we will generally consider whether a
form of compensation will be deductible under
section 162(m) in determining executive compensation,
though other factors will also be considered. However, we may
authorize compensation payments that do not comply with the
exemptions to section 162(m) when we believe that such
payments are appropriate to attract and retain executive talent.
We expect that equity awards under our 1998 Stock Option Plan
and 2009 Stock Incentive Plan will qualify as performance-based
compensation under section 162(m).
2008 Summary
Compensation Table
The following tables set forth compensation for services
rendered in all capacities to us for the fiscal year ended
December 31, 2008 for our President and Chief Executive
Officer, Chief Financial Officer and our three other most highly
compensated executive officers as of December 31, 2008,
whom we refer to in this Registration Statement as the named
executive officers.
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Non-Equity
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Stock
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Option
|
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Incentive Plan
|
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All Other
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Name & Principal Position
|
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Year
|
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|
Salary
|
|
|
Bonus
|
|
|
Awards
(1)
|
|
|
Awards
(1)
|
|
|
Compensation
|
|
|
Compensation
(2)
|
|
|
Total
|
|
|
Jeffrey N. Maggioncalda
President and Chief Executive Officer
|
|
|
2008
|
|
|
$
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237,500
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|
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$
|
87,150
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|
|
$
|
63,512
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|
|
$
|
351,050
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|
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$
|
304,650
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|
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$
|
6,900
|
|
|
$
|
963,610
|
|
Raymond J. Sims
Executive Vice President Chief Financial Officer
|
|
|
2008
|
|
|
|
193,750
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|
|
|
43,575
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|
|
|
63,512
|
|
|
|
106,583
|
|
|
|
133,575
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|
|
|
5,813
|
|
|
|
503,230
|
|
Christopher L. Jones
Executive Vice President, Investment Management and Chief
Investment Officer
|
|
|
2008
|
|
|
|
193,750
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|
|
|
87,150
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|
|
|
63,512
|
|
|
|
145,397
|
|
|
|
267,150
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|
|
|
5,813
|
|
|
|
675,619
|
|
Lawrence M. Raffone
Executive Vice President, Sales and Client Services
|
|
|
2008
|
|
|
|
200,000
|
|
|
|
122,010
|
|
|
|
63,512
|
|
|
|
151,188
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|
|
|
567,283
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|
|
|
6,000
|
|
|
|
987,981
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|
Garry W. Hallee
Executive Vice President, Technology and Service Delivery
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|
|
2008
|
|
|
|
193,750
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|
|
|
68,575
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|
|
|
63,512
|
|
|
|
145,397
|
|
|
|
158,575
|
|
|
|
5,813
|
|
|
|
567,044
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|
|
|
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(1)
|
|
Amounts listed in this column
represent the stock-based compensation expense of awards
recognized by us for fiscal year 2008, rather than amounts paid
to or realized by the named individual. Our assumptions with
respect to the calculation of stock-based compensation expense
are set forth above in Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and
Significant Management Estimates Stock-Based
Compensation. There can be no assurance that awards will
vest or will be exercised (in which case no value will be
realized by the individual), or that the value upon vesting or
exercise will approximate the compensation expense recognized by
us.
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(2)
|
|
Represents amounts paid for 401(k)
contribution matching program.
|
105
2008 Grants of
Plan-Based Awards
The following table sets forth information on grants of
plan-based awards in fiscal year 2008 to our named executive
officers.
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All Other
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Option
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Awards:
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Exercise or
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Grant Date
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Estimated Future Payouts Under
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Number of
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Base Price
|
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Fair Value
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Non-Equity
Incentive Plan
|
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Securities
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of Option
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of Stock and
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Awards
(1)
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Underlying
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Awards
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Option
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Name
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Grant Date
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Threshold
|
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Target
|
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Maximum
|
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Options
|
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(per share)
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Awards
|
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|
Jeffrey N. Maggioncalda
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$
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75,000
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$
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150,000
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$
|
375,000
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|
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11/11/2008
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175,000
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$
|
6.51
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$
|
610,750
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Raymond J. Sims
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|
|
|
|
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|
37,500
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75,000
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|
187,500
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11/11/2008
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|
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125,000
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6.51
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436,250
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Christopher L. Jones
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|
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75,000
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|
150,000
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|
375,000
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11/11/2008
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125,000
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|
6.51
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436,250
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Lawrence M. Raffone
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250,000
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|
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|
525,000
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|
1,250,000
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11/11/2008
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150,000
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|
|
6.51
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|
523,500
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|
Garry W. Hallee
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|
|
|
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|
37,500
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|
|
75,000
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|
|
|
187,500
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|
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|
11/11/2008
|
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125,000
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|
|
6.51
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|
|
|
436,250
|
|
|
|
|
(1)
|
|
The threshold illustrates the
smallest payout that can be made if all of the pre-established
performance objectives are achieved at the minimum achievement
level. Actual awards may be more or less than these amounts and
are at the discretion of the compensation committee. The target
is the payout that can be made if the pre-established
performance objectives have been achieved at the target
achievement level. The maximum is the greatest payout that can
be made if the pre-established maximum performance objectives
are achieved or exceeded at the outperform achievement levels.
|
Narrative to 2008
Summary Compensation Table and 2008 Grants Plan-Based Awards
Table
Please see Compensation Discussion and Analysis
above for a complete description of compensation plans pursuant
to which the amounts listed under the 2008 Summary Compensation
Table and 2008 Grants of Plan-Based Awards Table were paid or
awarded and the criteria for such payment, including targets for
payment of annual incentives, as well as performance criteria on
which such payments were based. The Compensation Discussion and
Analysis also describes the options grants.
Except as otherwise noted, all option awards vest over four
years with 1/4th of the total number of shares subject to
the option vesting 12 months after the vesting commencement
date and the remaining shares vesting at a rate of
1/48th of the total number of shares subject to the option
each month thereafter.
106
2008 Outstanding
Equity Awards at Fiscal Year-End
The following table lists all outstanding equity awards held by
our named executive officers as of December 31, 2008.
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Option Awards
(1)
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|
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Stock Awards
(2)
|
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|
Number of
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Number of
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|
|
Number of
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|
|
Securities
|
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|
Securities
|
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Shares or
|
|
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|
Underlying
|
|
|
Underlying
|
|
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|
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|
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Units of
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Unexercised
|
|
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Unexercised
|
|
|
Option
|
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|
Option
|
|
|
Stock That
|
|
|
Market Value of
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Have Not
|
|
|
Shares That
|
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Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
|
Vested
|
|
|
Have Not Vested
|
|
|
Jeffrey N. Maggioncalda
|
|
|
3,000
|
|
|
|
|
|
|
|
2.75
|
|
|
|
07/07/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
231,116
|
|
|
|
|
|
|
|
6.00
|
|
|
|
12/14/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
10.00
|
|
|
|
04/11/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
168,705
|
|
|
|
|
|
|
|
1.00
|
|
|
|
12/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
11,667
|
(3)
|
|
|
|
|
|
|
1.00
|
|
|
|
03/05/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
3.00
|
|
|
|
01/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
4.25
|
|
|
|
03/23/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
7.50
|
|
|
|
09/19/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
11/11/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Raymond J. Sims
|
|
|
247,500
|
|
|
|
|
|
|
|
5.00
|
|
|
|
11/16/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
5,500
|
|
|
|
|
|
|
|
1.00
|
|
|
|
12/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
3.00
|
|
|
|
01/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
4.25
|
|
|
|
07/22/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
7.50
|
|
|
|
09/19/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
11/11/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Christopher L. Jones
|
|
|
3,000
|
|
|
|
|
|
|
|
2.75
|
|
|
|
07/07/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
173,222
|
|
|
|
|
|
|
|
6.00
|
|
|
|
12/14/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
107,741
|
|
|
|
|
|
|
|
1.00
|
|
|
|
12/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
(3)
|
|
|
|
|
|
|
1.00
|
|
|
|
03/05/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
2.50
|
|
|
|
04/22/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
3.00
|
|
|
|
01/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
4.25
|
|
|
|
03/23/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
7.50
|
|
|
|
09/19/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
11/11/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Lawrence M. Raffone
|
|
|
110,001
|
|
|
|
|
|
|
|
1.00
|
|
|
|
12/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
2.50
|
|
|
|
10/28/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
3.00
|
|
|
|
01/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
4.25
|
|
|
|
03/23/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
7.50
|
|
|
|
09/19/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
11/11/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Garry W. Hallee
|
|
|
120,395
|
|
|
|
|
|
|
|
6.00
|
|
|
|
12/14/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
90,132
|
|
|
|
|
|
|
|
1.00
|
|
|
|
12/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
6,355
|
(3)
|
|
|
|
|
|
|
1.00
|
|
|
|
03/05/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
3.00
|
|
|
|
01/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
4.25
|
|
|
|
03/23/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
7.50
|
|
|
|
09/19/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
11/11/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
(1)
|
|
Except as otherwise noted, all
option awards listed in the table vest as to 1/4th of the total
number of shares subject to the option 12 months after the
vesting commencement date, and the remaining shares vest at a
rate of 1/48th of the total number of shares subject to the
options each month thereafter. All option awards are subject to
early exercise, subject to our right of repurchase during the
vesting period.
|
|
(2)
|
|
All stock awards vest on the
seventh anniversary of February 14, 2005, the vesting
commencement. The vesting accelerates upon a change of control
or following an initial public offering as to 50% of the shares
after six months, and as to the remaining 50% of the shares
after 12 months.
|
|
(3)
|
|
All option awards fully vest on
grant date.
|
107
2008 Option
Exercises and Stock Vested
The following table sets forth the number of shares acquired
upon exercise of options by each named executive officer during
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of Shares
|
|
|
|
Number of Shares
|
|
|
|
|
Acquired on
|
|
Value Realized
|
|
Acquired on
|
|
Value Realized
|
Name
|
|
Exercise
|
|
on Exercise
(1)
|
|
Vesting
|
|
on Vesting
(1)
|
|
Jeffrey N. Maggioncalda
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Raymond J. Sims
|
|
|
9,500
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Christopher L. Jones
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Lawrence M. Raffone
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Garry W. Hallee
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
(1)
|
|
Value realized is based on the fair market value of our common
stock on the date of exercise minus the exercise price. As there
was no public market for our common stock on the dates the
options were exercised, we have assumed the fair market value on
the date of exercise was
$ , which is the midpoint of
the proposed price range of our common stock set forth on the
cover page of this prospectus.
|
Employment
Agreements and Change in Control Arrangements
We do not have any employment agreements or termination
agreements with any of our executive officers.
We generally do not have change in control agreements with our
executives except with regards to their equity agreements. The
stock option agreements state that upon a change in control, the
following will occur:
|
|
|
|
|
If the executive is terminated other than for cause at any time
within 12 months following a change of control; and
|
|
|
|
If as of the date of termination some portion of the shares are
still subject to the one-year cliff;
|
|
|
|
Then the vesting for the portion of the shares still subject to
the one-year cliff will be accelerated.
|
In addition, shares subject to the restricted stock purchase
agreements will automatically vest upon a change of control or
following an initial public offering as to 50% of the shares
after six months, and the remaining 50% of the shares after 12
months.
For example, an executive who was hired on April 1, 2009
and who received 10,000 options would reach the one-year cliff
on April 1, 2010 and 2,500 options would vest accordingly.
If a change of control occurred on February 1, 2010, and
the executive was terminated other than for cause, then the
vesting of those 2,500 options would accelerate as of the date
of the change of control.
Our offer letter to our Executive Vice President of Sales and
Client Services provided for certain change of control benefits
if his employment is involuntarily terminated during the
12-month period commencing 30 days prior to a change in
control. Under the terms of his offer letter, any unvested
options held by him that would otherwise have vested during the
one-year period following the date of termination will become
vested on the termination date.
Employee Benefit
Plans
1998 Stock
Plan
Our 1998 Stock Plan was adopted by our board of directors in
April 1998 and was subsequently approved by our stockholders.
The 1998 Stock Plan was originally scheduled to expire on
April 9, 2008. However, pursuant to amendments to the 1998
Stock Plan adopted by our board of directors
108
and subsequently approved by our stockholders, the 1998 Stock
Plan will continue in effect until April 10, 2011, unless
sooner terminated under the terms of the 1998 Stock Plan.
As of September 30, 2009, 1,167,331 shares of common
stock remained available for future issuance under our 1998
Stock Plan. As of September 30, 2009, options to purchase a
total of 10,560,935 shares of our common stock were
outstanding under the 1998 Stock Plan. The outstanding options
have exercise prices ranging from $1.00 to $10.00 per share. The
weighted average exercise price of the options outstanding under
the 1998 Stock Plan was $5.76.
Following the completion of this offering, no additional awards
will be granted and no shares of our common stock will remain
available for future issuance under the 1998 Stock Plan. Shares
originally reserved for issuance under our 1998 Stock Plan but
which are not subject to outstanding options on the effective
date of our 2009 Stock Incentive Plan, and shares subject to
outstanding options under our 1998 Stock Plan on the effective
date of the 2009 Stock Incentive Plan that are subsequently
forfeited or terminated for any reason before being exercised,
up to a number of additional shares not to exceed an aggregate
of 2,000,000 shares, will again become available for awards
under our 2009 Stock Incentive Plan.
The 1998 Stock Plan provides for the grant of incentive stock
options within the meaning of Section 422 of the Code to
employees, including officers and employee directors, and the
grant of nonstatutory stock options and restricted stock to
employees, officers, directors (including non-employee
directors) and consultants.
The 1998 Stock Plan has been administered by our board of
directors or a committee appointed by the board of directors,
and may be amended or modified by the board of directors at any
time, without stockholder approval, unless approval is required
by applicable laws, rules or regulations or stock exchange
listings standards, and provided that any amendment or
termination does not impair the rights of holders of outstanding
awards without their consent.
Stock Options.
The committee administering the
1998 Stock Plan determines the term of each option, which may
not exceed 10 years (or five years in the case of an
incentive stock option granted to a stockholder holding more
than 10% of the voting shares of our company). To the extent an
optionholder has the right in any calendar year to exercise for
the first time one or more incentive stock options for shares
having an aggregate fair market value in excess of $100,000, any
such excess options are treated as nonstatutory stock options.
No option may be transferred by the optionholder other than by
will or the laws of descent or distribution. Stock options may
not be granted with an exercise price less than 100% of the fair
market value of the shares on the grant date, or, in the case of
incentive stock options granted to a holder of 10% or greater of
the voting shares of our company, the exercise price may not be
less than 110% of the fair market value of the shares on the
grant date. Each option may be exercised during the
optionholders lifetime solely by the optionholder.
1/4th of the total number of shares subject to the options
vest and become exercisable 12 months after the vesting
commencement date for options granted under the 1998 Stock Plan,
and the remaining options vest and become exercisable at a rate
of 1/48th of the total number of shares subject to the
options each month thereafter. After the termination of an
optionholders service as an employee, director, or
consultant for any reason other than death or disability, such
optionholder may exercise his or her vested options for the
length of time stated in the option agreement, which period may
not exceed three months or be less than 30 days. Generally,
upon the death of the optionholder, the option will remain
exercisable for six months. In the case of the
optionholders termination of service as a result of total
or permanent disability, the option will remain exercisable for
12 months. In the case of the optionholders
termination of service as a result of a disability that does not
constitute a total or permanent disability, the option will
remain exercisable for six months. Notwithstanding the
foregoing, no option may be exercised after the expiration of
its term.
109
Restricted Stock.
Restricted stock is a share
award that may be conditioned upon continued service, the
achievement of performance objectives or the satisfaction of any
other condition as specified in a restricted stock agreement.
Restricted stock purchase rights granted may not be granted with
a purchase price less than 85% of the fair market value of the
shares on the grant date, or, in the case of a holder of 10% or
greater of the voting shares of our company, the price may not
be less than 100% of the fair market value of the shares on the
grant date. Participants who were awarded restricted stock under
the 1998 Stock Plan generally have all the rights of a
stockholder with respect to such stock, other than the right to
transfer such stock prior to vesting. Restricted stock may
generally be subject to a repurchase right by us in the event
the recipient ceases to provide services to us.
The 1998 Stock Plan provides that in the event of any increase
or decrease in the number of outstanding shares of our common
stock resulting from a stock split, reverse stock split, stock
dividend, combination, recapitalization or reclassification of
our common stock, or any other increase or decrease effected
without receipt of consideration by the company; our board of
directors will make appropriate adjustments in order to preserve
the benefits of awards outstanding under the 1998 Stock Plan.
The 1998 Stock Plan further provides that upon consummation of a
sale of all or substantially all of our assets or a merger,
outstanding awards granted under the 1998 Stock Plan would
terminate, unless assumed or substituted by an equivalent option
or right by the acquiring or surviving company. For more
information regarding the effect of a merger, consolidation or
similar transaction on outstanding awards granted under the 1998
Stock Plan, see Employment Agreements and Change in
Control Arrangements above.
Special
Executive Restricted Stock Purchase Plan
Our Special Executive Restricted Stock Purchase Plan was adopted
by our board of directors on June 19, 2001 and was
subsequently approved by our stockholders. Our Special Executive
Restricted Stock Purchase Plan provides for grants of restricted
stock to our employees and consultants.
As of September 30, 2009, 25,000 shares of common
stock remained available for future issuance under our Special
Executive Restricted Stock Purchase Plan. As of
September 30, 2009, 350,000 shares of restricted stock
were issued but unvested under the Special Executive Restricted
Stock Purchase Plan. The weighted average purchase price of the
restricted stock awards granted was $0.04.
Following the completion of this offering, no additional awards
will be granted and no shares of our common stock will remain
available for future issuance under the Special Executive
Restricted Stock Purchase Plan.
The Special Executive Restricted Stock Purchase Plan provides
for the grant of restricted stock to employees and consultants
of the company.
The Special Executive Restricted Stock Purchase Plan was
administered by our board of directors or a committee appointed
by the board of directors, and may be amended or modified by the
board at any time, without stockholder approval, unless approval
is required by applicable laws, rules or regulations or stock
exchange listings standards, and provided that any amendment or
termination does not materially and adversely affect the rights
of any holder of outstanding awards without his or her consent.
Restricted stock is a share award that may be conditioned upon
continued service, the achievement of performance objectives or
the satisfaction of any other condition as specified in a
restricted stock purchase agreement. Prior to an initial public
offering and if required by applicable laws at the time of
grant, restricted stock granted under the Special Executive
Restricted Stock Purchase Plan may not be granted with a
purchase price less than 85% of the fair market value of the
shares on the grant date, or, in the case of a holder of 10% or
greater of the voting shares of our company, the price may not
be less than 100% of the fair market value of the shares on the
grant
110
date. Participants who were granted restricted stock under the
plan generally have all the rights of a stockholder with respect
to such stock, other than the right to transfer such stock prior
to vesting. Restricted stock may generally be subject to a
repurchase right by us in the event the recipient ceases to
provide services to us.
The Special Executive Restricted Stock Purchase Plan provides
that in the event of any increase or decrease in the number of
outstanding shares of our common stock resulting from a stock
split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of our common stock, or any
other increase or decrease effected without receipt of
consideration by the company, our board of directors will make
appropriate adjustments in order to preserve the benefits of
awards outstanding under the plan. The plan further provides
that upon consummation of a sale of all or substantially all of
our assets, or a merger, consolidation or other capital
reorganization of the company that includes a change of control,
outstanding stock purchase rights granted under the Special
Executive Restricted Stock Purchase Plan would terminate, unless
assumed or substituted by an equivalent right by the acquiring
or surviving company. For more information regarding the effect
of a merger, consolidation or similar transaction on outstanding
awards granted under the Special Executive Restricted Stock
Purchase Plan, see Employment Agreements and Change in
Control Arrangements above.
2009 Stock
Incentive Plan
General.
Our 2009 Stock Incentive Plan was
adopted by our board of directors in November 2009, subject to
stockholder approval, and will become effective immediately
prior to the closing of this offering.
The 2009 Stock Incentive Plan provides for the granting of
incentive stock options within the meaning of Section 422
of Code to employees and the granting of nonstatutory stock
options to employees, non-employee directors, advisors and
consultants. The 2009 Stock Incentive Plan also provides for the
grants of restricted stock, stock appreciation rights and stock
unit awards to employees, non-employee directors, advisors and
consultants.
Administration.
The compensation committee of
our board of directors will administer the 2009 Stock Incentive
Plan, including the determination of the recipient of an award,
the number of shares subject to each award, whether an option is
to be classified as an incentive stock option or nonstatutory
option, and the terms and conditions of each award, including
the exercise and purchase prices and the vesting or duration of
the award.
At the discretion of our board of directors, the compensation
committee may consist solely of two or more non-employee
directors within the meaning of
Rule 16b-3
of the Exchange Act, or solely of two or more outside
directors within the meaning of Section 162(m) of the
Code. Our board of directors may appoint one or more separate
committees of our board, each consisting of one or more members
of our board of directors, to administer our 2009 Stock
Incentive Plan with respect to employees who are not subject to
Section 16 of the Exchange Act. Subject to applicable law,
our board of directors may also authorize one or more officers
to designate employees, other than employees who are subject to
Section 16 of the Exchange Act, to receive awards under our
2009 Stock Incentive Plan
and/or
determine the number of such awards to be received by such
employees subject to limits specified by our board of directors.
Authorized Shares.
Under our 2009 Stock
Incentive Plan, 2,000,000 shares of our common stock have
been authorized for issuance. In addition, the number of shares
that have been authorized for issuance under the 2009 Stock
Incentive Plan will be automatically increased on the first day
of each fiscal year beginning in 2010 and ending in 2019, in an
amount equal to the least of (i) 2,000,000 million
shares, (ii) 4% of the outstanding shares of our common
stock on the last day of the immediately preceding year or
(iii) another amount determined by the board of directors.
Shares subject to awards granted under the 2009 Stock Incentive
Plan that expire unexercised, are forfeited or terminated before
being exercised or settled, or are not delivered to the
participant because such
111
award is settled in cash will again become available for
issuance under the 2009 Stock Incentive Plan. Shares tendered or
withheld to satisfy the grant, exercise price or tax withholding
obligation related to an award will again become available for
issuance under the 2009 Stock Incentive Plan. In addition,
shares originally reserved for issuance under our 1998 Stock
Plan but which are not subject to outstanding options on the
effective date of our 2009 Stock Incentive Plan, and shares
subject to outstanding options under our 1998 Stock Plan on the
effective date of the 2009 Stock Incentive Plan that are
subsequently forfeited or terminated for any reason before being
exercised, up to a number of additional shares not to exceed an
aggregate of 2,000,000 shares, will again become available
for awards under our 2009 Stock Incentive Plan after this
offering is completed and the 2009 Stock Incentive Plan is
effective.
No participant in the 2009 Stock Incentive Plan can receive
option grants, restricted shares, stock appreciation rights or
stock units totaling more than an aggregate of
500,000 shares in any calendar year, except in the
participants first year of employment in which the
participant may receive equity awards totaling up to
1,000,000 shares. No participant in the 2009 Stock
Incentive Plan may be paid more than an aggregate of $1,000,000
in cash during any calendar year with respect to equity awards
that are payable in cash.
Types of
Awards.
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Stock Options.
A stock option is the right to
purchase a certain number of shares of stock, at a certain
exercise price, in the future. Under our 2009 Stock Incentive
Plan, incentive stock options and nonstatutory options must be
granted with an exercise price of at least 100% of the fair
market value of our common stock on the date of grant. Incentive
stock options granted to any holder of more than 10% or greater
of the voting shares of our company must have an exercise price
of at least 110% of the fair market value of our common stock on
the date of grant. No incentive stock option can be granted to
an employee if as a result of the grant, the employee would have
the right in any calendar year to exercise for the first time
one or more incentive stock options for shares having an
aggregate fair market value in excess of $100,000. The stock
option agreement specifies the date when all or any installment
of the option is to become exercisable. We expect that
1/4th of the total number of shares subject to the options
will vest and become exercisable 12 months after the
vesting commencement date for options granted, and the remaining
options will vest and become exercisable at a rate of
1/48th of
the total number of shares subject to the options each month
thereafter. Each stock option agreement sets forth the term of
the options, which is prohibited from exceeding 10 years
(five years in the case of an incentive stock option granted to
any holder of more than 10% of our voting shares), and the
extent to which the optionee will have the right to exercise the
option following termination of the optionees service with
the company. Payment of the exercise price may be made in cash
or cash equivalents or, if provided for in the stock option
agreement evidencing the award, (i) by surrendering, or
attesting to the ownership of, shares which have already been
owned by the optionee, (ii) by delivery of an irrevocable
direction to a securities broker to sell shares and to deliver
all or part of the sale proceeds to us in payment of the
aggregate exercise price, (iii) by delivery of an
irrevocable direction to a securities broker or lender to pledge
shares and to deliver all or part of the loan proceeds to us in
payment of the aggregate exercise price, (iv) by delivering
a full-recourse promissory note or (v) by any other form
that is consistent with applicable laws, regulations and rules.
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Restricted Stock.
Restricted stock is a share
award that may be subject to vesting conditioned upon continued
service, the achievement of performance objectives or the
satisfaction of any other condition as specified in a restricted
stock agreement. Participants who are granted restricted stock
awards generally have all of the rights of a stockholder with
respect to such stock, other than the right to transfer such
stock prior to vesting. Subject to the terms of the 2009 Stock
Incentive Plan, the compensation committee will determine the
terms and conditions of any restricted stock award, including
any vesting arrangement, which will be
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set forth in a restricted stock agreement to be entered into
between us and each recipient. Restricted stock may be awarded
for such consideration as the compensation committee may
determine, including without limitation cash, cash equivalents,
full-recourse promissory notes or future services or services
rendered prior to the award (without a cash payment by the
recipient).
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Stock Units.
Stock units give recipients the
right to acquire a specified number of shares of stock at a
future date upon the satisfaction of certain conditions,
including any vesting arrangement, established by the
compensation committee and as set forth in a stock unit
agreement. Unlike restricted stock, the stock underlying stock
units will not be issued until the stock units have vested and
are settled, and recipients of stock units generally will have
no voting or dividend rights prior to the time the vesting
conditions are satisfied and the award is settled. The
compensation committee may elect to settle vested stock units in
cash or in common stock or in a combination of cash and common
stock. Subject to the terms of the 2009 Stock Incentive Plan,
the compensation committee will determine the terms and
conditions of any stock unit award, which will be set forth in a
stock unit agreement to be entered into between us and each
recipient.
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Stock Appreciation Rights.
Stock appreciation
rights may be granted independently or in combination with an
award of stock options. Stock appreciation rights typically will
provide for payments to the recipient based upon increases in
the price of our common stock over the exercise price of the
award. The exercise price of a stock appreciation right will be
determined by the compensation committee, which shall not be
less than the fair market value of our common stock on the date
of grant. The compensation committee may elect to pay stock
appreciation rights in cash or in common stock or in a
combination of cash and common stock.
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Other Plan Features.
Under the 2009 Stock
Incentive Plan:
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Unless the agreement evidencing an award expressly provides
otherwise, no award granted under the plan may be transferred in
any manner (prior to the vesting and lapse of any and all
restrictions applicable to shares issued under such award),
other than by will or the laws of descent and distribution.
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Nondiscretionary, automatic grants of nonstatutory stock options
will be made to outside directors. Any outside director who
first joins the board of directors on or after the effective
date, will be automatically granted an initial nonstatutory
option to purchase 50,000 shares upon first becoming a
member of the board. The initial option will vest and become
exercisable over four years, with 1/4th of the shares
subject to the initial option vesting on the first anniversary
of the date of grant and the remainder vesting monthly after
that date. Immediately after each of our regularly scheduled
annual meetings of stockholders, each outside director will be
automatically granted an option to purchase 10,000 shares,
provided that the outside director has served on the board of
directors for at least six months. Each annual option will vest
and become exercisable on the first anniversary of the date of
grant, or immediately prior to the next regular annual meeting
of the companys stockholders following the date of grant
if the meeting occurs prior to the first anniversary date. The
options granted to outside directors will have a per share
exercise price equal to 100% of the fair market value of the
underlying shares on the date of grant and will become fully
vested if we are subject to a change of control.
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In the event of a recapitalization, stock split or similar
capital transaction, we will make appropriate and equitable
adjustments to the number of shares reserved for issuance under
the 2009 Stock Incentive Plan, including the share number in the
formula for automatic annual increases, the limitation regarding
the total number of shares underlying awards given to an
individual participant in any calendar year and the number of
nonstatutory stock options automatically granted to outside
directors and other adjustments in order to preserve the
benefits of outstanding awards under the 2009 Stock Incentive
Plan.
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113
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Generally, if we merge with or into another corporation, we will
provide for full exercisability or vesting and accelerated
expiration of outstanding awards or settlement of the intrinsic
value of the outstanding awards in cash or cash equivalents
followed by cancellation of such awards unless the awards are
continued if we are the surviving entity, or assumed or
substituted for by any surviving entity or a parent or
subsidiary of the surviving entity.
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If we are involved in an asset acquisition, stock acquisition,
merger or similar transaction with another entity, the
compensation committee may make awards under the 2009 Stock
Incentive Plan by the assumption, substitution or replacement of
awards granted by another entity. The terms of such assumed,
substituted or replaced awards will be determined by the
compensation committee, in its discretion.
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Awards under our 2009 Stock Incentive Plan may be made subject
to the attainment of performance criteria including cash flows,
earnings per share, earnings before interest, taxes and
amortization, return on equity, total stockholder return, share
price performance, return on capital, return on assets or net
assets, revenue, income or net income, operating income or net
operating income, operating profit or net operating profit,
operating margin or profit margin, return on operating revenue,
return on invested capital, market segment, shares, costs,
expenses, regulatory body approval for commercialization of a
product or implementation or completion of critical projects.
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The 2009 Stock Incentive Plan terminates ten years after its
initial adoption, unless terminated earlier by the board of
directors. The board of directors may amend or terminate the
plan at any time, subject to stockholder approval where required
by applicable law. Any amendment or termination may not impair
the rights of holders of outstanding awards without their
consent.
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114
RELATED PARTY
TRANSACTIONS
In addition to the compensation arrangements with directors and
executive officers and the registration rights described
elsewhere in this prospectus, the following is a description of
each transaction since January 1, 2006 and each currently
proposed transaction in which:
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we have been or are to be a participant;
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the amount involved exceeds or will exceed $120,000; and
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any of our directors, executive officers or beneficial holders
of more than 5% of our capital stock, or any immediate family
member of or person sharing the household with any of these
individuals (other than tenants or employees), had or will have
a direct or indirect material interest.
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Consulting
Agreements
We have entered into a consulting agreement, as amended and
restated as of October 1, 2009, that amended and restated a
prior Consulting Agreement dated May 1, 2002, with one of
our directors, E. Olena Berg-Lacy. Under this agreement,
Ms. Berg-Lacy serves as a strategic advisor to us. We paid
Ms. Berg-Lacy $140,000, $86,000 and $0 for services under
this agreement during the years ended December 31, 2006,
2007 and 2008, respectively.
We have entered into a consulting agreement, dated as of
March 5, 1998, as amended on January 11, 2002, with
Professor William F. Sharpe. Professor Sharpe retired from our
board of directors at the age of 75 in April 2009 and is
currently a director emeritus. Under the consulting agreement,
Professor Sharpe provides us with investment advisory services.
We incurred consulting fees under this agreement of $325,000,
$300,000 and $300,000 during the years ended December 31,
2006, 2007 and 2008, respectively.
Other
Agreements
In September 2006, we entered into a three-year
$10.0 million term loan with Coast DL Funding L.L.C., an
account managed by Oak Hill Advisors, L.P. Oak Hill Advisors,
L.P. receives fees for managing this account but has no
ownership interest in Coast DL Funding L.L.C. Oak Hill Capital
Partners, L.P., one of our greater than 5% holders, has a
strategic relationship with Oak Hill Advisors, L.P. One of our
directors, Mark A. Wolfson, is a managing partner of Oak Hill
Capital Partners, L.P. Neither Oak Hill Capital Partners, L.P.
nor Mr. Wolfson has an ownership interest in Oak Hill
Advisors, L.P. Any optional prepayment made within two years of
the date the loan was entered into was subject to a prepayment
penalty of 1% of principal amount of the note. The interest rate
with respect to the term loan was based on
3-month
LIBOR plus a margin of 5.00%. The term loan was repaid in full
in May 2009.
Issuance of
Preferred Stock for Anti-Dilution Adjustment
In March 2005, we issued 11,843 shares of our series D
preferred stock and 134,915 shares of our series E
preferred stock to existing holders of series D preferred
stock and series E preferred stock, respectively and on a
pro rata basis, in satisfaction of anti-dilution adjustments
that were triggered by increasing the number of shares reserved
for issuance under our stock incentive plan. Similarly, in
September 2006, December 2008 and November 2009, we issued
118,480, 207,181 and 91,651 shares of our series E
preferred stock, respectively, to existing holders of
series E preferred stock, on a pro rata basis, in
satisfaction of an anti-dilution adjustment that was triggered
by increasing the number of shares reserved for issuance under
our stock incentive plan.
115
Registration
Rights
We have entered into an investors rights agreement with
each of the purchasers of our preferred stock. Under this
agreement, our preferred stockholders are entitled to
registration rights with respect to their shares of common stock
issuable upon the automatic conversion of their convertible
preferred stock immediately prior to completion of this offering
and common stock, respectively. For additional information, see
Description of Capital Stock Registration
Rights.
Indemnification
Agreements
We intend to enter into indemnification agreements with each of
our current directors and executive officers. These agreements
will require us to indemnify these individuals to the fullest
extent permitted under Delaware law against liabilities that may
arise by reason of their service to us, and to advance expenses
incurred as a result of any proceeding against them as to which
they could be indemnified. We also intend to enter into
indemnification agreements with our future directors and
executive officers.
Procedures for
Approval of Related Party Transactions
Currently, any related party transaction is submitted to our
board of directors and are approved by a disinterested majority
of our board of directors. Our board of directors has approved a
Related Person Transactions Policy that will be effective upon
consummation of this offering. This Related Person Transactions
Policy will provide for approval by the audit committee of our
board of directors of transactions with our company valued at or
more than $120,000 in which any director, officer, 5% or greater
stockholder or certain related persons or entities has a direct
or indirect material interest.
116
PRINCIPAL AND
SELLING STOCKHOLDERS
The following table sets forth information as of
November 30, 2009 about the number of shares of common
stock beneficially owned and the percentage of common stock
beneficially owned before and after the completion of this
offering by:
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each person or group of persons known to us to be the beneficial
owner of more than 5% of our common stock;
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each of our named executive officers;
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each of our directors;
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all of our directors and executive officers as a group; and
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each of the selling stockholders.
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Unless otherwise noted below, the address of each beneficial
owner listed in the table is
c/o Financial
Engines, Inc., 1804 Embarcadero Road, Palo Alto, California
94303.
We have determined beneficial ownership in accordance with the
rules of the SEC. Except as indicated by the footnotes below, we
believe, based on the information furnished to us, that the
persons and entities named in the table below have sole voting
and investment power with respect to all shares of common stock
that they beneficially own, subject to applicable community
property laws.
Applicable percentage ownership is based on
32,966,515 shares of common stock outstanding on
November 30, 2009, which gives effect to the conversion of
each share of our preferred stock into one share of common
stock. For purposes of the table below, we have assumed
that shares
of common stock will be outstanding upon the completion of this
offering. The percentage ownership information assumes no
exercise of the option to purchase additional shares granted to
the underwriters. In computing the number of shares of common
stock beneficially owned by a person and the percentage
ownership of that person, we deemed outstanding shares of common
stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of
November 30, 2009. We did not deem these shares
outstanding, however, for the purpose of computing the
percentage ownership of any other person.
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Beneficial
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Ownership of
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Beneficial Ownership of
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Shares Before the
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Number
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Shares after the
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Offering
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of Shares
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Offering
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Name and Address of Beneficial
Owner
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Number
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Percent
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Offered
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Number
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Percent
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5% Stockholders:
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Entities affiliated with Foundation Capital Leadership Fund,
L.P.
(1)
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5,737,525
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17.4
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%
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Entities affiliated with New Enterprise Associates VII, L.P.
(2)
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4,745,358
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14.4
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Entities affiliated with Oak Hill Capital Partners, L.P.
(3)
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3,058,628
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9.3
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Named Executive Officers and Directors:
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Jeffrey N. Maggioncalda
(4)
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1,637,385
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4.8
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Raymond J. Sims
(5)
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537,017
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1.6
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Christopher L. Jones
(6)
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1,227,600
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3.6
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Lawrence M. Raffone
(7)
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1,069,292
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3.1
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Garry Hallee
(8)
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893,953
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2.7
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Paul G. Koontz
(9)
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5,737,525
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17.4
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117
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Beneficial
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Ownership of
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Beneficial Ownership of
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Shares Before the
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Number
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Shares after the
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Offering
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of Shares
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Offering
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Name and Address of Beneficial
Owner
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Number
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Percent
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Offered
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Number
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Percent
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E. Olena Berg-Lacy
(10)
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205,000
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*
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Heidi Fields
(11)
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50,000
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*
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Joseph A. Grundfest
(12)
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713,199
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2.2
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C. Richard Kramlich
(13)
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4,745,358
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14.4
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Mark A. Wolfson
(14)
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34,175
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*
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All executive officers and directors as a group
(14 persons)
(15)
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17,932,140
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46.7
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%
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Selling Stockholders:
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*
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Represents beneficial ownership of less than 1%.
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(1)
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Represents 2,871,232 shares held by Foundation Capital
Leadership Fund, L.P., 2,510,756 shares held by Foundation
Capital, L.P., 278,974 shares held by Foundation Capital
Entrepreneurs Fund, LLC and 76,563 shares held by
Foundation Capital Leadership Principals Fund, LLC. Paul G.
Koontz, one of our directors, is a Managing Member of Foundation
Capital Management Co., LLC, which is the general partner of
Foundation Capital, L.P. and Foundation Capital Entrepreneurs
Fund, LLC. Mr. Koontz is a Managing Member of FC Leadership
Management Co., LLC, which is the general partner of Foundation
Capital Leadership Fund, L.P. and FC Leadership Principals Fund,
LLC. Mr. Koontz holds voting and dispositive power over the
securities held by these funds. Mr. Koontz disclaims
beneficial ownership of the reported securities except to the
extent of his pecuniary interest therein. The principal business
address of Foundation Capital Leadership Fund, L.P. is 250
Middlefield Road, Menlo Park, CA 94025.
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(2)
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Represents 4,068,257 shares held by New Enterprise
Associates VII, L.P., 624,000 shares held by New Enterprise
Associates 9, L.P., 49,093 shares held by NEA Presidents
Fund, L.P. and 4,008 shares held by NEA Ventures 1997, L.P.
The shares held by New Enterprise Associates VII are indirectly
held by NEA Partners VII, Limited Partnership, the sole general
partner of NEA Partners VII and the individual general partners
of NEA Partners VII, Limited Partnership. The shares held by New
Enterprise Associates 9 are indirectly held by NEA Partners 9,
Limited Partnership, the sole general partner of New Enterprise
Associates 9 and the individual general partners of NEA Partners
9. The shares held by each of NEA Presidents Fund are indirectly
held by NEA General Partners L.P., the sole general partner of
NEA Presidents Fund and the individual general partners of NEA
General Partners. C. Richard Kramlich, one of our directors,
shares voting and dispositive power over the shares held by
these funds with Peter Barris, John M. Nehra, Charles W.
Newhall, III and Mark Perry. Messrs. Kramlich, Barris,
Nehra, Newhall and Perry disclaim beneficial ownership of these
shares except to the extent of their proportionate pecuniary
interest therein, if any. Pamela J. Clark, the general partner
of NEA Ventures 1997, holds voting and dispositive power over
the shares held by NEA Ventures 1997. Ms. Clark disclaims
beneficial ownership of these shares except to the extent of her
pecuniary interest therein. The principal business address of
the New Enterprise Associates funds is 2490 Sand Hill Road,
Menlo Park, CA 94025.
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(3)
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Represents 2,982,159 shares held by Oak Hill Capital
Partners, L.P. and 76,469 shares held by Oak Hill Capital
Management Partners, L.P. OHCP MGP, LLC, a Delaware limited
liability company, holds voting and dispositive power over these
shares. Mark A. Wolfson, one of our directors, is one of eight
members of OHCP MGP, LLC. The principal business address of Oak
Hill Capital Partners, L.P. is 2775 Sand Hill Road,
Suite 220, Menlo Park, CA 94025.
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(4)
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Includes 1,355,372 shares subject to options that are
immediately exercisable, of which 564,584 shares are
subject to our right of repurchase as of November 30, 2009,
and 50,000
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restricted shares are subject to our right of repurchase as of
November 30, 2009. Also includes 36,222 shares held in each
of three separate trusts for each of his three children, for
which Jeffrey N. Maggioncalda serves as custodian.
Mr. Maggioncalda has voting and dispositive power over the
shares held by these trusts. Also includes 144,739 shares
held in trust by The 1999 Maggioncalda Family Trust.
Mr. Maggioncalda has voting and dispositive power over the
shares held by the trust.
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(5)
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Includes 400,000 shares subject to options that are
immediately exercisable, of which 214,584 shares are
subject to our right of repurchase as of November 30, 2009,
and 50,000 restricted shares are subject to our right of
repurchase as of November 30, 2009. Also includes
3,542 shares held in trust for one of his children, for
which Raymond J. Sims serves as a custodian. Mr. Sims has
voting and dispositive power over the shares held by the trust.
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(6)
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Includes 840,963 shares subject to options that are
immediately exercisable, of which 225,001 shares are
subject to our right of repurchase as of November 30, 2009,
and 50,000 restricted shares are subject to our right of
repurchase as of November 30, 2009.
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(7)
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Includes 985,001 shares subject to options that are
immediately exercisable, of which 243,751 shares are
subject to our right of repurchase as of November 30, 2009,
and 50,000 restricted shares are subject to our right of
repurchase as of November 30, 2009.
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(8)
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Includes 621,487 shares subject to options that are
immediately exercisable, of which 250,001 shares are
subject to our right of repurchase as of November 30, 2009,
and 50,000 restricted shares are subject to our right of
repurchase as of November 30, 2009. Also includes 63,187
shares held in trust by the Hallee Family Trust. Mr. Hallee
has voting and dispositive power over the shares held by the
trust.
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(9)
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Represents 2,871,232 shares held by Foundation Capital
Leadership Fund L.P., 2,510,756 shares held by
Foundation Capital, L.P., 278,974 shares held by Foundation
Capital Entrepreneurs Fund, LLC and 76,563 shares held by
Foundation Capital Leadership Principals Fund, LLC.
Mr. Koontz, one of our directors, is a Manager of
Foundation Capital Management Co., LLC, which is the general
partner of Foundation Capital, L.P. and the sole manager of
Foundation Capital Entrepreneurs Fund, LLC. Mr. Koontz is a
Manager of FC Leadership Management Co., LLC, which is the
general partner of Foundation Capital Leadership Fund, L.P. and
the sole manager of FC Leadership Principals Fund,
LLC. Mr. Koontz holds voting and dispositive
power over the shares held by these funds. Mr. Koontz
disclaims beneficial ownership of the reported securities except
to the extent of his pecuniary interest therein.
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(10)
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Includes 160,000 shares subject to options that are
immediately exercisable, of which 52,084 shares are subject
to our right of repurchase as of November 30, 2009.
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(11)
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Consists of 50,000 shares subject to options that are
immediately exercisable, all of which are subject to our right
of repurchase as of November 30, 2009.
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(12)
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Includes 713,199 shares held in trust by The Grundfest
Living Trust U/T/A DD 8/25/97. Mr. Grundfest shares
voting and dispositive power over these shares with Carol C.
Grundfest.
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(13)
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Represents 4,068,257 shares held by New Enterprise
Associates VII, L.P., 624,000 shares held by New Enterprise
Associates 9, L.P., 49,093 shares held by NEA Presidents
Fund, L.P. and 4,008 shares held by NEA Ventures 1997, L.P.
Mr. Kramlich shares voting and dispositive power over the
shares held by these funds with Peter Barris, John M. Nehra,
Charles W. Newhall, III and Mark Perry.
Messrs. Kramlich, Barris, Nehra, Newhall and Perry disclaim
beneficial ownership of these shares except to the extent of
their proportionate pecuniary interest therein, if any.
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(14)
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Does not include 2,982,159 shares held by Oak Hill Capital
Partners, L.P. and 76,469 shares held by Oak Hill Capital
Management Partners, L.P. as to which Mr. Wolfson disclaims
beneficial ownership.
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(15)
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Includes 5,445,123 shares subject to options that are
immediately exercisable, of which 2,096,781 shares are
subject to our right of repurchase as of November 30, 2009,
and 325,000 restricted shares are subject to our right of
repurchase as of November 30, 2009.
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119
DESCRIPTION OF
CAPITAL STOCK
General
The following description of our capital stock and provisions of
our certificate of incorporation and bylaws is only a summary.
You should also refer to the copies of our certificate of
incorporation and bylaws that have been or will be filed with
the SEC as exhibits to our registration statement, of which this
prospectus forms a part, and to the provisions of Delaware law.
Upon completion of this offering, we expect that our authorized
capital stock will consist of 500,000,000 shares of common
stock, $0.0001 par value per share, and
10,000,000 shares of undesignated preferred stock,
$0.0001 par value per share, after giving effect to the
conversion of all outstanding preferred stock into common stock
and the restatement of our certificate of incorporation.
Common
Stock
As of September 30, 2009, there were 32,784,581 shares
of common stock outstanding held by approximately 371
stockholders of record, assuming the conversion on a
one-for-one
basis of each outstanding share of series A preferred
stock, series B preferred stock, series C preferred
stock, series D preferred stock, series E preferred
stock and series F preferred stock upon the completion of
this offering.
Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of
stockholders. Upon completion of this offering and the filing of
our amended and restated certificate of incorporation, our
common stockholders will not be entitled to cumulative voting in
the election of directors by our certificate of incorporation.
This means that the holders of a majority of the voting shares
will be able to elect all of the directors then standing for
election. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of
outstanding shares of our common stock will be entitled to
receive dividends out of assets legally available at the times
and in the amounts that our board of directors may determine
from time to time. Upon our liquidation, dissolution or
winding-up,
the holders of common stock would be entitled to share ratably
in all assets remaining after payment of all liabilities and the
liquidation preferences of any outstanding preferred stock.
Holders of common stock have no preemptive or conversion rights
or other subscription rights. There will be no redemption or
sinking fund provisions applicable to the common stock. All
currently outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued in
this offering, when paid for, will also be fully paid and
nonassessable.
Preferred
Stock
Upon the completion of this offering, each outstanding share of
our series A preferred stock will convert into one share of
common stock, or an aggregate of 1,030,006 shares of common
stock; each outstanding share of our series B preferred
stock will convert into one share of common stock, or an
aggregate of approximately 3,445,858 shares of common
stock; each outstanding share of our series C preferred
stock will convert into one share of common stock, or an
aggregate of approximately 3,123,573 shares of common
stock; each outstanding share of our series D preferred
stock will convert into one share of common stock, or an
aggregate of approximately 3,655,166 shares of common
stock; each outstanding share of our series E preferred
stock will convert into one share of common stock, or an
aggregate of approximately 7,411,158 shares of common stock
and each outstanding share of our series F preferred stock
will convert into one share of common stock, or an aggregate of
approximately 3,684,211 shares of common stock.
Following the conversion, our certificate of incorporation will
be amended to delete all references to the prior series of
preferred stock and our board of directors will be authorized,
subject to limitations imposed by Delaware law, to issue from
time to time up to a total of 10,000,000 shares of
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preferred stock in one or more series, without stockholder
approval. We expect that our board of directors will be
authorized to establish from time to time the number of shares
to be included in each series, and to fix the rights,
preferences and privileges of the shares of each wholly unissued
series and any of its qualifications, limitations or
restrictions. We expect that our board of directors will also be
able to increase or decrease the number of shares of any series,
but not below the number of shares of that series then
outstanding, without any further vote or action by the
stockholders.
The board of directors may authorize the issuance of preferred
stock with voting or conversion rights that could dilute the
voting power or alter other rights of the holders of our common
stock, or that could decrease the amount of earnings and assets
available for distribution to holders of our common stock. The
issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate
purposes, could, among other things, have the effect of
delaying, deferring or preventing a change in control of us and
might harm the market price of our common stock and the voting
and other rights of the holders of common stock. We have no
current plans to issue any shares of preferred stock after the
completion of this offering.
Warrant
As of September 30, 2009, there was a warrant outstanding
to purchase 108,290 shares of common stock, at an exercise
price of $9.23 per share, upon completion of this offering. The
warrant expired in October 2009.
Registration
Rights
After this offering, the holders of 23,596,952 shares of
common stock, including shares issued upon conversion of the
preferred stock, without taking into account any shares sold in
this offering by the selling stockholders are entitled to
contractual rights by which they may require us to register
those shares under the Securities Act. All of these shares are
subject to a
lock-up
period for 163 days, subject to extension as described
under Shares Eligible For Future Sale. If we
propose to register any of our securities under the Securities
Act for our own account, holders of those shares are entitled to
include their shares in our registration, provided they accept
the terms of the underwriting as agreed upon between us and the
underwriters selected by us, and among other conditions, that
the underwriters of any such offering have the right to limit
the number of shares included in the registration. Six months
after the effective date of the registration statement of which
this prospectus is a part, and subject to limitations and
conditions specified in the registration rights agreement with
the holders, holders of at least 50% of the shares of common
stock issued upon conversion of the series A preferred
stock, series B preferred stock, series C preferred
stock, series D preferred stock, series E preferred
stock and series F preferred stock may require us to
prepare and file a registration statement under the Securities
Act at our expense covering those shares, provided that the
shares to be included in the registration have an anticipated
aggregate public offering price of at least $25,000,000. We are
not obligated to effect more than two of these demand
registrations. In addition, six months after the effective date
of the registration statement of which this prospectus is a
part, and subject to limitations and conditions specified in the
registration rights agreement with the holders, holders of at
least 50% of the shares of common stock issued upon conversion
of the series D preferred stock, series E preferred
stock and series F preferred stock may require us to
prepare and file a registration statement under the Securities
Act at our expense covering those shares, provided that the
shares to be included in the registration have an anticipated
aggregate public offering price of at least $5,000,000. We are
not obligated to effect more than two of these demand
registrations. Holders of those shares may also require us to
file additional registration statements on
Form S-3,
subject to limitations specified in the registration rights
agreement.
121
Anti-Takeover
Effects of Delaware Law and Our Certificate of Incorporation and
Bylaws
The provisions of Delaware law, our restated certificate of
incorporation and our bylaws described below may have the effect
of delaying, deferring or discouraging another party from
acquiring control of us.
Delaware
Law
We will be subject to the provisions of Section 203 of the
Delaware General Corporation Law regulating corporate takeovers.
In general, those provisions prohibit a Delaware corporation
from engaging in any business combination with any interested
stockholder for a period of three years following the date that
the stockholder became an interested stockholder, unless:
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the transaction is approved by the board of directors before the
date the interested stockholder attained that status;
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upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction
commenced; or
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on or after the date the business combination is approved by the
board of directors, the business combination is authorized at a
meeting of stockholders, and not by written consent, by at least
two-thirds of the outstanding voting stock that is not owned by
the interested stockholder.
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In general, Section 203 defines business
combination to include the following:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested
stockholder;
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subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
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any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
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In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation, and any entity or
person affiliated with or controlling or controlled by any such
entity or person.
A Delaware corporation may opt out of this provision by express
provision in its original certificate of incorporation or by
amendment to its certificate of incorporation or bylaws approved
by its stockholders. However, we have not opted out of, and do
not currently intend to opt out of, this provision. The statute
could prohibit or delay mergers or other takeover or change in
control attempts and, accordingly, may discourage attempts to
acquire us.
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Charter and
Bylaws
Following the completion of this offering, we expect that our
certificate of incorporation and bylaws will provide that:
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no action can be taken by stockholders except at an annual or
special meeting of the stockholders called in accordance with
our bylaws, and stockholders may not act by written consent;
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the classification of our board of directors so that only a
portion of our directors are elected each year, with each
director serving a three-year term;
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the approval of holders of two-thirds of the shares entitled to
vote at an election of directors will be required to adopt,
amend or repeal our bylaws or amend or repeal the provisions of
our certificate of incorporation regarding the election and
removal of directors and the ability of stockholders to take
action by written consent or call a special meeting;
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our board of directors will be expressly authorized to make,
alter or repeal our bylaws;
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stockholders may not call special meetings of the stockholders
or fill vacancies on the board;
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stockholders must provide notice of nominations of directors or
the proposal of business to be voted on at an annual meeting;
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our board of directors will be authorized to issue preferred
stock without stockholder approval, as described above;
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our board of directors will be elected annually to serve until
the next annual meeting of stockholders;
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directors may only be removed for cause; and
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we will indemnify officers and directors against losses that
they may incur in investigations and legal proceedings resulting
from their services to us, which may include services in
connection with takeover defense measures.
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Limitation of
Liability and Indemnification Matters
We will adopt provisions in our certificate of incorporation
that limit the liability of our directors for monetary damages
for breach of their fiduciary duty as directors, except for
liability that cannot be eliminated under the Delaware General
Corporation Law. Accordingly, our directors will not be
personally liable for monetary damages for breach of their
fiduciary duty as directors, except for liabilities:
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for any breach of the directors duty of loyalty to us or
our stockholders;
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for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
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for unlawful payments of dividends or unlawful stock repurchases
or redemptions, as provided under Section 174 of the
Delaware General Corporation Law; or
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for any transaction from which the director derived an improper
personal benefit.
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Any amendment or repeal of these provisions will require the
approval of the holders of shares representing at least
two-thirds of the shares entitled to vote in the election of
directors, voting as one class.
Our certificate of incorporation and bylaws will also provide
that we will indemnify our directors and officers to the fullest
extent permitted under Delaware law. Our certificate of
incorporation and bylaws will also permit us to purchase
insurance on behalf of any officer, director, employee or other
123
agent for any liability arising out of his or her actions as our
officer, director, employee or agent, regardless of whether
Delaware law would permit indemnification. We intend to enter
into separate indemnification agreements with our directors and
executive officers that could require us, among other things, to
indemnify them against certain liabilities that may arise by
reason of their status or service as directors and to advance
their expenses incurred as a result of any proceeding against
them as to which they could be indemnified. We believe that the
limitation of liability provision in our certificate of
incorporation and the indemnification agreements will facilitate
our ability to continue to attract and retain qualified
individuals to serve as directors and officers.
The Nasdaq Global
Market Listing Symbol
We intend to apply to list our common stock on The Nasdaq Global
Market under the symbol FNGN.
Transfer Agent
and Registrar
The transfer agent and registrar for our common stock
is .
124
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. We cannot predict the effect, if any, that market
sales of shares or the availability of shares for sale will have
on the market price prevailing from time to time. As described
below, only a limited number of shares will be available for
sale shortly after this offering due to contractual and legal
restrictions on resale. Nevertheless, sales of our common stock
in the public market after the restrictions lapse, or the
perception that those sales may occur, could cause the
prevailing market price to decrease or to be lower than it might
be in the absence of those sales or perceptions.
Sale of
Restricted Shares
Upon completion of this offering, we will
have
outstanding shares of common stock, assuming that there are no
exercised outstanding options
after 2010.
The shares of common stock being sold in this offering will be
freely tradable, other than by any of our affiliates
as defined in Rule 144(a) under the Securities Act, without
restriction or registration under the Securities Act. All
remaining shares were issued and sold by us in private
transactions and are eligible for public sale if registered
under the Securities Act or sold in accordance with
Rule 144 or Rule 701 under the Securities Act. These
remaining shares are restricted securities within
the meaning of Rule 144 under the Securities Act. Shares
purchased by our affiliates may not be resold except pursuant to
an effective registration statement or an exemption from
registration, including the exemption under Rule 144 under
the Securities Act, as described below.
As a result of the
lock-up
agreements described below, other contractual restrictions on
resale and the provisions of Rules 144 and 701 described
below, the restricted securities will be available for sale in
the public market as follows:
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no shares will be eligible for sale prior to 163 days after
the date of this prospectus;
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shares
will be eligible for sale upon the expiration of the
lock-up
agreements, described below, beginning 163 days after the
date of this prospectus, subject to extension as described
below, and when permitted under Rule 144 or 701; and
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shares
will be eligible for sale upon the exercise of vested options
163 days after the date of this prospectus, subject to
extension as described below.
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Lock-up
Agreements
Our directors, executive officers and substantially all of our
stockholders have agreed with limited exceptions that they will
not sell any shares of common stock owned by them without the
prior written consent of Goldman, Sachs & Co., on
behalf of the underwriters for a period of 163 days from
the date of this prospectus; provided, however, that if
(1) during the last 17 days of the initial
lock-up
period, we release earnings results or announce material news or
a material event or (2) prior to the expiration of the
initial
lock-up
period, we announce that we will release earnings results during
the
15-day
period following the last day of the initial
lock-up
period, then in each case the
lock-up
period will be automatically extended until the expiration of
the
17-day
period beginning on the date of release of the earnings results
or the announcement of the material news or material event, as
applicable, unless Goldman, Sachs & Co. waives, in
writing, such extension. As a result, the maximum possible
lock-up
period under these
lock-up
agreements is 180 days beginning on the date of this
prospectus. At any time and without public notice, Goldman,
Sachs & Co. may in its sole discretion release some or
all of the securities from these
lock-up
agreements. To the extent shares are released before the
expiration of the
lock-up
period and these shares are sold into the market, the market
price of our common stock could decline. Immediately following
the
163-day
lock-up
period, shares of our common stock outstanding after this
offering will become available for sale, subject to legal
restrictions on resale. See Underwriting .
125
Rule 144
In general, under Rule 144, beginning 90 days after
the date of this prospectus, a person who is not our affiliate
and has not been our affiliate at any time during the preceding
three months will be entitled to sell any shares of common stock
that such person has beneficially owned for at least six months,
including the holding period of any prior owner other than one
of our affiliates, without regard to volume limitations. Sales
of our common stock by any such person would be subject to the
availability of current public information about us if the
shares to be sold were beneficially owned by such person for
less than one year.
In addition, under Rule 144, a person may sell shares of
our common stock acquired from us immediately upon the closing
of this offering, without regard to volume limitations or the
availability of public information about us, if:
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the person is not our affiliate and has not been our affiliate
at any time during the preceding three months; and
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the person has beneficially owned the shares to be sold for at
least one year, including the holding period of any prior owner
other than one of our affiliates.
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Beginning 90 days after the date of this prospectus, a
person deemed to be our affiliate, who beneficially owned the
shares proposed to be sold for at least six months, including
the holding period of any prior owner other than one of our
affiliates, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
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1% of the then outstanding shares of our common stock, or
approximately shares
immediately after this offering, assuming no exercise of the
underwriters option to purchase additional shares; or
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the average weekly trading volume of the common stock on The
Nasdaq Global Market during the four calendar weeks preceding
the date on which notice of the sale is filed with the
Securities and Exchange Commission.
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Sales under Rule 144 by our affiliates are subject to
requirements relating to manner of sale, notice and availability
of current public information about us.
Rule 701
Subject to various limitations on the aggregate offering price
of a transaction and other conditions, Rule 701 may be
relied upon with respect to the resale of securities originally
purchased from us by our employees, directors, officers,
consultants or advisers prior to the completion of this
offering, pursuant to written compensatory benefit plans or
written contracts relating to the compensation of such persons.
In addition, the SEC has indicated that Rule 701 will apply
to stock options granted by us before this offering, along with
the shares acquired upon exercise of those options. Securities
issued in reliance on Rule 701 are deemed to be restricted
securities and, beginning 90 days after the date of this
prospectus, unless subject to the contractual restrictions
described above, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144
and by affiliates under Rule 144 without compliance with
the minimum holding period requirements. All securities issued
in reliance on 701 are also subject to the
163-day
lock-up
period described above.
Stock
Plans
We intend to file a registration statement under the Securities
Act
covering shares
of common stock reserved for issuance under our stock plans.
This registration statement is expected to be filed soon after
the date of this prospectus and will automatically become
effective upon filing. Accordingly, shares registered under this
registration statement will be available for sale in the open
126
market unless those shares are subject to vesting restrictions
with us or the contractual restrictions described above.
Registration
Rights
In addition, after this offering, the holders of approximately
23,596,952 shares of common stock, without taking into
account the shares sold in this offering by the selling
stockholders, including shares of common stock issuable upon
conversion of our series A preferred stock, series B
preferred stock, series C preferred stock, series D
preferred stock, series E preferred stock and series F
preferred stock upon the completion of this offering, will be
entitled to rights to cause us to register the sale of those
shares under the Securities Act. All of these shares are subject
to the
163-day
lock-up
period. Registration of these shares under the Securities Act
would result in these shares, other than shares purchased by our
affiliates, becoming freely tradable without restriction under
the Securities Act immediately upon the effectiveness of the
registration. See Description of Capital Stock
Registration Rights.
127
DESCRIPTION OF
CERTAIN INDEBTEDNESS
General
On April 20, 2009, we, and our subsidiary, Financial
Engines Reincorporation Sub, Inc., as borrower, entered into a
second amended and restated loan and security agreement that
provides for a three-year $10.0 million term loan, which
matures on May 1, 2012, and a
364-day
$7.0 million revolving credit facility, with Silicon Valley
Bank. The key terms of the term loan are described below. This
description is not complete and is qualified in its entirety by
reference to the complete text of the Second Amended and
Restated Loan Security Agreement, a copy of which has been filed
as an exhibit to this registration statement, of which this
prospectus forms a part.
Loan and Terms of
Payment
Under the terms of the loan and security agreement, we may
borrow up to the lesser of (a) $7.0 million or
(b) the sum of 80% of our eligible accounts and 50% of our
eligible intra-quarter managed accounts through our revolving
credit facility. As part of our revolving credit facility, the
lender may issue letters of credit up to an aggregate amount of
$2.5 million. We are required to immediately reimburse the
lender for drawings made under the letters of credit. In
addition, we may enter into foreign exchange contracts with the
lender under which we commit to purchase from or sell to the
lender specified amounts of foreign currency on specific days up
to an aggregate amount of $2.5 million. We also may use up
to $2.5 million of the revolving credit facility for the
lenders cash management services. Any amounts paid under
the foreign exchange contracts or for the cash management
services will be treated as advances under the revolving credit
facility and accrue interest at the applicable interest rate.
We also may borrow up to $10.0 million under our term loan
as either a prime rate loan or a LIBOR rate loan. We must repay
any principal and accrued interest in 36 equal installments.
Interest and
Fees
The interest rate for the revolving credit facility will accrue
at a floating rate per annum rate equal to 0.75% above the prime
rate, which is payable monthly, and which may be increased by an
additional 5.00% in the event of default. We also must pay a
commitment fee equal to 0.25% of the revolving credit facility.
However, if our account balances with the lender drop below
$5.0 million at any time, we will immediately owe the
lender an additional commitment fee of $30,000.
The interest rate for a prime rate loan is at a rate per annum
equal to 1.50% above the prime rate, with a minimum prime rate
of 4.00% per annum, resulting in a minimum interest rate for
prime rate loans of 5.50% per annum, subject to an additional
5.00% in the event of default. The interest rate for a LIBOR
loan is 4.00% above the three-month LIBOR rate per annum,
measured on a
360-day
basis, with a minimum LIBOR rate of 1.50% per annum, resulting
in a minimum interest rate for LIBOR loans of 5.50% per annum,
which may be increased in the event of default to prime rate
plus 5.00%. We also paid a fee of $50,000, or an amount equal to
0.50% of the term loan.
Immediately upon an event of default and during the continuance
of any event of default, all outstanding amounts under the
revolving credit facility or a prime rate loan will bear an
interest rate per annum that is 5.00% above the rate that would
otherwise be applicable to such amounts.
Guarantees and
Security
The borrower, jointly and severally, unconditionally and
irrevocably, guarantees the prompt and complete payment and
performance of the note when due.
The term loan is secured by a security interest in all of our
personal property, including our deposit accounts, intellectual
property and intellectual property licenses, investment property
and receivables.
128
Covenants
The loan and security agreement contains covenants that, among
other things, limit our ability to create liens, merge or
consolidate, dispose of assets, incur indebtedness and
guarantees, repurchase or redeem capital stock and indebtedness,
make certain investments, acquisitions and capital expenditures,
enter into certain transactions with affiliates or change the
nature of our business.
The loan and security agreement also contains financial
covenants, including:
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the maintenance of a ratio of (a) quick assets to
(b) the sum of (i) current liabilities plus
(ii) all advances and term loans minus (iii) deferred
revenue of at least 1.15 to 1.0 through September 30, 2009,
and at least 1.25:1.00 thereafter;
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a minimum EBITDA for each fiscal quarter of $750,000; and
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a fixed charge coverage ratio of no less than 1.50 for the
period ending September 30, 2009, 2.0 for the period ending
December 31, 2009, 1.50 for the period ending
March 31, 2010, 2.0 for the period ending June 30,
2010 and 2.50 for the period ending September 30, 2010 and
thereafter.
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Events of
Default
Events of default, subject to certain exceptions and limitations
and whereupon the note shall become immediately due and payable,
include: non-payment of principal or interest as such amounts
become due, misrepresentation, breach of covenants, other
defaults, insolvency proceedings, bankruptcy filing, judgments,
cross-defaults, dissolution or liquidation and cessation of the
enforceability of any material provision of the note or any lien
created therein.
129
MATERIAL U.S.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
purchase, ownership and disposition of our common stock as of
the date hereof that may be relevant to you if you are a
non-U.S. Holder.
As used in this discussion, the term
non-U.S. Holder
means any person that is not, for U.S. federal income tax
purposes, any of the following:
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an individual citizen or resident of the United States;
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a corporation (or any other entity treated as a corporation for
U.S. federal income tax purposes) created or organized in
or under the laws of the United States, any state thereof or the
District of Columbia;
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an estate the income of which is subject to U.S. federal
income taxation regardless of its sources; or
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a trust if it (1) is subject to the primary supervision of
a court within the United States and one or more United States
persons have the authority to control all substantial decisions
of the trust or (2) has a valid election in effect under
applicable United States Treasury regulations to be treated as a
United States person.
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This discussion is based on the provisions of the Internal
Revenue Code of 1986, as amended, or the Code, and regulations,
rulings and judicial decisions as of the date hereof. Those
authorities may be changed, possibly with retroactive effect, or
different interpretations. This discussion is limited to
non-U.S. Holders
who hold shares of our common stock as capital assets. Moreover,
this discussion is for general information only and does not
address all the U.S. federal income tax consequences and
does not address foreign, state, local or other tax
considerations that may be relevant to you in light of your
personal circumstances, nor does it discuss special tax
provisions that may apply to you if you relinquished
U.S. citizenship or residence. In addition, it does not
represent a detailed description of the U.S. federal income
tax consequences to you if you are subject to special treatment
under the U.S. federal income tax laws (including, for
example, if you are an expatriate, controlled foreign
corporation, passive foreign investment
company, financial institution, insurance company,
tax-exempt organization or a partnership or other pass-through
entity for U.S. federal income tax purposes). If you are a
partnership holding our common stock, the tax treatment of a
partner will generally depend upon the status of the partner and
the activities of the partnership. If you are a partner in a
partnership holding our common stock, you should consult your
tax advisor.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT A TAX
ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL AND
FOREIGN INCOME, ESTATE AND OTHER TAX CONSEQUENCES OF PURCHASING,
OWNING AND DISPOSING OF OUR COMMON STOCK.
Dividends
If dividends are paid on our common stock, as a
non-U.S. Holder,
you will generally be subject to withholding of
U.S. federal income tax at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty. To claim
the benefit of a lower rate under an income tax treaty, you must
properly file with the payor an Internal Revenue Service
Form W-8BEN,
or successor form, certifying under penalty of perjury that you
are not a United States person (as defined under the Code) and
claiming an exemption from or reduction in withholding under the
applicable tax treaty. Special certification and other
requirements apply to you if you are a pass-through entity
rather than a corporation or individual or if our common stock
is held through certain foreign intermediaries.
If dividends are considered effectively connected with the
conduct of a trade or business by you within the United States
and, where a tax treaty applies, are attributable to a
U.S. permanent establishment of yours, those dividends will
not be subject to withholding tax, but instead will be subject
to U.S. federal income tax on a net basis at applicable
graduated individual or corporate rates
130
as if you were a United States person (as defined under the
Code), unless an applicable income tax treaty provides
otherwise, provided an Internal Revenue Service
Form W-8ECI,
or successor form, is filed with the payor. In addition, if you
are required to provide an Internal Revenue Service
Form W-8ECI
or successor form, as discussed above, you must also provide
your tax identification number. If you are a foreign
corporation, any effectively connected dividends may, under
certain circumstances, be subject to an additional branch
profits tax at a rate of 30% or such lower rate as may be
specified by an applicable income tax treaty.
If you are eligible for a reduced rate of U.S. withholding
tax pursuant to an income tax treaty, you may obtain a refund of
any excess amounts withheld by filing an appropriate claim for
refund with the Internal Revenue Service.
Gain on
Disposition of Common Stock
As a
non-U.S. Holder,
you generally will not be subject to U.S. federal income
tax on any gain recognized on the sale or other disposition of
our common stock unless:
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the gain is considered effectively connected with the conduct of
a trade or business by you within the United States and, where a
tax treaty applies, is attributable to a U.S. permanent
establishment of yours, in which case, you will generally be
subject to tax on the net gain derived from the sale under
regular graduated U.S. federal income tax rates as if you
were a United States person (as defined in the Code) and, if you
are a corporation, you may be subject to an additional branch
profits tax equal to 30% or such lower rate as may be specified
by an applicable income tax treaty;
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you are an individual who is present in the United States for
183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met, in which case,
you will be subject to a 30% tax on the gain derived from the
sale, which may be offset by United States source capital
losses; or
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we are or have been a United States real property holding
corporation, or a USRPHC, for U.S. federal income tax
purposes, and at any time within the shorter of the five-year
period ending on the date of disposition or the period you held
our common stock, you held, directly or indirectly, more than 5%
of the common stock. We believe that we are not currently, and
are not likely to become, a USRPHC.
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Federal Estate
Tax
If you are an individual, our common stock held at the time of
your death will be included in your gross estate for
U.S. federal estate tax purposes and may be subject to
U.S. federal estate tax, unless an applicable estate tax
treaty provides otherwise.
Current U.S. federal tax law provides for reductions in
U.S. federal estate tax through 2009 and the elimination of
such estate tax entirely in 2010. Under this law, such estate
tax would be fully reinstated, as in effect prior to the
reductions, in 2011, unless further legislation is enacted.
Information
Reporting and Backup Withholding Tax
We must report annually to the Internal Revenue Service and to
each of you the amount of dividends paid to you and the tax
withheld with respect to those dividends, regardless of whether
withholding was required. Copies of the information returns
reporting those dividends and withholding may also be made
available by the Internal Revenue Service to the tax authorities
in the country in which you reside under the provisions of an
applicable income tax treaty or other applicable agreements.
Backup withholding tax may also apply to dividend payments made
to you on or with respect to our common stock unless you certify
under penalty of perjury that you are a
non-U.S. Holder
(and we
131
do not have actual knowledge or reason to know that you are a
United States person (as defined under the Code)) or you
otherwise establish an exemption.
Information reporting and, depending on the circumstances,
backup withholding will apply to the proceeds of a sale of our
common stock within the United States or conducted through
United States-related financial intermediaries unless the
beneficial owner certifies under penalty of perjury that it is a
non-U.S. Holder
(and the payor does not have actual knowledge or reason to know
that the beneficial owner is a United States person (as defined
under the Code)) or the holder otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules
generally will be allowed as a refund or a credit against your
U.S. federal income tax liability provided that the
required procedures are followed.
You should consult your tax advisor regarding the application of
the information reporting and backup withholding rules to you.
132
UNDERWRITING
We, the selling stockholders and the underwriters named below,
have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman,
Sachs & Co. is the representative of the underwriters.
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Underwriter
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Number of Shares
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Goldman, Sachs & Co.
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UBS Investment Bank
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Piper Jaffray & Co.
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Cowen and Company, LLC
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Total
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The underwriters are committed to take and pay for all the
shares being offered, if any are taken, other than those shares
covered by the option described below.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an
additional shares
from us and the selling stockholders. They may exercise that
option for 30 days. If any shares are purchased pursuant to
this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table
above.
The following tables show the per share and total underwriting
discounts and commissions to be paid to the underwriters by us
and the selling stockholders. Such amounts are shown assuming
both no exercise and full exercise of the underwriters
option to
purchase
additional shares.
Paid by
Us
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Full
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No Exercise
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Exercise
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Per Share
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$
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$
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Total
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$
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$
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Paid by the
Selling Stockholders
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Full
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No Exercise
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Exercise
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Per Share
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$
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$
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Total
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$
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$
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Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the initial
public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change
the offering price and the other selling terms. The offering of
the shares by the underwriters is subject to receipt and
acceptance and subject to the underwriters right to reject
any order in whole or in part.
We and our officers, directors and holders of substantially all
of our common stock, including the selling stockholders, have
agreed with the underwriters, subject to certain exceptions, not
to dispose of or hedge any of our common stock or securities
convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing
through the date 163 days after the date of this
prospectus, except with the prior written consent of the
representatives.
133
This agreement does not apply to any existing employee benefit
plans. See Shares Eligible for Future Sale for
a discussion of certain transfer restrictions.
The
163-day
restricted period described in the preceding paragraph will be
automatically extended if (i) during the last 17 days
of the
163-day
restricted period the company issues an earnings release or
announces material news or a material event or (ii) prior
to the expiration of the
163-day
restricted period, the company announces that it will release
earnings results during the
15-day
period following the last day of the
163-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
17-day
period beginning on the issuance of the earnings release of the
announcement of the material news or material event.
Prior to the offering, there has been no public market for the
shares. The initial public offering price will be negotiated
among us and the representatives. Among the factors to be
considered in determining the initial public offering price of
the shares, in addition to prevailing market conditions, will be
our historical performance, estimates of our business potential
and earnings prospects, an assessment of our management and the
consideration of the above factors in relation to market
valuation of companies in related businesses.
We intend to apply to list the common stock on The Nasdaq Global
Market under the symbol FNGN.
In connection with the offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Shorts
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in the offering.
Covered short sales are sales made in an amount not
greater than the underwriters option to purchase
additional shares from the company and selling stockholders in
the offering. The underwriters may close out any covered short
position by either exercising their option to purchase
additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase additional
shares pursuant to the option granted to them. Naked
short sales are any sales in excess of such option. The
underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock
in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions
consist of various bids for or purchases of common stock made by
the underwriters in the open market prior to the completion of
the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of the companys
stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be
higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on
The Nasdaq Global Market, in the
over-the-counter
market or otherwise.
The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of shares offered.
We and the selling stockholders estimate that our share of the
total expenses of the offering, excluding underwriting discounts
and commissions, will be approximately
$ million.
134
We and the selling stockholders have agreed to indemnify the
several underwriters against certain liabilities, including
liabilities under the Securities Act of 1933.
Goldman, Sachs & Co. is acting as an underwriter of
this offering, and we will enter into an underwriting agreement
with them.
Goldman, Sachs & Co. owns 1,307,837 shares of
Series E preferred stock as of September 30, 2009.
The underwriters and their respective affiliates are full
service financial institutions engaged in various activities,
including securities trading, commercial and investment banking,
financial advisory, investment management, principal investment,
hedging, financing and brokerage activities. Certain of the
underwriters and their respective affiliates have, from time to
time, performed, and may in the future perform, various
financial advisory and investment banking services for the
issuer, for which they received or will receive customary fees
and expenses.
In the ordinary course of their various business activities, the
underwriters and their respective affiliates may make or hold a
broad array of investments and actively trade debt and equity
securities (or related derivative securities) and financial
instruments (including bank loans) for their own account and for
the accounts of their customers and may at any time hold long
and short positions in such securities and instruments. Such
investment and securities activities may involve securities and
instruments of the issuer.
European Economic
Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), each underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make
an offer of shares to the public in that Relevant Member State
prior to the publication of a prospectus in relation to the
shares which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with
the Prospectus Directive, except that it may, with effect from
and including the Relevant Implementation Date, make an offer of
shares to the public in that Relevant Member State at any time:
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the representatives
for any such offer; or
(d) in any other circumstances which do not require the
publication by us of a prospectus pursuant to Article 3 of
the Prospectus Directive.
For the purposes of this provision, the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
135
Notice to
Investors in the United Kingdom
Each underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue or sale of the shares in
circumstances in which Section 21(1) of the FSMA does not
apply to us; and
(b) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom.
Notice to
Residents of Hong Kong
The shares may not be offered or sold by means of any document
other than (i) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong
Kong) and any rules made thereunder, or (iii) in other
circumstances which do not result in the document being a
prospectus within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), and no
advertisement, invitation or document relating to the shares may
be issued or may be in the possession of any person for the
purpose of issue (in each case whether in Hong Kong or
elsewhere), which is directed at, or the contents of which are
likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the laws of Hong Kong) other
than with respect to shares which are or are intended to be
disposed of only to persons outside Hong Kong or only to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)
and any rules made thereunder.
Notice to
Residents of Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore, or SFA, (ii) to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance with the conditions, specified in
Section 275 of the SFA or (iii) otherwise pursuant to,
and in accordance with the conditions of, any other applicable
provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
Notice to
Residents of Japan
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan (the Securities and
Exchange Law) and each underwriter has agreed that it will not
offer or
136
sell any securities, directly or indirectly, in Japan or to, or
for the benefit of, any resident of Japan (which term as used
herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for re-offering or resale, directly or indirectly,
in Japan or to a resident of Japan, except pursuant to an
exemption from the registration requirements of, and otherwise
in compliance with, the Securities and Exchange Law and any
other applicable laws, regulations and ministerial guidelines of
Japan.
LEGAL
MATTERS
The validity of the common stock offered by this prospectus will
be passed upon for us by Pillsbury Winthrop Shaw Pittman LLP,
Palo Alto, California. Certain legal matters relating to the
offering will be passed upon for the underwriters by Gibson,
Dunn & Crutcher LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of Financial Engines, Inc.
as of December 31, 2007 and 2008 and for each of the years
in the three-year period ended December 31, 2008 have been
included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent registered public
accounting firm, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN
FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement under the
Securities Act of 1933 with respect to the common stock offered
by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and the
exhibits and schedules to the registration statement. Please
refer to the registration statement, exhibits and schedules for
further information with respect to the common stock offered by
this prospectus. Statements contained in this prospectus
regarding the contents of any contract or other document are
only summaries. With respect to any contract or document filed
as an exhibit to the registration statement, you should refer to
the exhibit for a copy of the contract or document, and each
statement in this prospectus regarding that contract or document
is qualified by reference to the exhibit. A copy of the
registration statement and its exhibits and schedules may be
inspected without charge at the Securities and Exchange
Commissions public reference room, located at
100 F Street, NE, Washington, D.C. 20549. Please
call the SEC at
1-800-SEC-0330
for further information on the public reference room. Our SEC
filings are also available to the public from the SECs
website at
www.sec.gov
.
Upon completion of this offering, we will be subject to the
information reporting requirements of the Securities Exchange
Act of 1934, and we intend to file reports, proxy statements and
other information with the SEC. These periodic reports, proxy
statements and other information will be available for
inspection and copying at the SECs public reference room
and the website of the SEC referred to above.
137
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
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Page
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F-2
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Consolidated Financial Statements:
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F-3
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F-4
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F-5
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F-6
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F-7
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Condensed Consolidated Financial Statements:
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F-28
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F-29
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F-30
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F-31
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F-32
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F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Financial Engines, Inc.:
We have audited the accompanying consolidated balance sheets of
Financial Engines, Inc. and subsidiaries as of December 31,
2007 and 2008, and the related consolidated statements of
operations, stockholders equity and comprehensive loss,
and cash flows for each of the years in the three-year period
ended December 31, 2008. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Financial Engines, Inc. and subsidiaries as of
December 31, 2007 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
May 29, 2009
F-2
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|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,015
|
|
|
$
|
14,857
|
|
Accounts receivable, net of allowance of $309 in 2007 and $180
in 2008
|
|
|
15,791
|
|
|
|
12,826
|
|
Prepaid expenses
|
|
|
1,582
|
|
|
|
1,537
|
|
Other current assets
|
|
|
1,058
|
|
|
|
1,575
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
33,446
|
|
|
|
30,795
|
|
Property and equipment, net
|
|
|
2,058
|
|
|
|
2,991
|
|
Internal use software, net
|
|
|
4,521
|
|
|
|
6,474
|
|
Other assets
|
|
|
2,083
|
|
|
|
2,042
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
42,108
|
|
|
$
|
42,302
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,558
|
|
|
$
|
5,405
|
|
Accrued compensation
|
|
|
6,752
|
|
|
|
2,283
|
|
Deferred revenue
|
|
|
6,700
|
|
|
|
7,040
|
|
Bank borrowings and note payable
|
|
|
|
|
|
|
13,500
|
|
Other current liabilities
|
|
|
46
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
17,056
|
|
|
|
28,305
|
|
Note payable
|
|
|
10,000
|
|
|
|
|
|
Deferred revenue
|
|
|
3,030
|
|
|
|
2,271
|
|
Other liabilities
|
|
|
508
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
30,594
|
|
|
|
31,033
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see note 9)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value. Authorized
24,100,000 shares; issued and outstanding
22,142,791 shares; and 22,349,972 shares at
December 31, 2007 and 2008, respectively. Aggregate
liquidation preference of $139,404 as of December 31, 2007
and 2008
|
|
|
2
|
|
|
|
2
|
|
Common stock, $.0001 par value. Authorized
47,650,000 shares; issued and outstanding 10,138,300; and
10,287,881 shares at December 31, 2007 and 2008,
respectively
|
|
|
1
|
|
|
|
1
|
|
Additional paid-in capital
|
|
|
171,728
|
|
|
|
174,749
|
|
Preferred stock warrant
|
|
|
1,191
|
|
|
|
1,191
|
|
Deferred compensation
|
|
|
(923
|
)
|
|
|
(575
|
)
|
Accumulated deficit
|
|
|
(160,485
|
)
|
|
|
(164,099
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
11,514
|
|
|
|
11,269
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
42,108
|
|
|
$
|
42,302
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional management
|
|
$
|
14,597
|
|
|
$
|
28,226
|
|
|
$
|
38,963
|
|
Platform
|
|
|
28,950
|
|
|
|
31,374
|
|
|
|
29,498
|
|
Other
|
|
|
4,686
|
|
|
|
3,750
|
|
|
|
2,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
48,233
|
|
|
|
63,350
|
|
|
|
71,271
|
|
Cost of
revenue
(1)
|
|
|
15,691
|
|
|
|
20,602
|
|
|
|
27,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
32,542
|
|
|
|
42,748
|
|
|
|
43,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
(1)
|
|
|
14,233
|
|
|
|
14,643
|
|
|
|
13,663
|
|
Sales and
marketing
(1)
|
|
|
18,807
|
|
|
|
19,871
|
|
|
|
21,157
|
|
General and
administrative
(1)
|
|
|
5,557
|
|
|
|
6,663
|
|
|
|
6,613
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
Amortization of internal use
software
(1)
|
|
|
2,499
|
|
|
|
3,070
|
|
|
|
2,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
41,096
|
|
|
|
44,247
|
|
|
|
46,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,554
|
)
|
|
|
(1,499
|
)
|
|
|
(3,039
|
)
|
Interest expense
|
|
|
(317
|
)
|
|
|
(961
|
)
|
|
|
(799
|
)
|
Interest and other income, net
|
|
|
896
|
|
|
|
687
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(7,975
|
)
|
|
|
(1,773
|
)
|
|
|
(3,602
|
)
|
Income tax expense
|
|
|
8
|
|
|
|
31
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(7,983
|
)
|
|
|
(1,804
|
)
|
|
|
(3,614
|
)
|
Less preferred stock dividend
|
|
|
930
|
|
|
|
|
|
|
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to holders of common stock
|
|
$
|
(8,913
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(5,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to holders of
common stock
|
|
$
|
(1.00
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
Shares used to compute basic and diluted net loss per share
attributable to holders of common stock
|
|
|
8,879
|
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based
compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
358
|
|
|
$
|
648
|
|
|
$
|
817
|
|
Research and development
|
|
|
921
|
|
|
|
1,134
|
|
|
|
796
|
|
Sales and marketing
|
|
|
1,189
|
|
|
|
1,150
|
|
|
|
1,112
|
|
General and administrative
|
|
|
480
|
|
|
|
1,434
|
|
|
|
801
|
|
Amortization of internal use
software
|
|
|
11
|
|
|
|
50
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
2,959
|
|
|
$
|
4,416
|
|
|
$
|
3,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Preferred
|
|
|
Deferred
|
|
|
Stockholder
|
|
|
other
|
|
|
|
|
|
Total
|
|
|
|
Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Stock
|
|
|
Notes
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Warrant
|
|
|
Compensation
|
|
|
Receivable
|
|
|
Loss
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance, January 1, 2006
|
|
|
22,024,311
|
|
|
$
|
2
|
|
|
|
9,293,894
|
|
|
$
|
1
|
|
|
$
|
164,163
|
|
|
$
|
1,191
|
|
|
$
|
(2,770
|
)
|
|
$
|
(144
|
)
|
|
$
|
1
|
|
|
$
|
(150,698
|
)
|
|
$
|
11,746
|
|
Antidilution issuance of Series E preferred stock
|
|
|
118,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
702,707
|
|
|
|
|
|
|
|
984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
984
|
|
Repurchase of unvested shares of restricted stock
|
|
|
|
|
|
|
|
|
|
|
(125,000
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
Reduction of deferred stock compensation due to repurchase of
restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(619
|
)
|
|
|
|
|
|
|
619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation under the intrinsic
value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
682
|
|
Stock-based compensation under the fair value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,137
|
|
Nonemployee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208
|
|
Unrealized loss on investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,983
|
)
|
|
|
(7,983
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
22,142,791
|
|
|
|
2
|
|
|
|
9,871,601
|
|
|
|
1
|
|
|
|
166,867
|
|
|
|
1,191
|
|
|
|
(1,469
|
)
|
|
|
(144
|
)
|
|
|
|
|
|
|
(158,681
|
)
|
|
|
7,767
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
304,199
|
|
|
|
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
909
|
|
Repayment of stockholder notes receivable for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
Repurchase of unvested shares
|
|
|
|
|
|
|
|
|
|
|
(37,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation under the intrinsic
value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546
|
|
Stock-based compensation under the fair value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,843
|
|
Non-employee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,804
|
)
|
|
|
(1,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
22,142,791
|
|
|
|
2
|
|
|
|
10,138,300
|
|
|
|
1
|
|
|
|
171,728
|
|
|
|
1,191
|
|
|
|
(923
|
)
|
|
|
|
|
|
|
|
|
|
|
(160,485
|
)
|
|
|
11,514
|
|
Antidilution issuance of Series E preferred stock
|
|
|
207,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
236,042
|
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552
|
|
Net share settlements for restricted stock awards minimum tax
withholdings
|
|
|
|
|
|
|
|
|
|
|
(86,461
|
)
|
|
|
|
|
|
|
(830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(830
|
)
|
Amortization of deferred stock compensation under the intrinsic
value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
Stock-based compensation under the fair value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,303
|
|
Nonemployee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,614
|
)
|
|
|
(3,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
22,349,972
|
|
|
$
|
2
|
|
|
|
10,287,881
|
|
|
$
|
1
|
|
|
$
|
174,749
|
|
|
$
|
1,191
|
|
|
$
|
(575
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(164,099
|
)
|
|
$
|
11,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,983
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,388
|
|
|
|
1,284
|
|
|
|
1,641
|
|
Amortization of internal use software
|
|
|
2,488
|
|
|
|
3,020
|
|
|
|
2,196
|
|
Amortization of stock-based compensation
|
|
|
2,959
|
|
|
|
4,416
|
|
|
|
3,589
|
|
Amortization of deferred sales commissions
|
|
|
864
|
|
|
|
1,034
|
|
|
|
991
|
|
Provision for doubtful accounts
|
|
|
125
|
|
|
|
451
|
|
|
|
136
|
|
Loss on fixed asset disposal
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,770
|
)
|
|
|
(8,253
|
)
|
|
|
2,828
|
|
Prepaid expenses
|
|
|
(14
|
)
|
|
|
(49
|
)
|
|
|
45
|
|
Other assets
|
|
|
(1,629
|
)
|
|
|
(923
|
)
|
|
|
(1,466
|
)
|
Accounts payable
|
|
|
655
|
|
|
|
204
|
|
|
|
1,726
|
|
Accrued compensation
|
|
|
2,946
|
|
|
|
854
|
|
|
|
(4,469
|
)
|
Deferred revenue
|
|
|
(1,694
|
)
|
|
|
405
|
|
|
|
(419
|
)
|
Other liabilities
|
|
|
3
|
|
|
|
131
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(1,662
|
)
|
|
|
770
|
|
|
|
3,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,152
|
)
|
|
|
(1,426
|
)
|
|
|
(2,456
|
)
|
Capitalization of internal use software
|
|
|
(2,791
|
)
|
|
|
(3,560
|
)
|
|
|
(4,092
|
)
|
Purchases of short-term investments
|
|
|
(3,480
|
)
|
|
|
|
|
|
|
|
|
Proceeds from maturities of short-term investments
|
|
|
5,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,251
|
)
|
|
|
(4,986
|
)
|
|
|
(6,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from bank borrowings
|
|
|
|
|
|
|
|
|
|
|
3,500
|
|
Payments on capital lease obligations
|
|
|
(25
|
)
|
|
|
(18
|
)
|
|
|
(20
|
)
|
Proceeds from issuance of common stock
|
|
|
984
|
|
|
|
909
|
|
|
|
552
|
|
Net share settlements for restricted stock awards minimum tax
withholdings
|
|
|
|
|
|
|
|
|
|
|
(830
|
)
|
Repayment of stockholder notes receivable
|
|
|
|
|
|
|
144
|
|
|
|
|
|
Repurchase of unvested common stock
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
10,953
|
|
|
|
1,035
|
|
|
|
3,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
7,040
|
|
|
|
(3,181
|
)
|
|
|
(158
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
11,156
|
|
|
|
18,196
|
|
|
|
15,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
18,196
|
|
|
$
|
15,015
|
|
|
$
|
14,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flows information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
150
|
|
Interest paid
|
|
|
261
|
|
|
|
961
|
|
|
|
867
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
|
|
930
|
|
|
|
|
|
|
|
2,362
|
|
Unrealized gain or loss on short-term investments
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Purchase of property and equipment under capital lease
|
|
|
81
|
|
|
|
|
|
|
|
|
|
Capitalized stock-based compensation
|
|
|
79
|
|
|
|
133
|
|
|
|
120
|
|
Accounts payable for purchases of property and equipment
|
|
|
79
|
|
|
|
33
|
|
|
|
121
|
|
See accompanying notes to the consolidated financial statements.
F-6
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
|
|
NOTE 1
|
THE COMPANY AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The
Company
Financial Engines, Inc. (the Company) was incorporated on
May 13, 1996 under the laws of the state of California and
is headquartered in Palo Alto, California. The Company is a
provider of independent, technology-enabled portfolio management
services, investment advice and retirement help to participants
in employer-sponsored defined contribution retirement plans such
as 401(k) plans. The Company uses its proprietary advice
technology platform to provide its services to retirement plan
participants, regardless of personal wealth or account size, on
a cost-efficient basis. The Companys business model is
based on workplace delivery of its services. The Company targets
three key constituencies in the retirement plan markets: plan
participants (employees of companies offering defined
contribution plans, collectively referred to as 401(k) plans),
plan sponsors (employers offering 401(k) plans to their
employees) and plan providers (companies providing
administrative services to retirement plan sponsors).
The Company has incurred losses to date and continues to devote
the majority of its resources to the growth of the
Companys business in accordance with its business plan.
The Companys activities have been financed primarily
through the sale of equity securities and, to a lesser extent,
cash flows from operations and notes payable and other
borrowings.
Basis of
Presentation and Principles of Consolidation
The accompanying consolidated financial statements were prepared
in accordance with accounting principles generally accepted in
the United States of America (GAAP).
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated in
consolidation.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expense during the reporting period. Significant items subject
to such estimates and assumptions include revenue recognition,
allowance for doubtful accounts, the carrying amount and useful
lives of property, equipment and internal use software cost,
valuation allowance for deferred income tax assets and
stock-based compensation. Actual results could differ from those
estimates under different assumptions or conditions.
Cash and Cash
Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less from date of purchase
to be cash equivalents. The carrying amount of these instruments
approximates fair value because of their short-term maturity.
Marketable
Securities
Available-for-sale
securities are recorded at fair value with the resulting
unrealized gain or loss recorded in other comprehensive income
(loss).
Other-than-temporary
declines in market value from original cost are charged to
interest and other income in the period in which the loss
occurs. In determining whether an
other-than-temporary
decline in the market value has occurred, the Company
F-7
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
considers the duration that, and extent to which, fair value of
the investment is below its cost. Realized gains and losses are
included in interest and other income in the consolidated
statement of operations. For the years ended December 31,
2006, 2007 and 2008, there was no realized gain or loss and the
unrealized (loss) gain was $(1,000), $0 and $0, respectively.
Concentration
of Credit Risk and Fair Value of Financial
Instruments
The Company believes the fair value of its financial
instruments, principally cash and cash equivalents, accounts
receivable, bank borrowings, note and accounts payable,
approximate their recorded values due to the short-term nature
of the instruments or interest rates, which are comparable with
current rates.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement (SFAS) 157,
Fair Value Measurements
(SFAS 157), which defines fair value, establishes
guidelines for measuring fair value, and expands disclosures
regarding fair value measurements. SFAS 157 does not
require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting
pronouncements.
The Company adopted SFAS 157 effective January 1,
2008, for all of its financial assets and liabilities that are
recognized or disclosed at fair value on a recurring basis (at
least annually). To increase consistency and comparability in
fair value measurements, SFAS 157 establishes a fair value
hierarchy based on the inputs used in valuation techniques.
There are three levels to the fair value hierarchy of inputs to
fair value, as follows:
|
|
|
|
|
Level 1: Observable inputs that reflect quoted prices
(unadjusted) for identical assets or liabilities in active
markets.
|
|
|
|
Level 2: Inputs reflect quoted prices for identical assets
or liabilities in markets that are not active; quoted prices for
similar assets or liabilities in active markets; inputs other
than quoted prices that are observable for the assets or
liabilities; or inputs that are derived principally from or
corroborated by observable market data by correlation or other
means.
|
|
|
|
Level 3: Unobservable inputs reflecting the Companys
own assumptions incorporated in valuation techniques used to
determine fair value. These assumptions are required to be
consistent with market participant assumptions that are
reasonably available.
|
The Company measures and reports its investments in money market
funds at fair value on a recurring basis. The fair value of the
Companys investments in certain money market funds
approximates their face value. Such instruments are classified
as Level 1 and are included in cash and cash equivalents.
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash, cash equivalents and accounts receivable. The Company
deposits its cash and cash equivalents primarily with a major
bank, in which deposits may exceed federal deposit insurance
limits.
The Companys customers are concentrated in the United
States of America. The Company performs ongoing credit
evaluations of its customers and does not require collateral.
The Company reviews the need for allowances for potential credit
losses and such losses have been insignificant to date.
F-8
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant customer information is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2007
|
|
2008
|
|
Percentage of accounts receivable:
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
14
|
%
|
|
|
21
|
%
|
Customer B
|
|
|
39
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2006
|
|
2007
|
|
2008
|
|
Percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
Customer B
|
|
|
13
|
|
|
|
15
|
|
|
|
17
|
|
Customer C
|
|
|
11
|
|
|
|
10
|
|
|
|
11
|
|
Allowance for
Doubtful Accounts
The Company maintains an allowance for doubtful accounts to
reserve for potentially uncollectible trade receivables. The
Company reviews its trade receivables by aging category to
identify significant customers with collection issues. For
accounts not specifically identified, the Company provides
reserves based on historical bad debt loss experience.
Property and
Equipment
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized
over the shorter of the remaining lease term or the useful life
of the asset. Software purchased for internal use is amortized
over its useful life. Expenditures for maintenance and repairs
are charged to expense as incurred.
|
|
|
|
|
|
|
Estimated
|
|
|
Useful Lives
|
|
|
in Years
|
|
Computer equipment
|
|
|
3
|
|
Computer software
|
|
|
3
|
|
Furniture, fixtures, and equipment
|
|
|
5
|
|
Internal Use
Software
The Company capitalizes certain direct development costs
associated with Internal Use Software in accordance with
American Institute of Certified Public Accountants Statement of
Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, and Emerging Issues Task Force (EITF)
Issue
00-2,
Accounting for Website Development Costs. The capitalized costs
are amortized using the straight-line method over their
estimated lives of two to five years. Costs related to
preliminary project activities and post implementation
activities are expensed as incurred.
During the years ended December 31, 2006, 2007 and 2008,
the Company capitalized approximately $2.9 million,
$3.7 million and $4.2 million, respectively, of
development costs, including interest and stock compensation
expense, relating to technology to be used to enhance the
F-9
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys internal use software and website for delivery of
its financial advice services. For the years ended
December 31, 2007 and 2008, included in the total costs
capitalized are $75,000 and $104,000, respectively, of interest
related to internal use software. The Company did not capitalize
any interest related to website development in the year ended
December 31, 2006, as such amounts were not significant.
During the years ended December 31, 2006, 2007 and 2008,
the Company capitalized $79,000, $133,000 and $120,000,
respectively, of noncash stock-based compensation costs related
to website development.
Long-Lived
Assets
In accordance with SFAS 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
, long-lived
assets, such as property, equipment and capitalized website
development costs subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset group may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset
group to estimated undiscounted future cash flows expected to be
generated by the asset group. If the carrying amount of an asset
group exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount
of the asset group exceeds the fair value of the asset group.
Management evaluates the useful lives of these assets on an
annual basis and tests for impairment whenever events or changes
in circumstances occur that could impact the recoverability of
these assets. There were no impairments to long-lived assets
during the years ended December 31, 2006, 2007 and 2008.
Sales
Commissions
Deferred sales commissions consist of incremental costs paid to
the Companys direct sales force associated with the
execution of noncancelable customer contracts. The deferred
sales commission amounts are recoverable through future revenue
streams under the noncancelable customer contracts. The Company
believes this is the preferable method of accounting as the
commission charges are so closely related to the revenue from
the noncancelable customer contracts that they should be
recorded as an asset and charged to expense over the life of the
related noncancelable customer contracts, which is typically
three years. Amortization of deferred sales commissions is
included in marketing and sales expense in the accompanying
consolidated statements of operations.
The Company capitalized sales commission of $1.7 million,
$1.1 million and $1.0 million during the years ended
December 31, 2006, 2007 and 2008, respectively, and
amortized $864,000, $1.0 million and $991,000 of deferred
sales commissions during the years ended December 31, 2006,
2007 and 2008, respectively.
Comprehensive
Loss
Comprehensive loss is defined as the change in equity of a
business enterprise during a period from transactions and other
events and circumstances from nonowner sources. Accumulated
other comprehensive loss comprises solely unrealized gains and
losses on
available-for-sale
securities.
Segment
Information
The Company operates in one reportable segment in accordance
with SFAS 131,
Disclosures about Segments of an
Enterprise and Related Information
. The Companys chief
operating decision-maker, its chief executive officer, reviews
its operating results on an aggregate basis and manages its
operations as
F-10
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
a single operating segment. In addition, all of the
Companys operations and assets are based in the United
States.
Revenue
Recognition
The Company recognizes revenue when all of the following
conditions are met:
|
|
|
|
|
There is persuasive evidence of an arrangement, as evidenced by
a signed contract;
|
|
|
|
Delivery has occurred or the service has been made available to
the customer, which occurs upon completion of implementation and
connectivity services and acceptance by the customer;
|
|
|
|
The collectibility of the fees is reasonably assured; and
|
|
|
|
The amount of fees to be paid by the customer is fixed or
determinable.
|
The Company generates its revenue through three primary sources:
professional management, platform and other revenue.
Professional Management.
The Company
derives Professional Management revenue from management fees
paid by plan participants for its Professional Management
service. This discretionary investment management service
includes a Retirement Plan analyzing investments, contribution
rate and projected retirement income, and a Retirement Checkup
designed to help plan participants to develop a strategy for
closing the gap, if any, between the participants
retirement goal and current retirement income forecast. The
services are generally made available to plan participants in a
401(k) plan by written agreements between the Company and the
plan provider, plan sponsor and the plan participant. The
arrangement generally provides for management fees based on the
value of assets we manage for plan participants, and is
generally payable quarterly in arrears. Revenue derived from
Professional Management services is recognized as the services
are performed.
Platform.
The Company derives platform
revenue from recurring, annual subscription-based platform fees
for access to either its full suite of services, including
Professional Management, Online Advice and Retirement
Evaluation, or its Online Advice service only. Online Advice is
a nondiscretionary Internet-based investment advisory service,
which includes features such as: recommendations among the
investment alternatives available in the employer sponsored
retirement plan; a summary of the current value of the plan
account; a forecast of how much the plan account investments
might be worth at retirement; whether a change is recommended to
the contribution rate, risk and diversification
and/or
unrestricted employer stock holdings; and a projection of how
much the participant may spend at retirement. Plan participants
may use the service as frequently as they choose to monitor
progress toward their financial goals, receive forecasts and
investment recommendations and access educational content at the
Companys website. The arrangements generally provide for
the Companys fees to be paid by the plan sponsor, plan
provider or the retirement plan itself, depending on the plan
structure. Platform revenue is generally paid annually in
advance and recognized ratably over the term of the subscription
period, which is typically three to five years in length,
beginning after the completion of customer setup and data
connectivity.
Other.
Other revenue includes
reimbursement for marketing and member materials from certain
subadvisory relationships, reimbursement for providing personal
statements to participants from a limited number of plan
sponsors and plan implementation fees. A small portion of other
revenue is derived from a defined benefit consulting business.
Revenue is recognized as the related services are performed, in
accordance with the specific terms of the contract with the
customers.
F-11
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
Revenue
Deferred revenue primarily consists of billings or payments
received in advance of revenue recognition generated by the
Companys platform and implementation service revenue
described above. For these services, the Company generally
invoices its customers in annual or quarterly installments
payable in advance. Accordingly, the deferred revenue balance
does not represent the total contract value of annual or
multiyear, noncancelable subscription contracts. Implementation
service revenue is recognized ratably over the estimated
customer life, which is usually three to five years.
Cost of
Revenue
Cost of revenue includes expenses from portfolio management,
operations, advisor call center operations, technical
operations, including information technology, customer support,
installation and
set-up
costs, data connectivity fees and printed materials costs for
certain subadvisory relationships where the reimbursed costs are
included in other revenue. These expenses are shared across the
different revenue categories and the Company is not able to
meaningfully allocate such costs between separate categories of
revenue. Consequently, all costs and expenses applicable to the
Companys revenue are included in the category cost of
revenue in the Companys statements of operations.
Advertising
Costs
The Companys advertising costs consist primarily of print
materials associated with new customer solicitations. The
Company accounts for its advertising costs in accordance with
SOP 93-7,
Reporting on Advertising Costs. Print materials costs primarily
relate to either Active Enrollment campaigns, where marketing
materials are sent to solicit enrollment in professional
management, or Passive Enrollment campaigns, where the plan
sponsor defaults all eligible members into the professional
management service unless they decline. Advertising costs
relating to Passive Enrollment campaigns do not qualify as
direct response advertising and are expensed to sales and
marketing at the first time advertisement takes place. The
Company has concluded that the costs associated with Active
Enrollment campaigns qualify as direct response advertising
under
SOP 93-7.
As of December 31, 2008, the Company determined that it did
not have sufficient verifiable historical patterns to estimate
the probable future economic benefit from Active Enrollment
campaigns in order to capitalize such costs. Consequently, all
related advertising costs have been expensed at the first time
the advertising takes place. Advertising expense was
$1.2 million, $1.8 million and $2.6 million for
the years ended December 31, 2006, 2007 and 2008,
respectively, of which direct advised Active Enrollment campaign
expense was $1.2 million, $1.6 million and
$2.5 million, respectively.
Income
Taxes
The Company uses the asset and liability method to account for
income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and net
operating loss carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. The Company records a valuation allowance to
reduce deferred tax assets to an amount whose realization is
more likely than not.
F-12
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective January 1, 2007, the Company adopted the
provisions of FASB Interpretation (FIN) 48,
Accounting for
Uncertainty in Income Taxes
, which requires a two-step
approach to recognizing, derecognizing and measuring uncertain
tax positions. The adoption of FIN 48 had no impact on the
Companys financial position, results of operations, or
cash flows. In accordance with its accounting policy, the
Company recognizes accrued interest and penalties related to
unrecognized tax benefits as a component of income tax expense.
Stock-Based
Compensation
Effective January 1, 2006, the Company adopted the
provisions of SFAS 123R (Revised 2004),
Share-Based
Payment
, using the prospective transition method, which
requires the application of the provisions of SFAS 123R
only to new awards granted, and to awards modified, repurchased,
or canceled, after the effective date. Under this transition
method, total employee stock-based compensation expense
recognized beginning January 1, 2006 is based on the
following: (1) the grant date fair value of stock option
awards granted or modified after January 1, 2006 and
(2) the balance of deferred stock-based compensation
related to stock option awards granted prior to January 1,
2006, which was calculated using the intrinsic value method as
previously permitted under Accounting Principles Board (APB)
Opinion 25,
Accounting for Stock Issued to Employees
.
Under SFAS 123R, the Company estimates the fair value of
stock options granted using the Black-Scholes option pricing
model. The Company amortizes stock-based compensation expense
using a graded vesting method over the requisite service periods
of the awards, which is generally the vesting period. The
expected term represents the period that stock-based awards are
expected to be outstanding, giving consideration to the
contractual terms of the stock-based awards, vesting schedules
and expectations of future employee behavior as influenced by
changes to the terms of the Companys stock-based awards.
Effective January 1, 2007, the Company uses the
simplified method, as discussed in Staff Accounting
Bulletin (SAB) 107 and 110, Share-Based Payment, in developing
an estimate of expected term of stock options in accordance with
SFAS 123R. The computation of expected volatility for the
years ended December 31, 2007 and 2008 is based on a
combination of the historical and implied volatility of
comparable companies from a representative peer group based on
industry and market capitalization data. As required by
SFAS 123R, management estimates expected forfeitures and
recognizes compensation costs only for those stock-based awards
expected to vest.
The Companys current practice is to issue new shares to
settle stock option exercises.
Net Loss per
Common Share
Basic net loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted average
number of common shares outstanding during the period less the
weighted average number of unvested common shares subject to our
right of repurchase. Diluted net loss per common share is
computed by giving effect to all potential dilutive common
shares, including options, common stock subject to repurchase,
warrants and convertible preferred stock. Basic and diluted net
loss per common share were the same for all periods presented as
the impact of all potentially dilutive securities outstanding
was anti-dilutive.
Recent
Accounting Pronouncements
In June 2008, the EITF reached consensus on Issue
07-5,
Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entitys Own Stock.
EITF 07-5
provides guidance for instruments (including options or warrants
on a companys shares, forward contracts on a
companys shares and convertible preferred stock) that may
contain contract terms that call into question whether
F-13
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the instrument or embedded feature is indexed to the
entitys own stock.
EITF 07-5
is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008. The
Company currently is evaluating the impact of applying
EITF 07-5.
|
|
NOTE 2
|
NET LOSS PER
SHARE
|
The following table sets forth the computation of basic and
diluted net loss per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Numerator (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,983
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
Less preferred stock dividend
|
|
|
930
|
|
|
|
|
|
|
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to holders of common stock
|
|
$
|
(8,913
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(5,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
$
|
9,626
|
|
|
$
|
9,989
|
|
|
$
|
10,183
|
|
Less weighted average restricted common shares subject to
repurchase
|
|
|
(747
|
)
|
|
|
(562
|
)
|
|
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net weighted average common shares outstanding
|
|
$
|
8,879
|
|
|
$
|
9,427
|
|
|
$
|
9,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share attributable to holders of
common stock
|
|
$
|
(1.00
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
Diluted net loss per share does not include the effect of the
following antidilutive common equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Stock options and awards outstanding
|
|
|
8,189
|
|
|
|
8,982
|
|
|
|
9,169
|
|
Common shares from convertible note payable
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
Common equivalent shares from preferred stock warrant outstanding
|
|
|
108
|
|
|
|
108
|
|
|
|
108
|
|
Restricted common shares subject to repurchase
|
|
|
747
|
|
|
|
562
|
|
|
|
416
|
|
Common shares from preferred stock
|
|
|
22,058
|
|
|
|
22,143
|
|
|
|
22,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,602
|
|
|
|
31,795
|
|
|
|
31,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 3
|
BALANCE SHEET
ITEMS
|
Cash and Cash
Equivalents
Cash and cash equivalents consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash
|
|
$
|
3,726
|
|
|
$
|
884
|
|
Money market fund
|
|
|
11,289
|
|
|
|
13,973
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,015
|
|
|
$
|
14,857
|
|
|
|
|
|
|
|
|
|
|
Allowance for
Doubtful Accounts
The following table summarizes the changes to the allowance for
doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
69
|
|
|
$
|
44
|
|
|
$
|
309
|
|
Add provisions for doubtful accounts
|
|
|
125
|
|
|
|
451
|
|
|
|
136
|
|
Less write-offs
|
|
|
(150
|
)
|
|
|
(186
|
)
|
|
|
(265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
44
|
|
|
$
|
309
|
|
|
$
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and
Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Computer equipment
|
|
$
|
6,056
|
|
|
$
|
7,258
|
|
Computer software
|
|
|
2,463
|
|
|
|
3,358
|
|
Office equipment, furniture, and fixtures
|
|
|
2,071
|
|
|
|
2,290
|
|
Leasehold improvements
|
|
|
553
|
|
|
|
665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,143
|
|
|
|
13,571
|
|
Less accumulated depreciation
|
|
|
(9,085
|
)
|
|
|
(10,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,058
|
|
|
$
|
2,991
|
|
|
|
|
|
|
|
|
|
|
Included in property and equipment as of December 31, 2007
and 2008 are assets acquired under capital lease obligations
with original costs of approximately $81,000. Accumulated
depreciation on the leased assets was approximately $23,000 and
$39,000 as of December 31, 2007 and 2008, respectively.
Depreciation and amortization expense was $1.4 million,
$1.3 million and $1.6 million for the years ended
December 31, 2006, 2007 and 2008, respectively.
F-15
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Internal Use
Software
Internal use software consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Capitalized internal use software
|
|
$
|
20,241
|
|
|
$
|
24,452
|
|
Accumulated amortization
|
|
|
(15,720
|
)
|
|
|
(17,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,521
|
|
|
$
|
6,474
|
|
|
|
|
|
|
|
|
|
|
Other Current
Assets
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred sales commissions
|
|
$
|
1,055
|
|
|
$
|
1,132
|
|
Other
|
|
|
3
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,058
|
|
|
$
|
1,575
|
|
|
|
|
|
|
|
|
|
|
Revolving Line
of Credit
In June 2008, the Company executed an amendment to its December
2006 agreement for a committed revolving line of credit with a
bank for up to $7.0 million. The interest rate is set at
0.25% points above the banks prime rate. The interest rate
on the line of credit was 4.25% as of December 31, 2008. As
of December 31, 2008, a total of $950,000 of the borrowing
limit has been pledged as security related to the Companys
operating leases. There were borrowings outstanding of
$3.5 million and interest payable of $13,000 under this
line of credit as of December 31, 2008. The line of credit
expired on April 27, 2009 and was replaced by a line of
credit expiring April 19, 2010 (see note 10).
Note
Payable
In March 2006, the Company borrowed $15.0 million under a
promissory note (the Note) with a financial institution (the
Issuer). The Note had a stated interest rate of LIBOR plus 2%.
Under certain circumstances, the Issuer had the ability to
covert the Note to common stock. The maturity date was
August 29, 2006 and later amended to September 29,
2006. In September 2006, the Company repaid the Note in full.
In September 2006, the Company borrowed $10.0 million under
a promissory note (the Second Note) with a different lender (the
Second Issuer). The Note has a stated interest rate of LIBOR
plus 5.00% (6.47% at December 31, 2008) and a maturity
date of September 29, 2009. The Second Note was
collateralized by the Companys assets including
intellectual property and is subject to financial covenants that
include meeting gross margin minimums, limitations on creating
debt by subsidiaries and annual restrictions on capital spending
to $3.0 million. The Second Note calls for quarterly
interest payments and as of December 31, 2008 the
outstanding interest payable balance was
F-16
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$7,000. In conjunction with this agreement, the Company signed
an intercreditor agreement with the bank holding its revolving
line of credit, to allow the Second Issuer to be named the
primary creditor.
As described further in note 10, the Company repaid the
outstanding balance of the Second Note in May 2009 with proceeds
from a new term loan.
The Company is subject to income taxes only in the United
States. Provision for income tax expense consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
25
|
|
|
$
|
(3
|
)
|
State
|
|
|
8
|
|
|
|
6
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8
|
|
|
$
|
31
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between income tax expense and the amount
resulting from applying the federal statutory rate of 35% to net
loss is attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Federal tax at statutory rate
|
|
$
|
(2,791
|
)
|
|
$
|
(621
|
)
|
|
$
|
(1,261
|
)
|
State taxes, net of federal benefit
|
|
|
8
|
|
|
|
6
|
|
|
|
15
|
|
Nondeductible expenses
|
|
|
24
|
|
|
|
25
|
|
|
|
38
|
|
Nondeductible stock compensation
|
|
|
360
|
|
|
|
553
|
|
|
|
559
|
|
Research and development credit
|
|
|
(699
|
)
|
|
|
(131
|
)
|
|
|
(12
|
)
|
Change in valuation allowance
|
|
|
3,106
|
|
|
|
224
|
|
|
|
673
|
|
Other
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8
|
|
|
$
|
31
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the Companys deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
54,791
|
|
|
$
|
57,910
|
|
Research and other credits
|
|
|
2,546
|
|
|
|
2,558
|
|
Deferred revenue
|
|
|
703
|
|
|
|
775
|
|
Capital loss carryforward
|
|
|
509
|
|
|
|
488
|
|
Stock-based compensation
|
|
|
2,778
|
|
|
|
1,887
|
|
Other temporary differences
|
|
|
1,458
|
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
62,785
|
|
|
|
64,040
|
|
Valuation allowance
|
|
|
(61,350
|
)
|
|
|
(61,694
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,435
|
|
|
|
2,346
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible amortization
|
|
|
(1,435
|
)
|
|
|
(2,346
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,435
|
)
|
|
|
(2,346
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of the future taxable income during the
periods in which those temporary differences become deductible.
A valuation allowance is recorded for the entire deferred tax
asset as a result of uncertainties regarding realization of the
asset including the lack of profitability to date and the
uncertainty over future operating profitability and taxable
income.
As of December 31, 2008, the Company has net operating loss
carryforwards for federal and state income tax purposes of
approximately $158 million and $77 million,
respectively, available to reduce future income subject to
income taxes. The federal net operating loss carryforwards
expire through 2027. The state net operating loss carryforwards
expire through 2019.
As of December 31, 2008, approximately $4.9 million of
the net operating losses will benefit additional paid in capital
when realized. As of December 31, 2008, the Company also
has research credit carryforwards for federal and California
income tax purposes of approximately $1.6 million and
$1.4 million, respectively, available to reduce future
income taxes. The federal research credit carryforwards expire
through 2028. The California research credit carries forward
indefinitely.
The Internal Revenue Code of 1986 and applicable state tax laws
impose substantial restrictions on the ability of a company to
utilize net operating losses and tax credit carryforwards in the
event of an ownership change as defined in Section 382 of
the Internal Revenue Code. The Companys federal and state
tax losses and tax credit carryover incurred through that date
of change are subject to an annual limitation.
As of December 31, 2008, unrecognized tax benefits
approximated $8.4 million all of which would affect the
effective tax rate if recognized. Included in the balance at
December 31, 2008 is $68,000 of current year tax positions,
which would affect the Companys income tax expense if
recognized. As of December 31, 2008, the Company has no
uncertain tax positions that would be reduced as a result of a
lapse of the applicable statute of limitations. The Company does
not
F-18
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
anticipate any adjustments would result in a material change to
its financial position. For the year ended December 31,
2008, the Company did not recognize interest or penalties
related to unrecognized tax benefits. A reconciliation of the
beginning and ending balances of the total amounts of gross
unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
6,877
|
|
Increase in tax positions for prior years
|
|
|
1,504
|
|
Decrease in tax positions for prior years
|
|
|
(5
|
)
|
Increase in tax positions for current year
|
|
|
68
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
8,444
|
|
|
|
|
|
|
The Company files income tax returns in the U.S. federal
jurisdiction and various states jurisdictions. The 1996 through
2008 tax years are open and may be subject to potential
examination in one or more jurisdictions. The Company is not
currently under federal or state income tax examination.
|
|
NOTE 6
|
STOCKHOLDERS
EQUITY
|
Convertible
Preferred Stock
As of December 31, 2007 and 2008, the Companys
Articles of Incorporation, as amended, designate and authorizes
the Company to issue 24,100,000 shares of convertible
preferred stock, of which the following are outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
Noncumulative
|
|
|
|
Shares
|
|
|
Shares
|
|
|
|
|
|
Liquidation
|
|
|
Dividend per
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Preference
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Series A
|
|
|
1,030,006
|
|
|
|
1,030,006
|
|
|
$
|
509
|
|
|
$
|
515
|
|
|
$
|
0.03
|
|
Series B
|
|
|
3,445,858
|
|
|
|
3,445,858
|
|
|
|
4,270
|
|
|
|
4,301
|
|
|
|
0.06
|
|
Series C
|
|
|
3,123,573
|
|
|
|
3,123,573
|
|
|
|
11,799
|
|
|
|
11,835
|
|
|
|
0.19
|
|
Series D
|
|
|
3,800,000
|
|
|
|
3,655,166
|
|
|
|
20,218
|
|
|
|
20,252
|
|
|
|
0.28
|
|
Series E
|
|
|
7,500,000
|
|
|
|
7,411,158
|
|
|
|
84,899
|
|
|
|
85,001
|
|
|
|
0.57
|
|
Series F
|
|
|
4,000,000
|
|
|
|
3,684,211
|
|
|
|
17,373
|
|
|
|
17,500
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,899,437
|
|
|
|
22,349,972
|
|
|
$
|
139,068
|
|
|
$
|
139,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
Each share of preferred stock is convertible at the right and
option of the stockholder into such number of fully paid and non
assessable shares of common stock as is determined by
(i) $0.50 for Series A preferred stock,
(ii) $1.25 for Series B preferred stock,
(iii) $3.79 for Series C preferred stock,
(iv) $5.54 for Series D preferred stock,
(v) $11.47 for Series E preferred stock and
(vi) $4.75 for Series F preferred stock, by the
conversion price applicable to such share in effect on the date
the certificate is surrendered for conversion. The conversion
price is subject to adjustment for certain dilutive issuances,
splits and combinations.
F-19
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Each share of Series A, B, C, D, E and F preferred stock
will automatically convert into common stock in the event of the
closing of an underwritten public offering of the Companys
common stock from which the Company receives proceeds in excess
of $25.0 million and for which the offering price is not
less than $19.00 per share of common stock, or (a) as to
Series A, B, C and D preferred stock, the date specified by
written consent or agreement of the holders of a majority of the
then outstanding shares of Series A, B, C and D preferred
stock, voting together as a class and on an as-converted basis,
(b) as to Series E preferred stock, the date specified
by written consent or agreement of the holders of the majority
of the then outstanding shares of Series E preferred stock,
voting as a single class and (c) as to Series F
preferred stock, the date specified by written consent or
agreement of the holders of the majority of the then-outstanding
shares of Series F preferred stock, voting as a single
class. If the automatic conversion of the Series D preferred
stock is effected other than in connection with an underwritten
public offering of the Companys common stock from which
the Company receives proceeds in excess of $25.0 million and for
which the offering price is not less than $19.00 per share of
common stock, then the vote of the holders of a majority of the
then outstanding shares of Series D preferred stock shall also
be required for the automatic conversion of the Series D
preferred stock.
Liquidation
In the event of any liquidation, dissolution, or winding up of
the Company, either voluntary or involuntary, each stockholder
of Series A, B, C, D, E and F preferred stock shall be
entitled to receive, prior and in preference to any distribution
of any assets or surplus funds to the holders of common stock,
an amount per share equal to $0.50, $1.25, $3.79, $5.54, $11.47
and $4.75, respectively. If the full amount is not available for
distribution, amounts shall be paid out in proportion to the
aggregate preferential amounts owed. After the distributions
described above have been paid in full, the remaining assets of
the Company shall always be distributed ratably among the
holders of common stock.
Voting
Rights
Each share of each series of preferred stock have the right to
one vote for each share of common stock into which such
preferred stock could be converted and with respect to such
vote, such holder will have full voting rights and powers equal
to holders of common stock, and shall be entitled to notice of
any stockholders meeting and shall be entitled to vote with
respect to any question upon which holders of common stock have
the right to vote.
Dividends
Each stockholder of Series A, B, C, D, E and F preferred
stock is entitled to receive annual dividends at the rate of
$0.03, $0.06, $0.19, $0.28, $0.57 and $0.24, respectively, per
share per annum when and if declared by the board of directors,
prior to payment of dividends on common stock. Dividends are
noncumulative, and no dividends have been declared to date.
Preferred Stock
Dividend
In accordance with certain antidilution provisions contained in
the Series B, C, D and E preferred stock agreements,
certain increases to the number of shares available for issuance
under the 1998 Stock Plan resulted in an antidilution adjustment
for the holders of those preferred shares during the years ended
December 31, 2006 and 2008. Rather than adjust the
conversion ratio as provided in the
F-20
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys Articles of Incorporation, the board of directors
approved a preferred stock dividend such that each of those
series maintained an
one-for-one
conversion ratio to common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
2006
|
|
|
2008
|
|
|
|
Preferred
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
Stock
|
|
|
Fair Value of
|
|
|
Stock
|
|
|
Fair Value of
|
|
|
|
Dividend
|
|
|
Dividend
|
|
|
Dividend
|
|
|
Dividend
|
|
|
Series E
|
|
|
118,480
|
|
|
$
|
930,000
|
|
|
|
207,181
|
|
|
$
|
2,361,863
|
|
Warrant
Issued
In October 1999, the Company issued a warrant to purchase
100,000 shares of Series D preferred stock at a price
of $10.00 per share to a Company in connection with an
interactive marketing and services agreement. The warrant
expires in October 2009. The fair value of the warrant, as
determined using the Black-Scholes option pricing model, was
approximately $1.2 million and was being amortized to
marketing expense over the underlying performance period, until
the date at which the service agreement was terminated in 2000.
As part of the Series D antidilution adjustments in 2005,
the warrant was adjusted up to 108,290 shares at an
exercise price of $9.23 per share.
Common Stock
Reserved for Future Issuance
As of December 31, 2008, the Company has reserved the
following shares of common stock for issuance in connection with:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Convertible preferred stock
|
|
|
22,349,972
|
|
Warrant
|
|
|
108,290
|
|
Stock option and stock purchase plans
|
|
|
11,072,283
|
|
Stock options available for grant
|
|
|
1,291,714
|
|
|
|
|
|
|
Total shares reserved
|
|
|
34,822,259
|
|
|
|
|
|
|
Stock Option
and Restricted Stock Plans
1996 Stock Option
Plan
The Company has reserved 426,000 shares of its common stock
for issuance under its 1996 Stock Option Plan (the 1996 Plan),
as amended. The board of directors may grant incentive and
nonstatutory stock options to employees, consultants and
directors at an exercise price of not less than 100% or 85%,
respectively, of the fair market value, as determined by the
board of directors, at the date of grant. Stock options vest
ratably over periods determined by the board of directors,
generally 4 years, and expire no later than 10 years
from the date of grant. In the event of voluntary or involuntary
termination of employment with the Company for any reason, with
or without cause, all unvested options are forfeited and all
vested options must be exercised within a
60-day
period or they are forfeited. Options are exercisable
immediately upon grant.
Upon termination of employment with the Company for any reason,
the Company has an irrevocable, exclusive option to repurchase
the unvested shares purchased prior to vesting at the original
exercise price. This repurchase option exists for a period of
60 days from termination. The
F-21
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
plan expired in 2006 and as of December 31, 2008, no shares
were subject to repurchase and there were no remaining shares of
common stock available for grant under the 1996 Plan.
1996 Restricted
Stock Purchase Plan
The Company has reserved 847,500 shares of its common stock
for issuance under its 1996 Restricted Stock Purchase Plan (the
Restricted Plan). Under the Restricted Plan, the board of
directors may grant stock purchase rights to employees,
consultants and directors at an exercise price equal to the fair
market value of the underlying common stock on the date of
grant. Stock purchase rights must be exercised within
30 days of grant and vest ratably over a period as
determined by the board of directors, generally four years.
Upon termination of employment with the Company for any reason,
the Company has an irrevocable, exclusive option to repurchase
the unvested shares purchased prior to vesting at the original
exercise price. This repurchase option exists for a period of
60 days from termination. The plan expired in 2006 and as
of December 31, 2008, no shares were subject to repurchase
and there were no remaining shares of common stock available for
grant under the Restricted Plan.
1998 Stock
Plan
The Company has reserved 17,075,276 shares of its common
stock for issuance under its 1998 Stock Plan (the 1998 Plan).
Under the 1998 Plan, the board of directors may grant stock
purchase rights and incentive and nonstatutory stock options to
employees, consultants and directors at fair market value on the
date of grant. Vesting provisions of stock purchase rights and
options granted under the 1998 Plan are determined by the board
of directors. Stock purchase rights have a
30-day
expiration period, and options expire no later than
10 years from the date of grant. In the event of voluntary
or involuntary termination of employment with the Company for
any reason, with or without cause, all unvested options are
forfeited and all vested options must be exercised within three
months or they are forfeited. Stock purchase rights or options
acquired under the 1998 Plan are exercisable upon grant;
however, they generally vest over a period of four years.
In the event of voluntary or involuntary termination of
employment with the Company for any reason, with or without
cause, the Company shall, upon the date of such termination,
have an irrevocable, exclusive option to repurchase the unvested
shares purchased prior to vesting, at the original exercise
price. This repurchase option exists for a period of
60 days from termination. As of December 31, 2008, no
shares were subject to repurchase and 1,204,839 shares were
available for future grant.
Special Executive
Restricted Stock Purchase Plan
The Company has reserved 1,000,000 shares of its common
stock for issuance under its Special Executive Restricted Stock
Purchase Plan (the Special Restricted Plan). Under the Special
Restricted Plan, the board of directors may grant stock purchase
rights to employees and consultants at an exercise price
determined by the board of directors at the date of grant.
In June 2001, 350,000 stock purchase rights were issued, and
subsequently exercised, under the Special Restricted Plan to
members of the executive management team at $0.10 per share. At
that time, the Company recorded deferred stock compensation of
$3.5 million, which is being amortized over the vesting
period of the stock purchase rights. These shares cliff vest
over an initial vesting period of seven years. The restriction
lapsed in June 2008 when all shares vested.
In January 2004, 175,000 stock purchase rights were issued, and
subsequently exercised, under the Special Restricted Plan to
members of the executive management team at $0.01 per share.
F-22
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
These shares cliff vest over an initial vesting period of three
years. The restriction lapsed in January 2007, when all shares
vested.
In February and May 2005, 400,000 stock purchase rights were
issued, and subsequently exercised, under the Special Restricted
Plan to members of the executive management team at $0.01 per
share. These shares cliff vest over an initial vesting period of
seven years. The restriction lapses upon a change of control or
following an initial public offering, as to 50% of the shares,
after six months and as to the remaining 50% of the shares after
12 months, or in February and May 2012, respectively.
Upon termination of employment or consulting relationship with
the Company, for any reason, the Company has an irrevocable,
exclusive option to repurchase the unvested shares purchased
prior to vesting at the original exercise price. This repurchase
option exists for a period of 90 days from termination. In
connection with the issuances of stock purchase rights, the
Company recorded $682,000, $546,000 and $348,000 as deferred
compensation amortization in the years ended December 31,
2006, 2007 and 2008, respectively. As of December 31, 2008,
300,000 shares were subject to repurchase, and
75,000 shares were available for future grant.
The following table summarizes option activity under the 1996
Plan and the 1998 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Balance January 1, 2006
|
|
|
7,452,045
|
|
|
$
|
0.67 - 10.00
|
|
|
$
|
3.67
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,807,575
|
|
|
|
6.00 - 8.00
|
|
|
|
7.25
|
|
|
|
|
|
|
|
|
|
Exercised
(1)
|
|
|
(718,450
|
)
|
|
|
1.00 - 4.50
|
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(499,973
|
)
|
|
|
1.00 - 10.00
|
|
|
|
4.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
9,041,197
|
|
|
|
0.67 - 10.00
|
|
|
|
4.91
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
503,000
|
|
|
|
8.00 - 9.50
|
|
|
|
8.76
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(304,199
|
)
|
|
|
0.83 - 7.50
|
|
|
|
2.99
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(417,088
|
)
|
|
|
1.00 - 10.00
|
|
|
|
6.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
8,822,910
|
|
|
|
0.67 - 10.00
|
|
|
|
5.12
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,026,850
|
|
|
|
6.51 - 9.60
|
|
|
|
7.06
|
|
|
|
|
|
|
|
|
|
Exercised
(1)
|
|
|
(237,042
|
)
|
|
|
0.07 - 8.00
|
|
|
|
2.37
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(540,435
|
)
|
|
|
0.83 - 10.00
|
|
|
|
6.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
11,072,283
|
|
|
|
1.00 - 10.00
|
|
|
|
5.66
|
|
|
|
6.09 years
|
|
|
$
|
15,803,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable, December 31, 2008
|
|
|
6,987,429
|
|
|
|
1.00 - 10.00
|
|
|
|
4.76
|
|
|
|
4.29 years
|
|
|
|
15,666,584
|
|
|
|
|
(1)
|
|
Stock option exercises for the year ended December 31, 2006
include 15,743 shares, which were tendered in exchange for
option exercises. Exercises for the year ended December 31,
2008 include 1,000 shares, which were tendered in exchange
for option exercises.
|
The aggregate intrinsic values in the table above represent the
total pre-tax intrinsic value (the aggregate difference between
the fair value of the Companys common stock on
December 31, 2008 of $6.51, and the exercise price of
in-the-money
options) that would have been received by the option holders had
all option holders exercised their options as of that date. The
total intrinsic value of options exercised during the years
ended December 31, 2007 and 2008 was $2.0 million and
$982,000, respectively. The weighted average fair value per
share of options granted to employees for
F-23
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the years ended December 31, 2006, 2007 and 2008 was
approximately $3.31, $3.70 and $3.63, respectively. Total cash
received from employees as a result of employee stock option
exercises for the years ended December 31, 2006, 2007 and
2008 was $1.0 million, $909,000 and $552,000, respectively.
The following weighted average assumptions were used to value
options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2006
|
|
2007
|
|
2008
|
|
Expected life in years
|
|
|
6.99
|
|
|
|
6.08
|
|
|
|
6.06
|
|
Risk-free interest rate
|
|
|
4.66
|
%
|
|
|
4.46
|
%
|
|
|
2.58
|
%
|
Volatility
|
|
|
30
|
|
|
|
35
|
|
|
|
52
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, there was $8.7 million of
unrecognized compensation cost, adjusted for estimated
forfeitures, related to unvested stock options and restricted
stock purchase rights granted after January 1, 2006, to be
recognized over the weighted average period of 1.7 years.
The following table summarizes restricted stock purchase right
activity under the Special Restricted Plan:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Unvested
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Value
|
|
|
Balance, January 1, 2006
|
|
|
875,000
|
|
|
$
|
5.97
|
|
Granted
|
|
|
|
|
|
|
|
|
Released
|
|
|
(37,500
|
)
|
|
|
3.42
|
|
Forfeited
|
|
|
(125,000
|
)
|
|
|
6.30
|
|
Balance, December 31, 2006
|
|
|
712,500
|
|
|
|
6.05
|
|
Granted
|
|
|
|
|
|
|
|
|
Released
|
|
|
(125,000
|
)
|
|
|
3.00
|
|
Forfeited
|
|
|
(37,500
|
)
|
|
|
4.25
|
|
Balance, December 31, 2007
|
|
|
550,000
|
|
|
|
6.86
|
|
Granted
|
|
|
|
|
|
|
|
|
Released
|
|
|
(250,000
|
)
|
|
|
10.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
300,000
|
|
|
$
|
4.25
|
|
The balance in deferred stock-based compensation of $923,000 and
$575,000 as of December 31, 2007 and 2008, respectively,
comprises executive restricted stock purchase rights issued
prior to December 31, 2005 and accounted for in accordance
with APB Opinion 25. As of December 31, 2008, the
unamortized deferred stock compensation related to restricted
stock granted in 2005 will be amortized over 41 months.
F-24
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the prices whereby the Company
granted employees stock options during the year ended
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price and Fair
|
|
|
|
|
Market Value of Common
|
Grant Date
|
|
Options Granted
|
|
Stock (per Share)
|
|
January 16, 2008 February 26, 2008
|
|
|
42,500
|
|
|
$
|
9.50
|
|
March 5, 2008 July 1, 2008
|
|
|
398,500
|
|
|
|
9.60
|
|
July 22, 2008 October 15, 2008
|
|
|
156,250
|
|
|
|
8.54
|
|
November 11, 2008 December 17, 2008
|
|
|
2,429,600
|
|
|
|
6.51
|
|
The Board of Directors determined the exercise price was the
fair market value on the respective grant dates. The Company
performed contemporaneous valuations to determine the fair value
of the Companys common stock at the following dates:
|
|
|
|
|
|
|
Fair Market
|
|
|
Value
|
|
December 31, 2007
|
|
$
|
9.60
|
|
March 31, 2008
|
|
|
9.42
|
|
June 30, 2008
|
|
|
8.54
|
|
October 31, 2008
|
|
|
6.51
|
|
Equity
Instruments Issued to Non-Employees
Stock-based compensation related to stock options to purchase
common stock, which were issued to non-employees, is determined
in accordance with
EITF 96-18,
Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling
Goods or Services
. The fair value of the options was
determined using the Black-Scholes option-pricing model with a
volatility rate of 30%, 35% and 55% for the years ended
December 31, 2006, 2007 and 2008, respectively; a
contractual life of five years; a risk-free interest rate
ranging from 1.52% to 3.49% in 2008; and an expected dividend
yield of zero. The Company granted 24,000 shares of stock
options to non-employees during the year ended December 31,
2008.
Compensation expense for equity instruments issued to
non-employees recognized in the years ended December 31,
2006, 2007 and 2008 was $208,000, $109,000 and $(4,000),
respectively.
The Company maintains a savings plan under Section 401(k)
of the Internal Revenue Code. Under the plan, employees may
contribute up to 75% of their pre-tax salaries per year, but not
more than the statutory limits. The Company may, at its
discretion, make matching contributions to the 401(k) Plan. For
the year ended December 31, 2005, the Company made no
matching contributions. For the years ended December 31,
2006, 2007 and 2008, the Company made matching contributions of
50% of employee contributions up to 3% of salary (including
commissions) for every employee, which totaled $581,000,
$667,000 and $730,000, respectively.
|
|
NOTE 8
|
RELATED PARTY
TRANSACTIONS
|
One of the Companys directors provided consulting services
to the Company for which compensation was provided. The Company
incurred consulting fees of $325,000, $300,000 and $300,000
during the years ended December 31, 2006, 2007 and 2008,
respectively. As of
F-25
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2007 and 2008, respectively, the Company had
accrued liabilities of $150,000 and $125,000, respectively, for
consulting fees payable to this director.
One of the Companys directors provided consulting services
to the Company for which the Company incurred consulting fees of
$140,000, $86,000 and $0 during the years ended
December 31, 2006, 2007 and 2008, respectively. As of
December 31, 2007 and 2008, there were no unpaid consulting
fees relating to consulting services from this director.
In connection with the purchase of shares of common stock, the
Company provided full recourse loans to certain officers, with
annual interest rates ranging from 4.77% to 6.32%, pursuant to
promissory notes secured by pledges of restricted shares. In
September 2007, the remaining note was paid in full and there
were no loans outstanding at December 31, 2008.
|
|
NOTE 9
|
COMMITMENTS AND
CONTINGENCIES
|
Commitments
The Company leases its facilities under noncancelable operating
leases expiring at various dates through the year 2015. Rent
expense for all operating leases totaled approximately
$2.6 million, $2.0 million and $2.0 million, for
the years ended December 31, 2006, 2007 and 2008,
respectively. Certain of the Companys facility leases
provide for a free rent period or escalating rent payments.
Accordingly, the Company has straight-lined the rental payments
over the respective lease terms, resulting in accrued rent of
$499,000 and $491,000 at December 31, 2007 and 2008,
respectively.
Minimum future lease payments under all noncancelable operating
and capital leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Lease
|
|
|
Lease
|
|
|
|
(In thousands)
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
23
|
|
|
$
|
2,057
|
|
2010
|
|
|
12
|
|
|
|
1,903
|
|
2011
|
|
|
|
|
|
|
1,924
|
|
2012
|
|
|
|
|
|
|
1,507
|
|
2013
|
|
|
|
|
|
|
632
|
|
Thereafter
|
|
|
|
|
|
|
685
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
35
|
|
|
$
|
8,708
|
|
|
|
|
|
|
|
|
|
|
Less amounts representing interest expense
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
33
|
|
|
|
|
|
Less current obligations
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies
The Company is a party to two consulting agreements pursuant to
which it may be obligated to indemnify the other party with
respect to certain matters. Typically, these obligations arise
in the context of contracts entered into by the Company under
which the Company customarily agrees to hold the other party
harmless against losses arising from a breach of representation
and covenants.
F-26
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company includes service level commitments to its customers
warranting certain levels of reliability and performance. To
date, the Company has not incurred any material costs as a
result of such commitments and has not accrued any liabilities
related to such obligations.
NOTE 10
SUBSEQUENT EVENTS
In April 2009, the Company executed a new agreement to renew its
$7.0 million revolving credit facility, and to add a new
$10.0 million term loan with the same lender (collectively
referred to as the credit facility). The interest rate on the
revolving credit facility is set at 0.75% above the banks
prime rate, and the interest rate on the term loan is set at
1.50% above the banks prime rate for prime rate loans,
with a minimum 4.00% prime rate, and 4.00% above the LIBOR rate
for LIBOR rate loans, with a minimum 1.50% LIBOR rate. The bank
is granted a first priority perfected security interest and the
credit facility is collateralized by substantially all of the
current and future assets of the Company. The revolving line of
credit agreement expires on April 19, 2010 and the
$10.0 million term loan matures on May 1, 2012.
In May 2009, the Company repaid the outstanding balance of the
Second Note, described in note 4.
F-27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,857
|
|
|
$
|
15,798
|
|
|
|
|
|
Accounts receivable, net of allowance of $180 and $66 as of
December 31, 2008 and September 30, 2009, respectively
|
|
|
12,826
|
|
|
|
18,475
|
|
|
|
|
|
Prepaid expenses
|
|
|
1,537
|
|
|
|
1,607
|
|
|
|
|
|
Other current assets
|
|
|
1,575
|
|
|
|
1,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
30,795
|
|
|
|
37,552
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,991
|
|
|
|
2,211
|
|
|
|
|
|
Internal use software, net
|
|
|
6,474
|
|
|
|
7,982
|
|
|
|
|
|
Other assets
|
|
|
2,042
|
|
|
|
2,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
42,302
|
|
|
$
|
50,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,405
|
|
|
$
|
5,239
|
|
|
|
|
|
Accrued compensation
|
|
|
2,283
|
|
|
|
6,009
|
|
|
|
|
|
Deferred revenue
|
|
|
7,040
|
|
|
|
10,778
|
|
|
|
|
|
Bank borrowings and note payable
|
|
|
13,500
|
|
|
|
3,333
|
|
|
|
|
|
Other current liabilities
|
|
|
77
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
28,305
|
|
|
|
25,477
|
|
|
|
|
|
Bank borrowings
|
|
|
|
|
|
|
5,556
|
|
|
|
|
|
Deferred revenue
|
|
|
2,271
|
|
|
|
1,598
|
|
|
|
|
|
Other liabilities
|
|
|
457
|
|
|
|
465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
31,033
|
|
|
|
33,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies (see note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value. Authorized
24,100,000 shares; issued and outstanding
22,349,972 shares as of December 31, 2008 and
September 30, 2009. Aggregate liquidation preference of
$139,404 as of December 31, 2008 and September 30,
2009; no shares outstanding pro forma
|
|
|
2
|
|
|
|
2
|
|
|
$
|
|
|
Common stock, $.0001 par value. Authorized
47,650,000 shares; issued and outstanding 10,287,881 and
10,434,609 shares at December 31, 2008 and
September 30, 2009, respectively; 32,784,581 shares
issued and outstanding pro forma
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
Additional paid-in capital
|
|
|
174,749
|
|
|
|
179,224
|
|
|
|
179,224
|
|
Preferred stock warrant
|
|
|
1,191
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
(575
|
)
|
|
|
(439
|
)
|
|
|
(439
|
)
|
Accumulated deficit
|
|
|
(164,099
|
)
|
|
|
(161,370
|
)
|
|
|
(161,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
11,269
|
|
|
|
17,418
|
|
|
$
|
17,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
42,302
|
|
|
$
|
50,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated
financial statements.
F-28
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Professional management
|
|
$
|
27,895
|
|
|
$
|
34,376
|
|
Platform
|
|
|
22,192
|
|
|
|
22,526
|
|
Other
|
|
|
2,177
|
|
|
|
1,945
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
52,264
|
|
|
|
58,847
|
|
Cost of
revenue
(1)
|
|
|
20,511
|
|
|
|
21,057
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
31,753
|
|
|
|
37,790
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
Research and
development
(1)
|
|
|
10,296
|
|
|
|
11,366
|
|
Sales and
marketing
(1)
|
|
|
16,059
|
|
|
|
16,689
|
|
General and
administrative
(1)
|
|
|
4,927
|
|
|
|
5,359
|
|
Amortization of internal use
software
(1)
|
|
|
1,680
|
|
|
|
2,126
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
32,962
|
|
|
|
35,540
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,209
|
)
|
|
|
2,250
|
|
Interest expense
|
|
|
(553
|
)
|
|
|
(514
|
)
|
Interest and other income, net
|
|
|
230
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(1,532
|
)
|
|
|
2,040
|
|
Income tax expense
|
|
|
9
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,541
|
)
|
|
$
|
1,681
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to holders of common
stock:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.16
|
)
|
|
$
|
0.17
|
|
Diluted
|
|
|
(0.16
|
)
|
|
|
0.05
|
|
Shares used to compute net income (loss) per share attributable
to holders of common stock:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,711
|
|
|
|
10,050
|
|
Diluted
|
|
|
9,711
|
|
|
|
34,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes stock-based compensation as follows:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
501
|
|
|
$
|
818
|
|
Research and development
|
|
|
468
|
|
|
|
969
|
|
Sales and marketing
|
|
|
697
|
|
|
|
1,484
|
|
General and administrative
|
|
|
532
|
|
|
|
1,304
|
|
Amortization of internal use software
|
|
|
46
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
2,244
|
|
|
$
|
4,648
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated
financial statements.
F-29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Preferred
|
|
|
Deferred
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Stock
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Warrant
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance, January 1, 2009
|
|
|
22,349,972
|
|
|
$
|
2
|
|
|
|
10,287,881
|
|
|
$
|
1
|
|
|
|
174,749
|
|
|
$
|
1,191
|
|
|
$
|
(575
|
)
|
|
$
|
(164,099
|
)
|
|
$
|
11,269
|
|
Cumulative adjustment to beginning balance upon adoption of EITF
07-5,
codified into ASC
815-40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,191
|
)
|
|
|
|
|
|
|
1,048
|
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance at January 1, 2009
|
|
|
22,349,972
|
|
|
|
2
|
|
|
|
10,287,881
|
|
|
|
1
|
|
|
|
174,749
|
|
|
|
|
|
|
|
(575
|
)
|
|
|
(163,051
|
)
|
|
|
11,126
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
548,856
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Net share settlements for stock-based awards minimum tax
witholdings
|
|
|
|
|
|
|
|
|
|
|
(452,128
|
)
|
|
|
|
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300
|
)
|
Amortization of deferred stock compensation under the intrinsic
value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
136
|
|
Stock-based compensation under the fair value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,644
|
|
Non-employee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,681
|
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
22,349,972
|
|
|
$
|
2
|
|
|
|
10,434,609
|
|
|
$
|
1
|
|
|
$
|
179,224
|
|
|
$
|
|
|
|
$
|
(439
|
)
|
|
$
|
(161,370
|
)
|
|
$
|
17,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
F-30
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,541
|
)
|
|
$
|
1,681
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,188
|
|
|
|
1,317
|
|
Amortization of internal use software
|
|
|
1,634
|
|
|
|
2,053
|
|
Amortization of stock-based compensation
|
|
|
2,244
|
|
|
|
4,648
|
|
Amortization of deferred sales commissions
|
|
|
738
|
|
|
|
853
|
|
Amortization of direct reponse advertising
|
|
|
|
|
|
|
10
|
|
Prepayment discount on note payable
|
|
|
|
|
|
|
(200
|
)
|
Fair value adjustment of warrant
|
|
|
|
|
|
|
(96
|
)
|
Provision for doubtful accounts
|
|
|
1
|
|
|
|
2
|
|
Loss on fixed asset disposal
|
|
|
2
|
|
|
|
5
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,701
|
)
|
|
|
(5,649
|
)
|
Prepaid expenses
|
|
|
(2,781
|
)
|
|
|
(20
|
)
|
Other assets
|
|
|
(962
|
)
|
|
|
(1,688
|
)
|
Accounts payable
|
|
|
600
|
|
|
|
(235
|
)
|
Accrued compensation
|
|
|
(4,130
|
)
|
|
|
3,726
|
|
Deferred revenue
|
|
|
2,028
|
|
|
|
3,065
|
|
Other liabilities
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
(2,680
|
)
|
|
|
9,498
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,000
|
)
|
|
|
(486
|
)
|
Capitalization of internal use software
|
|
|
(3,281
|
)
|
|
|
(3,355
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,281
|
)
|
|
|
(3,841
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from term loan payable
|
|
|
|
|
|
|
9,950
|
|
Repayments on term loan payable
|
|
|
|
|
|
|
(1,111
|
)
|
Repayments on notes payable
|
|
|
|
|
|
|
(9,800
|
)
|
Repayments on bank borrowings
|
|
|
|
|
|
|
(3,500
|
)
|
Payments on capital lease obligations
|
|
|
(15
|
)
|
|
|
(12
|
)
|
Proceeds from issuance of common stock
|
|
|
242
|
|
|
|
57
|
|
Net share settlements for stock-based awards minimum tax
withholdings
|
|
|
(830
|
)
|
|
|
(300
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(603
|
)
|
|
|
(4,716
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(8,564
|
)
|
|
|
941
|
|
Cash and cash equivalents, beginning of period
|
|
|
15,015
|
|
|
|
14,857
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
6,451
|
|
|
$
|
15,798
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated
financial statements.
F-31
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
|
|
NOTE 1
|
BASIS OF
PRESENTATION
|
Interim
Financial Statements
The accompanying unaudited condensed consolidated financial
statements of Financial Engines, Inc. and its subsidiaries (the
Company) as of September 30, 2009 and the nine months ended
September 30, 2008 and 2009 have been prepared on a basis
consistent with the audited consolidated financial statements.
The preparation of these condensed consolidated financial
statements requires management to make estimates and assumptions
that affect the amounts reported in these condensed consolidated
financial statements and accompanying notes. Actual results
could differ materially from those estimates. In the opinion of
management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have
been included. The results of operations for any interim period
are not necessarily indicative of, nor comparable to, the
results of operations for any other interim period or for a full
fiscal year. These unaudited condensed consolidated financial
statements should be read together with the December 31, 2008
audited consolidated financial statements and related notes
included elsewhere in this prospectus.
The Company evaluated subsequent events through December 8,
2009.
Adoption of
New Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB)
issued Statement (SFAS) 168,
The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement 162
(SFAS 168), codified into FASB ASC Topic 105, Generally
Accepted Accounting Principles. The FASB Accounting Standards
Codification, (Codification or ASC) will become the source of
authoritative Generally Accepted Accounting Principles (GAAP)
recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the Securities and
Exchange Commission (SEC) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants.
On the effective date of SFAS 168, the Codification will
supersede all then-existing non-SEC accounting and reporting
standards. All other
non-grandfathered
non-SEC accounting literature not included in the Codification
will become non-authoritative. SFAS 168 is effective for
financial statements issued for interim and annual periods
ending after September 15, 2009.
In May 2009, the FASB issued FASB Statement 165,
Subsequent
Events
(SFAS 165), codified into FASB ASC Topic 855,
Subsequent Events. SFAS 165 requires an entity to recognize
in the financial statements the effects of all subsequent events
that provide additional evidence about conditions that existed
at the date of the balance sheet. For unrecognized subsequent
events that must be disclosed to keep the financial statements
from being misleading, an entity will be required to disclose
the nature of the event as well as an estimate of its financial
effect or a statement that such an estimate cannot be made. In
addition, SFAS 165 requires an entity to disclose the date
through which subsequent events have been evaluated.
SFAS 165 is effective for interim and annual periods ending
after June 15, 2009 and is to be applied prospectively. The
Companys adoption of SFAS 165 did not have a material
impact on its financial position, results of operations and cash
flows.
In June 2008, the FASB ratified EITF Issue
07-05,
Determining Whether an Instrument (or an Embedded Feature) is
indexed to an Entitys Own Stock
(EITF 07-5),
codified into FASB ASC Subtopic
815-40,
Contracts in Entitys Own Equity.
EITF 07-5
provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including
evaluating the instruments contingent exercise and
settlement provisions.
EITF 07-5
is effective for fiscal years beginning after December 15,
2008. On adoption of
F-32
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
EITF 07-5
effective January 1, 2009, the Company recorded a warrant
liability for approximately $143,000 and a corresponding charge
of $1.0 million to the accumulated deficit to reflect the
cumulative effect of this change in accounting principle. The
warrant is thereafter recorded at its fair value on each
reporting date.
Recent
Accounting Pronouncements
In October 2009, the FASB issued Accounting Standards Update
(ASU)
2009-13
Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue
Arrangements
a consensus of the FASB Emerging
Issues Task Force (ASU
2009-13).
ASU
2009-13
addresses how to measure and allocate arrangement consideration
to one or more units of accounting within a multiple-deliverable
arrangement. ASU
2009-13
modifies the requirements for determining whether a deliverable
can be treated as a separate unit of accounting by removing the
criteria that objective evidence of fair value exists for the
undelivered elements in order to account for those undelivered
elements as a single unit of accounting. ASU
2009-13
is
effective for the Company prospectively for revenue arrangements
entered into or materially modified beginning January 1,
2011. Early adoption is permitted. The Company is currently
evaluating the impact the adoption of ASC
2009-13
will
have on its financial condition and results of operations.
Unaudited pro
forma information
The Company has filed a registration statement with the United
States Securities and Exchange Commission to sell shares of
its common stock to the public. The unaudited pro forma
stockholders equity information for the nine months ended
September 30, 2009 gives effect to the assumed conversion
of all outstanding shares of the Companys convertible
preferred stock into an aggregate of 22,349,972 shares of
common stock based on the shares of convertible preferred stock
outstanding at September 30, 2009 upon the assumed
completion of the Companys initial public offering.
Unaudited pro forma stockholders equity as adjusted for
the assumed conversion of the convertible preferred stock is set
forth on the face of the Companys condensed consolidated
balance sheet.
|
|
NOTE 2
|
ADVERTISING
COSTS
|
The Companys advertising costs consist primarily of print
materials associated with new customer solicitations. The
Company accounts for its advertising costs in accordance with
FASB ASC
340-20,
Capitalized Advertising Costs
(previously American
Institute of Certified Public Accountants Statement of Position
(SOP)
93-7,
Reporting on Advertising Costs
). Print material costs
primarily relate to either Active Enrollment campaigns, where
marketing materials are sent to solicit enrollment in
professional management services, or Passive Enrollment
campaigns, where the plan sponsor defaults all eligible members
into the professional management services unless they decline.
Advertising costs relating to Passive Enrollment campaigns do
not qualify as direct response advertising and are expensed to
sales and marketing in the period the advertisement activities
first take place. Advertising costs associated with Active
Enrollment campaigns qualify for capitalization as direct
response advertising under ASC
340-20.
The
capitalized costs are amortized over the estimated three-year
period of probable future benefits following the enrollment of a
member into the professional management service based on the
ratio of current period revenue for the direct response
advertising cost pool as compared to the total estimated revenue
expected for the direct response advertising cost pool over
future periods.
Effective July 1, 2009, the Company commenced
capitalization of direct-response advertising costs associated
with Active Enrollment campaigns on a prospective basis as the
Company first
F-33
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
concluded it had sufficient and verifiable historical patterns
over a reasonable period of time to demonstrate the probable
future benefits of such campaigns in accordance with ASC
340-20.
As
of September 30, 2009, $1.2 million of advertising
costs associated with direct response advertising were reported
in other assets in the accompanying unaudited condensed
consolidated balance sheet. Advertising expense was
$2.3 million and $2.0 million for the nine months
ended September 30, 2008 and 2009, respectively, of which
direct advised Active Enrollment campaign expense was
$2.2 million and $1.8 million, respectively. This
expense was recorded to sales and marketing expense in the
accompanying unaudited condensed consolidated statement of
operations.
|
|
NOTE 3
|
SEGMENT
REPORTING
|
The Company operates in one reportable segment. The
Companys chief operating decision-maker, its chief
executive officer, reviews its operating results on an aggregate
basis and manages its operations as a single operating segment.
In addition, all of the Companys operations and assets are
based in the United States.
|
|
NOTE 4
|
CONCENTRATION OF
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The Companys customers are concentrated in the United
States of America. The Company performs ongoing credit
evaluations of its customers and does not require collateral.
The Company reviews the need for allowances for potential credit
losses and such losses have been insignificant to date.
Significant customer information is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
September 30,
|
|
|
2008
|
|
2009
|
|
Percentage of accounts receivable:
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
21
|
%
|
|
|
6
|
%
|
Customer B
|
|
|
22
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2008
|
|
2009
|
|
Percentage of revenue:
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
17
|
%
|
|
|
13
|
%
|
Customer B
|
|
|
19
|
|
|
|
20
|
|
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash, cash equivalents and accounts receivable. The Company
deposits its cash and cash equivalents primarily with a major
bank, in which deposits may exceed federal deposit insurance
limits.
The Company believes the fair value of its financial
instruments, principally cash and cash equivalents, accounts
receivable, bank borrowings, note and accounts payable,
approximate their recorded values due to the short-term nature
of the instruments or interest rates, which are comparable with
current rates.
The Company measures and reports its investments in money market
funds at fair value on a recurring basis. The fair value of the
Companys investments in certain money market funds
approximates their face value. Such instruments are classified
as Level 1 and are included in cash
F-34
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and cash equivalents. The Company has utilized a valuation model
to determine the fair value of the outstanding warrant. The
inputs to the model include fair value of Series D
preferred stock, expected term, volatility and risk free
interest rate. As several significant inputs are not observable,
the overall fair value measurement of the warrant is classified
as Level 3.
The following table summarizes the Companys financial
assets and liabilities measured at fair value on a recurring
basis as of September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
|
Quoted Prices
|
|
Significant
|
|
Significant
|
|
|
Total Fair
|
|
in Active
|
|
Other
|
|
Other
|
|
|
Value as of
|
|
Markets for
|
|
Observable
|
|
Unobservable
|
|
|
September 30,
|
|
Identical
|
|
Inputs
|
|
Inputs
|
|
|
2009
|
|
Assets (Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
(In thousands)
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
14,878
|
|
|
$
|
14,878
|
|
|
$
|
|
|
|
$
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
The following table summarizes the change in the fair value of
the Companys Level 3 warrant during the nine months
ended September 30, 2009:
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2009
|
|
|
|
(In thousands)
|
|
|
Fair value, January 1, 2009
|
|
$
|
143
|
|
Fair value adjustment of warrant
|
|
|
(96
|
)
|
|
|
|
|
|
Fair value, September 30, 2009
|
|
$
|
47
|
|
|
|
|
|
|
F-35
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 5
|
NET INCOME (LOSS)
PER SHARE
|
The following table sets forth the computation of basic and
diluted net income (loss) per share attributable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator (basic and diluted):
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of common stock
|
|
$
|
(1,541
|
)
|
|
$
|
1,681
|
|
|
|
|
|
|
|
|
|
|
Denominator (basic):
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
10,166
|
|
|
|
10,393
|
|
Less weighted average restricted common shares subject to
repurchase
|
|
|
(455
|
)
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
Net weighted average common shares outstanding
|
|
|
9,711
|
|
|
|
10,050
|
|
|
|
|
|
|
|
|
|
|
Denominator (diluted):
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
9,711
|
|
|
|
10,050
|
|
Dilutive stock options and awards outstanding
|
|
|
|
|
|
|
1,905
|
|
Restricted common shares subject to repurchase
|
|
|
|
|
|
|
343
|
|
Common shares from preferred stock (weighted)
|
|
|
|
|
|
|
22,350
|
|
|
|
|
|
|
|
|
|
|
Net weighted average common shares oustanding
|
|
|
9,711
|
|
|
|
34,648
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to holders of common
stock
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.16
|
)
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
(0.16
|
)
|
|
$
|
0.05
|
|
Diluted net income (loss) per share does not include the effect
of the following anti-dilutive common equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Stock options and awards outstanding
|
|
|
6,218
|
|
|
|
6,310
|
|
Common equivalent shares from preferred stock warrant outstanding
|
|
|
108
|
|
|
|
108
|
|
Restricted common shares subject to repurchase
|
|
|
455
|
|
|
|
|
|
Common shares from preferred stock
|
|
|
22,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,924
|
|
|
|
6,418
|
|
|
|
|
|
|
|
|
|
|
The Company recorded a provision for income taxes of $9,000 and
$359,000 in the nine months ended September 30, 2008 and
2009, respectively. The income tax provision for the nine months
F-36
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ended September 30, 2009 was primarily due to federal
alternative minimum tax on income and state income taxes less
the recognition of a benefit of approximately $85,000 for a
U.S. federal refundable credit as provided by the Housing
and Economic Recovery Act of 2008.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of the future taxable income during the
periods in which those temporary differences become deductible.
A valuation allowance is recorded for the entire deferred tax
asset as a result of uncertainties regarding realization of the
asset including the lack of profitability through
December 31, 2008 and the uncertainty over future operating
profitability and taxable income.
Included in the balance as of December 31, 2008 and
September 30, 2009 are $8.4 million and
$9.8 million, respectively, of unrecognized tax positions
which would affect the effective tax rate if recognized. The
Company recognizes accrued interest and penalties related to
unrecognized tax benefits as a component of income tax expense.
As of September 30, 2009, the Company had $6,000 of accrued
interest related to uncertain tax matters. During the nine
months ended September 30, 2009, the Company expensed
$2,000 for interest related to income tax liabilities through
income tax expense. The Company has no uncertain tax positions
that would materially change in the next 12 months and such
adjustments would not result in a material change to our
financial position.
The Company files income tax returns in the U.S. federal
jurisdictions and various states jurisdictions. All tax years
since inception are open and may be subject to potential
examination in one or more jurisdictions. The Company is
currently under federal income tax examination for fiscal years
2006 and 2007. The outcome of this audit could reduce the value
of potential future tax benefits.
In April 2009, the Company executed a new agreement to renew its
$7.0 million revolving credit facility, and to add a new
$10.0 million term loan with the same lender (collectively
referred to as the credit facility). The interest rate on the
revolving credit facility is set at 0.75% above the banks
prime rate. Under the term loan, the Company can receive prime
rate loans or LIBOR rate loans. The interest rate for a prime
rate loan is 1.50% above prime rate, with a minimum prime rate
of 4.00% per annum, resulting in a minimum interest rate of
5.50% per annum. The interest rate for a LIBOR rate loan is
4.00% above the
three-month
LIBOR measured on a
360-day
basis, with a minimum LIBOR rate of 1.50% per annum, resulting
in a minimum interest rate of 5.50% per annum. As of
September 30, 2009, the amount outstanding under our term
loan was $8.9 million. The interest rate currently
applicable to this term loan is equal to 1.50% above prime rate,
with a minimum prime rate of 4.00% per annum. The bank is
granted a first priority perfected security interest and the
credit facility is collateralized by substantially all of the
current and future assets of the Company. The revolving line of
credit agreement expires on April 19, 2010 and the
$10.0 million term loan matures on May 1, 2012.
In May 2009, the Company prepaid the outstanding balance of the
previous $10.0 million note payable for an agreed amount of
$9.8 million and recognized the prepayment discount of
$0.2 million as a component of other income in the
accompanying unaudited condensed consolidated statement of
operations.
F-37
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 8
|
STOCKHOLDERS
EQUITY
|
The following table summarizes option activity under the 1996
Stock Option Plan and the 1998 Stock Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Balance, January 1, 2009
|
|
|
11,072,283
|
|
|
$
|
1.00 - 10.00
|
|
|
$
|
5.66
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
254,220
|
|
|
|
5.79 - 7.10
|
|
|
|
6.18
|
|
|
|
|
|
|
|
|
|
Exercised
(1)
|
|
|
(548,856
|
)
|
|
|
1.00 - 5.00
|
|
|
|
4.33
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(216,712
|
)
|
|
|
1.00 - 10.00
|
|
|
|
4.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
10,560,935
|
|
|
|
1.00 - 10.00
|
|
|
|
5.76
|
|
|
|
5.81
|
|
|
$
|
18,329,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
6,945,333
|
|
|
|
1.00 - 10.00
|
|
|
|
5.12
|
|
|
|
4.28
|
|
|
|
16,661,051
|
|
|
|
|
(1)
|
|
Stock option exercises for the nine months ended
September 30, 2009 include 452,128 shares which were
tendered in exchange for option exercises and minimum tax
withholding.
|
The aggregate intrinsic values in the table above represent the
total pre-tax intrinsic value (the aggregate difference between
the fair value of the Companys common stock on
September 30, 2009 of $7.10, and the exercise price of
in-the-money
options) that would have been received by the option holders had
all option holders exercised their options as of that date. The
total intrinsic value of options exercised during the nine
months ended September 30, 2009 was $1.5 million. The
weighted average fair value per share of options granted to
employees for the nine months ended September 30, 2009 was
approximately $3.59. Total cash received from employees as a
result of employee stock option exercises for the nine months
ended September 30, 2009 was $57,000.
The following weighted average assumptions were used to value
options granted during the nine months ended September 30,
2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
2008
|
|
2009
|
|
Expected life in years
|
|
|
6.07
|
|
|
|
6.07
|
|
Risk-free interest rate
|
|
|
3.27
|
%
|
|
|
2.54
|
%
|
Volatility
|
|
|
41
|
|
|
|
61
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
As of September 30, 2009, there was $4.8 million of
unrecognized compensation cost, adjusted for estimated
forfeitures, related to unvested stock options and restricted
stock purchase rights granted after January 1, 2006, to be
recognized over the weighted average period of 1.2 years.
F-38
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes restricted stock purchase right
activity under the Special Restricted Plan:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Unvested
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Value
|
|
|
Balance, January 1, 2009
|
|
|
300,000
|
|
|
$
|
4.25
|
|
Granted
|
|
|
50,000
|
|
|
|
6.15
|
|
Released
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
350,000
|
|
|
$
|
4.52
|
|
|
|
|
|
|
|
|
|
|
The balance in deferred stock compensation of $439,000 as of
September 30, 2009, comprises executive restricted stock
purchase rights issued prior to December 31, 2005 and
accounted for in accordance with Accounting Principles Board
(APB) Opinion 25,
Accounting for Stock Issued to
Employees
. As of September 30, 2009, the unamortized
deferred stock compensation related to restricted stock granted
in 2005 will be amortized over 32 months.
The following table summarizes the prices whereby the Company
granted employees stock during the nine months ended
September 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price and Fair
|
|
|
|
|
Market Value of Common
|
Grant Date
|
|
Options Granted
|
|
Stock (per Share)
|
|
January 27, 2009 - February 3, 2009
|
|
|
36,920
|
|
|
$
|
6.51
|
|
March 3, 2009 - May 7, 2009
|
|
|
61,800
|
|
|
|
5.79
|
|
June 17, 2009 - August 17, 2009
|
|
|
122,500
|
|
|
|
6.04
|
|
September 5, 2009
|
|
|
5,000
|
|
|
|
6.95
|
|
September 17, 2009 - September 25, 2009
|
|
|
28,000
|
|
|
|
7.10
|
|
The Board of Directors determined the exercise price was the
fair market value on the respective grant dates. The Company
performed contemporaneous valuations to determine the fair value
of the Companys common stock at the following dates:
|
|
|
|
|
|
|
Fair Market
|
|
|
Value
|
|
October 31, 2008
|
|
$
|
6.51
|
|
January 31, 2009
|
|
|
5.79
|
|
April 30, 2009
|
|
|
6.04
|
|
July 31, 2009
|
|
|
6.95
|
|
|
|
NOTE 9
|
RELATED PARTY
TRANSACTIONS
|
One of the Companys directors provided consulting services
to the Company for which compensation was provided. The Company
incurred consulting fees of $225,000 and $222,000 during the
nine months ended September, 2008 and 2009, respectively. As of
June 2009, this director resigned from his director position but
is still providing consulting services for which compensation is
provided.
Goldman, Sachs & Co., one of the Companys
underwriters in this offering, owned 1,307,837 shares of
Series E Preferred Stock as of September 30, 2009.
F-39
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is a party to two consulting agreements pursuant to
which it may be obligated to indemnify the other party with
respect to certain matters. Typically, these obligations arise
in the context of contracts entered into by the Company under
which the Company customarily agrees to hold the other party
harmless against losses arising from a breach of representation
and covenants.
The Company includes service level commitments to its customers
warranting certain levels of reliability and performance. To
date, the Company has not incurred any material costs as a
result of such commitments and has not accrued any liabilities
related to such obligations.
|
|
NOTE 11
|
SUBSEQUENT
EVENTS
|
In October 2009, the Company obtained shareholder approval to
extend the 1998 Stock Plan for an additional year to expire in
April 2011 and to increase the shares of common stock reserved
for issuance by 1,880,000 shares.
In October 2009, the warrant to purchase 108,290 shares of
Series D preferred stock expired unexercised.
On November 9, 2009, the Board of Directors increased the
fair value of the Companys common stock to $7.99 per share
and granted 1,839,900 stock options to employees.
In November 2009, the Company extended its Phoenix facilities
lease, which was originally set to expire in March 2010, through
May 31, 2015. Commitments for rental payments over the
5 year extension period are $1.1 million.
In November 2009, the Board of Directors approved the
reincorporation of the Company into the state of Delaware.
In November 2009, the Board of Directors adopted the 2009 Stock
Incentive Plan, subject to stockholder approval. The 2009 Stock
Incentive Plan will become effective immediately upon the
closing of this offering. Under the 2009 Stock Incentive Plan,
2,000,000 shares of the Companys common stock have
been authorized for issuance. In addition, shares originally
reserved for issuance under the 1998 Stock Plan but which are
not subject to outstanding options on the effective date of the
2009 Stock Incentive Plan, and shares subject to outstanding
options under the 1998 Stock Plan on the effective date of the
2009 Stock Incentive Plan that are subsequently forfeited or
terminated for any reason before being exercised, up to a number
of additional shares not to exceed 2,000,000, will again become
available for awards under the 2009 Stock Incentive Plan.
F-40
Shares
Financial Engines,
Inc.
Common Stock
Goldman, Sachs &
Co.
UBS Investment Bank
|
|
Piper
Jaffray
|
Cowen and Company
|
Part II
INFORMATION NOT
REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other Expenses
of Issuance and Distribution
|
The following table sets forth the various expenses expected to
be incurred by the Registrant in connection with the sale and
distribution of the securities being registered hereby, other
than underwriting discounts and commissions. All amounts are
estimated except for the Securities and Exchange Commission
registration fee, the Financial Industry Regulatory Authority
filing fee and The Nasdaq Global Market listing fee.
|
|
|
|
|
Securities and Exchange Commission registration fee
|
|
$
|
5,580
|
|
Financial Industry Regulatory Authority filing fee
|
|
|
10,500
|
|
The Nasdaq Global Market listing fee
|
|
|
100,000
|
|
Blue Sky fees and expenses
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Registrar and Transfer Agents fees
|
|
|
*
|
|
Miscellaneous fees and expenses
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
*
|
|
To be filed by amendment
|
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Section 102 of the Delaware General Corporation Law allows
a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except where the director breached the duty of loyalty, failed
to act in good faith, engaged in intentional misconduct or
knowingly violated a law, authorized the payment of a dividend
or approved a stock repurchase in violation of the Delaware
General Corporation Law or obtained an improper personal benefit.
Section 145 of the Delaware General Corporation Law
provides, among other things, that we may indemnify any person
who was or is a party, or is threatened to be made a party, to
any threatened, pending or completed action, suit or proceeding,
other than an action by or in the right of the Registrant, by
reason of the fact that the person is or was a director,
officer, agent or employee of the Registrant, or is or was
serving at our request as a director, officer, agent or employee
of another corporation, partnership, joint venture, trust or
other enterprise against expenses, including attorneys
fees, judgments, fines and amounts paid in settlement actually
and reasonably incurred by the person in connection with such
action, suit or proceeding. The power to indemnify applies
(a) if such person is successful on the merits or otherwise
in defense of any action, suit or proceeding, or (b) if
such person acting in good faith and in a manner he or she
reasonably believed to be in the best interest, or not opposed
to the best interest, of the Registrant, and with respect to any
criminal action or proceeding had no reasonable cause to believe
his or her conduct was unlawful. The power to indemnify applies
to actions brought by or in the right of the Registrant as well
but only to the extent of defense expenses, including
attorneys fees but excluding amounts paid in settlement,
actually and reasonably incurred and not to any satisfaction of
judgment or settlement of the claim itself, and with the further
limitation that in such actions no indemnification shall be made
in the event of any adjudication of liability to the Registrant,
unless the court believes that in light of all the circumstances
indemnification should apply.
II-1
Section 174 of the Delaware General Corporation Law
provides, among other things, that a director, who willfully or
negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for
such actions. A director who was either absent when the unlawful
actions were approved or dissented at the time, may avoid
liability by causing his or her dissent to such actions to be
entered in the books containing minutes of the meetings of the
board of directors at the time such action occurred or
immediately after such absent director receives notice of the
unlawful acts.
The Registrants amended and restated bylaws, attached as
Exhibit 3.(ii)(2) hereto, provide that the Registrant shall
indemnify its directors and executive officers to the fullest
extent not prohibited by the Delaware General Corporation Law or
any other applicable law. In addition, the Registrant has
entered into separate indemnification agreements, attached as
Exhibit 10 hereto, with its directors and officers which
would require the Registrant, among other things, to indemnify
them against certain liabilities which may arise by reason of
their status or service as directors or officers to the fullest
extent not prohibited by law. These indemnification provisions
and the indemnification agreements may be sufficiently broad to
permit indemnification of the Registrants officers and
directors for liabilities, including reimbursement of expenses
incurred, arising under the Securities Act of 1933, as amended,
which we refer to as the Securities Act. The Registrant also
intends to maintain director and officer liability insurance, if
available on reasonable terms.
The form of Underwriting Agreement, to be attached as
Exhibit 1.1 hereto, provides for indemnification by the
Underwriters of us and our officers and directors for certain
liabilities, including liabilities arising under the Securities
Act, and affords certain rights of contribution with respect
thereto.
|
|
Item 15.
|
Recent Sales
of Unregistered Securities
|
The following sets forth information regarding all unregistered
securities sold since our inception through November 30,
2009 and gives effect to the
three-for-two
forward stock split effected in June 1999:
Since inception through November 30, 2009, we granted stock
options to purchase 426,000 shares of our common stock to
our directors, officers, employees and consultants pursuant to
our 1996 Stock Plan, with exercise prices ranging from $0.07 to
$0.17 per share.
Since inception through November 30, 2009, we granted stock
options to purchase 23,151,789 shares of our common stock
to our directors, officers, employees and consultants pursuant
to our 1998 Stock Plan, with exercise prices ranging from $0.17
to $10.00 per share.
On June 7, 1996, we issued and sold 3,000,000 shares
of our common stock to our three founders, at a purchase price
of $0.0007 per share, for an aggregate consideration of $2,100.
On September 2, 1996, we issued and sold an additional
225,000 shares of our common stock to one of our executive
officers at a purchase price of $0.0067 per share, for an
aggregate consideration of $1,508.
On various dates between December 1996 and October 1997, we
issued and sold 847,500 shares of our common stock to 10
accredited investors pursuant to our 1996 Restricted Stock
Purchase Plan. The purchase prices ranged from $0.07 to $0.17
per share, for an aggregate consideration of $70,778.
On various dates between May 1998 and December 2001, we issued
and sold an aggregate of 414,125 shares of our common stock
to our directors, officers, employees and consultants pursuant
to the exercise of options granted under our 1996 Stock Plan.
The exercise prices ranged from $0.07 to $0.17 per share, for an
aggregate consideration of $62,285.
On various dates between May 1998 and November 2009, we issued
and sold an aggregate of 5,753,521 shares of our common
stock to our directors, officers, employees and consultants
pursuant
II-2
to the exercise of options granted under our 1998 Stock Plan.
The exercise prices ranged from $0.17 to $10.00 per share, for
an aggregate consideration of $13,274,490.
On February 20, 2001, we issued and sold
1,246,980 shares of our common stock to one accredited
investor for a purchase price of $10 per share, for
consideration of $12,246,980.
On various dates between June 2001 and March 2009, we issued and
sold 975,000 shares of our common stock to 11 accredited
investors pursuant to our Special Executive Restricted Stock
Purchase Plan. The purchase prices ranged from $0.01 to $0.10
per share, for an aggregate consideration of $41,250.
From September 20, 1996 through February 5, 1997, we
issued and sold an aggregate of 1,030,006 shares of our
series A preferred stock at $0.50 per share to 16
accredited investors for an aggregate consideration of $515,003.
On March 28, 1997, we issued and sold 3,394,740 shares
of our series B preferred stock at $1.2666 per share to 13
accredited investors for an aggregate consideration of
$4,299,981. In December 2001 we issued an additional
51,118 shares of series B preferred stock to the 13
accredited investors as a result of anti-dilution adjustments.
From June 5, 1998 through December 31, 1998, we issued
and sold an aggregate of 2,958,674 shares of our
series C preferred stock at $4.00 per share to 29
accredited investors for an aggregate consideration of
$11,834,696. In December 2001, we issued an additional
164,899 shares of series C preferred stock to the 29
accredited investors as a result of anti-dilution adjustments.
On April 30, 1999, we issued and sold an aggregate of
3,375,337 shares of our series D preferred stock at
$6.00 per share to 26 accredited investors for an aggregate
consideration of $20,252,022. Between December 2001 and March
2005, we issued an additional 279,829 shares of
series D preferred stock to the 26 accredited investors as
a result of anti-dilution adjustments.
On October 18, 1999, we issued a warrant to purchase up to
108,290 shares of our series D preferred stock at an
exercise price of $10.00 per share. This warrant expired in
October 2009.
From November 23, 1999 through March 18, 2000, we
issued and sold an aggregate of 6,024,708 shares of our
series E preferred stock at $14.1086 per share to 42
accredited investors for an aggregate consideration of
$85,000,219. Between February 2001 and November 2009 we issued
an additional 1,478,101 shares of series E preferred
stock to the 42 accredited investors as a result of
anti-dilution adjustments.
From December 20, 2004 through February 2, 2005 we
issued and sold an aggregate of 3,684,211 shares of our
series F preferred stock at $4.75 per share to 35
accredited investors for an aggregate consideration of
$17,500,002.
Unless otherwise stated, the sales of the above securities were
deemed to be exempt from registration under the Securities Act
in reliance upon Section 4(2) of the Securities Act or
Regulation D or Regulation S promulgated thereunder,
or Rule 701 promulgated under Section 3(b) of the
Securities Act as transactions by an issuer not involving any
public offering or pursuant to benefit plans and contracts
relating to compensation as provided under Rule 701. The
recipients of the securities in each of these transactions
represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were
placed upon the stock certificates issued in these transactions.
All recipients had adequate access, through their relationships
with Financial Engines, to information about Financial Engines.
II-3
|
|
Item 16.
|
Exhibits and
Financial Statement Schedules
|
(a) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
3
|
.(i)1
|
|
Amended and Restated Articles of Incorporation of the Registrant.
|
|
3
|
.(i)2
|
|
Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be effective upon the completion of the offering
to which this Registration Statement relates.
|
|
3
|
.(ii)1
|
|
Bylaws of the Registrant (composite copy).
|
|
3
|
.(ii)2
|
|
Form of Amended and Restated Bylaws of the Registrant, to be
effective upon the completion of the offering to which this
Registration Statement relates.
|
|
4
|
.1*
|
|
Specimen Common Stock Certificate.
|
|
4
|
.2
|
|
Fifth Amended and Restated Investors Rights Agreement
dated as of December 20, 2004.
|
|
5
|
.1*
|
|
Opinion of Pillsbury Winthrop Shaw Pittman LLP.
|
|
10
|
.1
|
|
Financial Engines, Inc. 1998 Stock Plan (as amended on
October 20, 2009) and related form stock option plan
agreements.
|
|
10
|
.2
|
|
Financial Engines, Inc. 2009 Stock Incentive Plan.
|
|
10
|
.3
|
|
Financial Engines, Inc. Special Executive Restricted Stock
Purchase Plan and related form stock purchase agreements.
|
|
10
|
.4
|
|
Form of Indemnification Agreement between the Registrant and its
officers and directors.
|
|
10
|
.5
|
|
Financial Engines, Inc. Consulting Agreement between the
Registrant and William F. Sharpe dated as of March 5, 1998,
including amendments thereto.
|
|
10
|
.6
|
|
Financial Engines, Inc. Third Amended and Restated Consulting
Agreement between the Registrant and E. Olena Berg-Lacy dated as
of October 1, 2009.
|
|
10
|
.7.1
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of July 14, 1997, including
amendments thereto.
|
|
10
|
.7.2
|
|
Partial Lease Termination Agreement between Registrant and
Harbor Investment Partners dated as of May 16, 2001.
|
|
10
|
.8
|
|
Second Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank dated as of
April 20, 2009.
|
|
10
|
.9
|
|
Offer letter to Lawrence M. Raffone dated December 21,
2000.
|
|
10
|
.10
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of December 7, 1999, including
amendments thereto.
|
|
21
|
.1
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of KPMG LLP, independent registered public accounting
firm.
|
|
23
|
.2*
|
|
Consent of Pillsbury Winthrop Shaw Pittman LLP (included in
Exhibit 5.1).
|
|
24
|
.1
|
|
Power of Attorney (see
page II-6
of this Registration Statement).
|
|
|
|
*
|
|
To be filed by amendment.
|
|
|
|
To be executed by all officers and directors upon the completion
of the reincorporation of the Registrant in Delaware.
|
(b) Consolidated Financial Statement Schedules
No consolidated financial statement schedules are provided
because the information called for is not required or is shown
either in the consolidated financial statements or the notes
thereto.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the Act), may be
permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is,
II-4
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the
Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Act, each post effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To provide to the underwriters at the closing(s)
specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(4) That, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser, each prospectus
filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses
filed in reliance on Rule 430A, shall be deemed to be part
of and included in the registration statement as of the date it
is first used after effectiveness.
Provided, however
,
that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first use.
For the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser in the initial
distribution of the securities:
The undersigned registrant undertakes that in a primary offering
of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Palo Alto, State of California, on
the 9
th
day of December, 2009.
FINANCIAL ENGINES, INC.
|
|
|
|
By
|
/s/ Jeffrey
N. Maggioncalda
|
Jeffrey N. Maggioncalda
Chief Executive Officer
POWER OF
ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jeffrey N. Maggioncalda
and Raymond J. Sims and each of them, his or her true and lawful
attorneys in fact and agents, each with full power of
substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign
any and all amendments, including post-effective amendments, to
this Registration Statement, and any registration statement
relating to the offering covered by this Registration Statement
and filed pursuant to Rule 462(b) under the Securities Act
of 1933, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary to
be done, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that
each of said attorneys in fact and agents or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Jeffrey
N. Maggioncalda
Jeffrey
N. Maggioncalda
|
|
Chief Executive Officer (Principal Executive Officer), President
and Director
|
|
December 9, 2009
|
|
|
|
|
|
/s/ Raymond
J. Sims
Raymond
J. Sims
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
December 9, 2009
|
|
|
|
|
|
/s/ Paul
G. Koontz
Paul
G. Koontz
|
|
Chairman
|
|
December 9, 2009
|
|
|
|
|
|
/s/ E.
Olena Berg-Lacy
E.
Olena Berg-Lacy
|
|
Director
|
|
December 9, 2009
|
|
|
|
|
|
/s/ Heidi
K. Fields
Heidi
K. Fields
|
|
Director
|
|
December 9, 2009
|
II-6
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Joseph
A. Grundfest
Joseph
A. Grundfest
|
|
Director
|
|
December 9, 2009
|
|
|
|
|
|
/s/ C.
Richard Kramlich
C.
Richard Kramlich
|
|
Director
|
|
December 9, 2009
|
|
|
|
|
|
/s/ Mark
A. Wolfson
Dr. Mark
A. Wolfson
|
|
Director
|
|
December 9, 2009
|
II-7
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement.
|
|
3
|
.(i)1
|
|
Amended and Restated Articles of Incorporation of the Registrant.
|
|
3
|
.(i)2
|
|
Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be effective upon the completion of the offering
to which this Registration Statement relates.
|
|
3
|
.(ii)1
|
|
Bylaws of the Registrant (composite copy).
|
|
3
|
.(ii)2
|
|
Form of Amended and Restated Bylaws of the Registrant, to be
effective upon the completion of the offering to which this
Registration Statement relates.
|
|
4
|
.1*
|
|
Specimen Common Stock Certificate.
|
|
4
|
.2
|
|
Fifth Amended and Restated Investors Rights Agreement
dated as of December 20, 2004.
|
|
5
|
.1*
|
|
Opinion of Pillsbury Winthrop Shaw Pittman LLP.
|
|
10
|
.1
|
|
Financial Engines, Inc. 1998 Stock Plan (as amended on
October 20, 2009) and related form stock option plan
agreements.
|
|
10
|
.2
|
|
Financial Engines, Inc. 2009 Stock Incentive Plan.
|
|
10
|
.3
|
|
Financial Engines, Inc. Special Executive Restricted Stock
Purchase Plan and related form stock purchase agreements.
|
|
10
|
.4
|
|
Form of Indemnification Agreement between the Registrant and its
officers and directors.
|
|
10
|
.5
|
|
Financial Engines, Inc. Consulting Agreement between the
Registrant and William F. Sharpe dated as of March 5, 1998,
including amendments thereto.
|
|
10
|
.6
|
|
Financial Engines, Inc. Third Amended and Restated Consulting
Agreement between the Registrant and E. Olena Berg-Lacy dated as
of October 1, 2009.
|
|
10
|
.7.1
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of July 14, 1997, including
amendments thereto.
|
|
10
|
.7.2
|
|
Partial Lease Termination Agreement between Registrant and
Harbor Investment Partners dated as of May 16, 2001.
|
|
10
|
.8
|
|
Second Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank dated as of
April 20, 2009.
|
|
10
|
.9
|
|
Offer letter to Lawrence M. Raffone dated December 21,
2000.
|
|
10
|
.10
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of December 7, 1999, including
amendments thereto.
|
|
21
|
.1
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of KPMG LLP, independent registered public accounting
firm.
|
|
23
|
.2*
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Consent of Pillsbury Winthrop Shaw Pittman LLP (included in
Exhibit 5.1).
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24
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.1
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Power of Attorney (see
page II-6
of this Registration Statement).
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*
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To be filed by amendment.
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To be executed by all officers and directors upon the completion
of the reincorporation of the Registrant in Delaware.
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Exhibit 10.7.1
Lease Agreement
By And Between
Harbor Investment Partners,
a California general partnership
As Landlord
And
Financial Engines, Inc.,
a California corporation
As Tenant
Dated July
14, 1997
T
able
O
f
C
ontents
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Page
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Basic Lease Information
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iv
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1. Demise
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1
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2. Premises
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1
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3. Term
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2
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4. Rent
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2
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5. Utilities And Services
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7
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6. Late Charge
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8
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7. Letter of Credit
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9
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8. Security Deposit
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10
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9. Possession
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11
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10. Use Of Premises
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11
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11. Acceptance Of Premises
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13
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12. Surrender
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14
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13. Alterations And Additions
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15
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14. Maintenance and Repairs Of Premises
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16
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15. Landlords Insurance
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17
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16. Tenants Insurance
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18
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17. Indemnification
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19
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18. Subrogation
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20
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19. Signs
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20
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20. Free From Liens
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21
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21. Entry By Landlord
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21
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22. Destruction And Damage
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21
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23. Condemnation
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24
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24. Assignment And Subletting
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25
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i
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Page
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25. Tenants Default
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28
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26. Landlords Remedies
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30
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27. Landlords Right to Perform Tenants Obligations
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33
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28. Attorneys Fees
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34
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29. Taxes
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34
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30. Effect Of Conveyance
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35
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31. Tenants Estoppel Certificate
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35
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32. Subordination
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36
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33. Environmental Covenants
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36
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34. Notices
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40
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35. Waiver
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40
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36. Holding Over
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41
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37. Successors And Assigns
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41
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38. Time
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41
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39. Brokers
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41
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40. Limitation Of Liability
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42
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41. Financial Statements
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42
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42. Rules And Regulations
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42
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43. Mortgagee Protection
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43
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44. Entire Agreement
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43
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45. Interest
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43
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46. Construction
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44
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47. Representations And Warranties Of Tenant
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44
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48. Security
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44
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49. Jury Trial Waiver
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45
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ii
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Exhibit
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A
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Diagram of the Premises
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B
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Commencement and Expiration Date Memorandum
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C
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Rules and Regulations
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D
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Hazardous Materials Disclosure Certificate
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iii
Lease
Agreement
Basic
Lease
Information
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Lease Date:
|
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July 14, 1997
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Landlord:
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Harbor Investment Partners,
a California general partnership
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Landlords Address:
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c/o Allegis Realty Investors LLC
455 Market
Street, Suite 1540
San Francisco, California
94105
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All notices sent to Landlord under this Lease
shall be sent to the above address, with copies
to:
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Insignia Commercial Group, Inc.
160 West Santa Clara Street, Suite 1350
San Jose, California 95113.
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Tenant:
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Financial Engines, Inc.,
a California corporation
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Tenants Contact Person:
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Jeff Maggioncalda
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Tenants Address and
Telephone Number:
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1804 Embarcadero Road
Suite 200
Palo Alto, California 94303
(415) _____
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Premises Square Footage:
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Approximately Eleven Thousand One Hundred Forty-Five
(11,145) rentable square feet
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Premises Address:
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1804 Embarcadero Road
Suite 200
Palo Alto, California 94303
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Project:
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The Harbor Business Park, 1800-1858 Embarcadero
Road and 2445-2465 Faber Place, Palo Alto,
California, together with the land on which the
Project is situated and all Common Areas
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iv
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Building (if not the same
as the Project):
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1804 Embarcadero Road
Palo
Alto, California 94303
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Tenants Proportionate
Share of Project:
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4.30%
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Tenants Proportionate
Share of Building:
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27.86%
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Length of Term:
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Sixty (60) months
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Estimated Commencement Date:
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August 7, 1997
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Estimated Expiration Date:
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August 6, 2002
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Monthly Base Rent:
|
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Monthly Base
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Monthly Base
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Months
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Sq. Ft.
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Rate
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Rent
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1-12
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11,145
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x$3.50
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=$39,007.50
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13-60
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Monthly Base Rent to be increased in accordance with
the Consumer Price Index Price (see Paragraph 4(a) of
the Lease)
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Prepaid Rent:
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Thirty-Nine Thousand Seven and 50/100 Dollars ($39,007.50)
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Month to which
Prepaid Base Rent
will be Applied:
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First (1st) month of the Term
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Base Year:
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1997
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Security Deposit:
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Forty Seven Thousand Four Hundred Thirteen and 86/100 Dollars ($47,413.86)
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Letter of Credit:
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Four Hundred Sixty-Eight Thousand Ninety Dollars ($468,090.00)
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Permitted Use:
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General office use for software development firm
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Unreserved Parking
Spaces:
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Thirty-three (33) nonexclusive and undesignated parking spaces
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v
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|
|
Broker (s):
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Cornish & Carey Commercial (Landlords Broker) BT
Commercial (Tenants Broker)
|
vi
Lease agreement
This Lease Agreement
is made and entered into by and between Landlord and Tenant on the Lease
Date. The defined terms used in this Lease which are defined in the Basic Lease Information
attached to this Lease Agreement (Basic Lease Information) shall have the meaning and definition
given them in the Basic Lease Information. The Basic Lease Information, the exhibits, the addendum
or addenda described in the Basic Lease Information, and this Lease Agreement are and shall be
construed as a single instrument and are referred to herein as the Lease.
1.
Demise
In consideration for the rents and all other charges and payments payable by Tenant, and for
the agreements, terms and conditions to be performed by Tenant in this Lease,
Landlord does hereby
lease to Tenant, and Tenant does hereby hire and take from Landlord,
the Premises described below (the Premises), upon the
agreements, terms and conditions of this Lease for the Term hereinafter stated.
2.
Premises
The Premises demised by this Lease is located in that certain building (the Building)
specified in the Basic Lease Information, which Building is located in that certain real estate
development (the Project) specified in the Basic Lease Information. The Premises has the address
and contains the square footage specified in the Basic Lease Information. The location and
dimensions of the Premises are depicted on
Exhibit A,
which is attached hereto and incorporated
herein by this reference. Tenant shall have the non-exclusive right (in common with the other
tenants, Landlord and any other person granted use by Landlord) to use the Common. Areas (as
hereinafter defined), except that, with respect to parking, Tenant shall have only a license to use
the number of non-exclusive and undesignated parking spaces set forth in the Basic Lease
Information in the Projects parking areas (the Parking Areas); provided, however, that Landlord
shall not be required to enforce Tenants right to use such parking spaces; and, provided further,
that the number of parking spaces allocated to Tenant hereunder shall be reduced on a proportionate
basis in the event any of the parking spaces in the Parking Areas are taken or otherwise eliminated
as a result of any Condemnation (as hereinafter defined) or casualty event affecting such Parking
Areas. No easement for light or air is incorporated in the Premises. For purposes of this Lease,
the term Common Areas shall mean all areas and facilities outside the Premises and within the
exterior boundary line of the Project that are provided and designated by Landlord for the
non-exclusive use of Landlord, Tenant and other tenants of the Project and their respective
employees, guests and invitees.
1
Landlord has the right, in its sole discretion, from time to time, to: (a) make changes to the
Common Areas, including, without limitation, changes in the location, size, shape and number of
driveways, entrances, parking spaces, parking areas, ingress, egress, direction of driveways,
entrances, corridors and walkways; (b) close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available; (c) add additional
buildings and improvements to the Common Areas or remove existing buildings or improvements
therefrom; (d) use the Common Areas while engaged in making additional improvements, repairs or
alterations to the Project or any portion thereof; and (e) do and perform any other acts or make
any other changes in, to or with respect to the Common Areas and the Project as Landlord may,
in its sole discretion, deem to be appropriate.
3.
Term
The term of this Lease (the Term) shall be for the period of months specified in the Basic
Lease Information, commencing on the date Landlord delivers possession of the Premises to Tenant
(the Commencement Date). In the event the actual Commencement Date is a date other than the
Estimated Commencement Date specified in the Basic Lease Information, then Landlord and Tenant
shall promptly execute a Commencement and Expiration Date Memorandum in the form attached hereto as
Exhibit B,
wherein the parties shall specify the Commencement Date and the date on which the Term
expires (the Expiration Date).
4.
Rent
(a)
Base Rent.
Tenant shall pay to Landlord, in advance on the first day of each month,
without further notice or demand and without offset or deduction, the monthly installments of rent
specified in the Basic Lease Information (the Base Rent).
The Base Rent under this Paragraph 4(a) shall be adjusted, as stated below, on August 1 of
each year during the Term commencing on August 1, 1998 to reflect percentage increases in the cost
of living. The Consumer Price Index (U.S. Department of Labor Consumer Price Index (all items) for
Urban Wage Earners and Clerical Workers, San Francisco Bay Area (1982-1984=100), hereinafter
referred to as the Index) published for the month immediately preceding each such adjustment date
(each, an Adjustment Index) and the Index published for the month immediately preceding the
Commencement Date of this Lease (Base Index) shall be compared and the percentage difference
between the Adjustment Index and the Base Index shall be determined. The initial Base Rent
specified in the Basic Lease Information shall be increased by adding to said initial Base Rent the
percentage amount of said initial Base Rent equal to the percentage
2
difference between the Base Index and the applicable Adjustment Index; provided, however, in no
event shall the initial Base Rent hereunder be increased by less than five percent (5%) or more
than eight percent (8%) for any one year. When the adjusted Base Rent is determined after each
adjustment date, Landlord shall give Tenant written notice indicating the amount thereof and the
method of computation. If the Consumer Price Index is changed or discontinued, Landlord shall
substitute an official index published by the Bureau of Labor Statistics or its successor or
similar governmental agency as may then be in existence and shall be most nearly equivalent
thereto.
Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid Base Rent specified in
the Basic Lease Information to be applied toward Base Rent for the month of the Term specified in
the Basic Lease Information.
(b)
Additional Rent.
During the term, in addition to the Base Rent, Tenant shall pay to
Landlord as additional rent (the Additional Rent), in accordance with this Paragraph 4, Tenants
Proportionate Share(s) of the total dollar increase, if any, in Expenses (as defined below) each
calendar year over Expenses in the Base Year (as specified in the Basic Lease Information). As used
in this Lease, Expenses means all costs and expenses paid or incurred by Landlord in connection
with the ownership, operation, maintenance, management and repair of the Premises, the Building
and/or the Project or any part thereof, including, without limitation, all the following items:
(1)
Taxes and Assessments.
All real estate taxes and assessments, which shall include any
form of tax, assessment, fee, license fee, business license fee, levy, penalty (if a result of
Tenants delinquency), or tax (other than net income, estate, succession, inheritance, transfer or
franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any
city, county, state or federal government or any improvement or other district or division thereof,
whether such tax is (i) determined by the area of the Premises, the Building and/or the Project or
any part thereof, or the Rent and other sums payable hereunder by Tenant or by other tenants,
including, but not limited to, any gross income or excise tax levied by any of the foregoing
authorities with respect to receipt of Rent and/or other sums due under this Lease; (ii) upon any
legal or equitable interest of Landlord in the Premises, the Building and/or the Project or any
part thereof; (iii) upon this transaction or any document to which Tenant is a party creating or
transferring any interest in the Premises, the Building and/or the Project; (iv) levied or assessed
in lieu of, in substitution for, or in addition to, existing or additional taxes against the
Premises, the Building and/or the Project, whether or not now customary or within the contemplation
of the parties; or (v) surcharged against the parking area. Tenant and Landlord acknowledge that
Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and
that assessments, taxes, fees, levies and charges may be imposed by governmental
3
agencies for such purposes as fire protection, street, sidewalk, road, utility construction and
maintenance, refuse removal and for other governmental services which may formerly have been
provided without charge to property owners or occupants. It is the intention of the parties that
all new and increased assessments, taxes, fees, levies and charges due to any cause whatsoever are
to be included within the definition of real property taxes for purposes of this Lease. Taxes and
assessments shall also include legal and consultants fees, costs and disbursements incurred in
connection with proceedings to contest, determine or reduce taxes, Landlord specifically reserving
the right, but not the obligation, to contest by appropriate legal proceedings the amount or
validity of any taxes.
(2)
Insurance.
All insurance premiums for the Building and/or the Project or any part thereof,
including premiums for all risk fire and extended coverage insurance, commercial general
liability insurance, rent loss or abatement insurance, earthquake insurance, flood or surface water
coverage, and other insurance as Landlord deems necessary in its sole discretion, and any
deductibles paid under policies of any such insurance.
(3)
Utilities.
The cost of all electricity, water, gas, sewers, oil and other utilities
(collectively, Utilities), including any surcharges imposed, serving the Premises, the Building
and the Project that are not separately metered to Tenant or any other tenant, any assessments or
charges for Utilities or similar purposes included within any tax bill for the Building or the
Project, including without limitation, entitlement fees, allocation unit fees, and/or any similar
fees or charges and any penalties (if a result of Tenants delinquency) related thereto, and any
amounts, taxes, charges, surcharges, assessments or impositions levied, assessed or imposed upon
the Premises, the Building or the Project or any part thereof, or upon Tenants use and occupancy
thereof, as a result of any rationing of Utility services or restriction on Utility use affecting
the Premises, the Building and/or the Project, as contemplated in Paragraph 5 below (collectively,
Utility Expenses).
(4)
Common Area Expenses.
All costs to operate, maintain, repair,
replace, supervise, insure and administer the Common Areas, including supplies, materials, labor
and equipment used in or related to the operation and maintenance of the Common Areas, including
parking areas (including, without limitation, all costs of resurfacing and restriping parking
areas), signs and directories on the Building and/or the Project, landscaping (including
maintenance contracts and fees payable to landscaping consultants), amenities, sprinkler systems,
sidewalks, walkways, driveways, curbs, lighting systems and security services, if any, provided by
Landlord for the Common Areas, and any charges, assessments, costs or fees levied by any
association or entity of which the Project or any part thereof is a member or to which the Project
or any part thereof is subject.
4
(5)
Parking Charges.
Any parking charges or other costs levied, assessed or imposed by, or at
the direction of, or resulting from statutes or regulations, or interpretations thereof,
promulgated by any governmental authority or insurer in connection with the use or occupancy of the
Building or the Project.
(6)
Maintenance and Repair Costs.
Except for costs which are the responsibility of Landlord
pursuant to Paragraph 14(b) below, all costs to maintain, repair, and replace the Premises, the
Building and/or the Project or any part thereof, including without limitation, (i) all costs paid
under maintenance, management and service agreements such as contracts for janitorial, security and
refuse removal, (ii) all costs to maintain, repair and replace the roof coverings of the Building
or the Project or any part thereof, (iii) all costs to maintain, repair and replace the heating,
ventilating, air conditioning, plumbing, sewer, drainage, electrical, fire protection, life safety
and security systems and other mechanical and electrical systems and equipment serving the
Premises, the Building and/or the Project or any part thereof (collectively, the Systems), (iv)
the cost of all cleaning and janitorial services and supplies, and (v) the cost of window glass
replacement and repair.
(7)
Life Safety Costs.
All costs to install, maintain, repair and replace all life safety
systems, including, without limitation, all fire alarm systems, serving the Premises, the Building
and/or the Project or any part thereof (including all maintenance contracts and fees payable to
life safety consultants) whether such systems are or shall be required by Landlords insurance
carriers, Laws (as hereinafter defined) or otherwise.
(8)
Management and Administration.
All costs for management and administration of the
Premises, the Building and/or the Project or any part thereof, including, without limitation, a
property management fee, accounting, auditing, billing, postage, salaries and benefits for clerical
and supervisory employees, whether located on the Project or off-site, payroll taxes and legal and
accounting costs and fees for licenses and permits related to the ownership and operation of the
Project.
Notwithstanding anything in this Paragraph 4(b) to the contrary, with respect to all sums
payable as Additional Rent under this Paragraph 4(b) for the repair or replacement of any item or
the construction of any new item in connection with the physical operation of the Premises, the
Building or the Project (i.e., HVAC, roof membrane or coverings and parking area) which is a
capital item the repair or replacement of which properly would be capitalized under generally
accepted accounting principles, Tenant shall be required to pay only its Percentage Share of the
prorata share of the cost of the item falling due within the Term (including any Renewal Term)
based upon the amortization of the same over the useful life of such item, as reasonably determined
by Landlord.
5
(c)
Payment of Additional Rent.
(1) During the last month of the Base Year and each calendar year thereafter, or as soon
thereafter as practicable, Landlord shall submit to Tenant an estimate of monthly Additional Rent
for the following calendar year, and Tenant shall pay such estimated Additional Rent on a monthly
basis, in advance, on the first day of each month. Tenant shall continue to make said monthly
payments until notified by Landlord of a change therein. By April 1 of each calendar year,
Landlord shall endeavor to provide to Tenant a statement showing the actual Additional Rent due to
Landlord for the prior calendar year. If the total of the monthly payments of Additional Rent that
Tenant has made for the prior calendar year is less than the actual Additional Rent chargeable to
Tenant for such prior calendar year, then Tenant shall pay the difference in a lump sum within ten
(10) days after receipt of such statement from Landlord. Any overpayment by Tenant of Additional Rent for the prior calendar year shall be credited towards the Additional Rent
next due.
(2) Landlords then-current annual operating and capital budgets for the Building and the
Project or the pertinent part thereof shall be used for purposes of calculating Tenants monthly
payment of estimated Additional Rent for the current year, subject to adjustment as provided
above. Landlord shall make the final determination of Additional Rent for the year in which this
Lease terminates as soon as possible after termination of such year. Even though the Term has
expired and Tenant has vacated the Premises, Tenant shall remain liable for payment of any amount
due to Landlord in excess of the estimated Additional Rent previously paid by Tenant, and,
conversely, Landlord shall promptly return to Tenant any overpayment. Failure of Landlord to
submit statements as called for herein shall not be deemed a waiver of Tenants obligation to pay
Additional Rent as herein provided.
(3) With respect to Expenses which Landlord allocates to the Building, Tenants
Proportionate Share shall be the percentage set forth in the Basic Lease Information as Tenants
Proportionate Share of the Building, as adjusted by Landlord from time to time for a remeasurement
of or changes in the physical size of the Premises or the Building, whether such changes in size
are due to an addition to or a sale or conveyance of a portion of the Building or otherwise. With
respect to Expenses which Landlord allocates to the Project as a whole or to only a portion of the
Project, Tenants Proportionate Share shall be, with respect to Expenses which Landlord
allocates to the Project as a whole, the percentage set forth in the Basic Lease Information as
Tenants Proportionate Share of the Project and, with respect to Expenses which Landlord allocates
to only a portion of the Project, a percentage calculated by Landlord from time to time in its
sole discretion and furnished to Tenant in writing, in either case as adjusted by Landlord from
time to time for a remeasurement of or changes in the physical size of the Premises or the
6
Project, whether such changes in size are due to an addition to or a sale or conveyance of a
portion of the Project or otherwise. Notwithstanding the foregoing, Landlord may equitably adjust
Tenants Proportionate Share(s) for all or part of any item of expense or cost reimbursable by
Tenant that relates to a repair, replacement, or service that benefits only the Premises or only a
portion of the Building and/or the Project or that varies with the occupancy of the Building and/or
the Project. Without limiting the generality of the foregoing, Tenant understands and agrees that
Landlord shall have the right to adjust Tenants Proportionate Share(s) of any Utility Expenses
based upon Tenants use of the Utilities or similar services as reasonably estimated and determined
by Landlord based upon factors such as size of the Premises and intensity of use of such Utilities
by Tenant such that Tenant shall pay the portion of such charges reasonably consistent with
Tenants use of such Utilities and similar services.
(4) In the event the average occupancy level of the Building or the Project for the Base Year
and/or any subsequent Comparison Year is not ninety percent (90%) or more of full occupancy, then
the Expenses for such year shall be apportioned among the tenants by the Landlord to reflect those
costs which would have occurred had the Building or the Project, as applicable, been ninety percent
(90%) occupied during such year.
(d)
General Payment Terms.
The Base Rent, Additional Rent and all other sums payable by
Tenant to Landlord hereunder, including, without limitation, any late charges assessed pursuant to
Paragraph 6 below and any interest assessed pursuant to Paragraph 45 below, are referred to as the
Rent. All Rent shall be paid without deduction, offset or abatement in lawful money of the United
States of America. Checks are to be made payable to Harbor Investment Partners and shall be mailed
to: Dept. No. 66218, E1 Monte, California 91735-6128, or to such other person or place as Landlord
may, from time to time, designate to Tenant in writing. The Rent for any fractional part of a
calendar month at the commencement or termination of the Lease term shall be a prorated amount of
the Rent for a full calendar month based upon a thirty (30) day month.
5.
Utilities And Services
(a) From 7:00 a.m. to 6:00 p.m. on weekdays (Normal Business Hours) (excluding legal
holidays), Landlord shall furnish to the Premises electricity for lighting and operation of
low-power usage office machines, water, heat and air conditioning, and elevator service. During all
other hours, Landlord shall furnish such service except for heat and air conditioning. Landlord
shall provide janitorial services for the Premises on weekdays (excluding legal holidays) as
determined reasonably necessary by Landlord.
7
(b) If requested by Tenant, Landlord shall furnish heat and air conditioning at times other
than Normal Business Hours and the cost of such services as established by Landlord shall be paid
by Tenant as Additional Rent, payable concurrently with the next installment of Base Rent.
(c) Tenant acknowledges that the Premises, the Building and/or the Project may become subject
to the rationing of Utility services or restrictions on Utility use as required by a public utility
company, governmental agency or other similar entity having jurisdiction thereof. Tenant
acknowledges and agrees that its tenancy and occupancy hereunder shall be subject to such rationing
or restrictions as may be imposed upon Landlord, Tenant, the Premises, the Building and/or the
Project, and Tenant shall in no event be excused or relieved from any covenant or obligation to be
kept or performed by Tenant by reason of any such rationing or restrictions. Tenant agrees to
comply with energy conservation programs implemented by Landlord by reason of rationing,
restrictions or Laws.
(d) Landlord shall not be liable for any loss, injury or damage to property caused by or
resulting from any variation, interruption, or failure of Utilities due to any cause whatsoever, or
from failure to make any repairs or perform any maintenance. No temporary interruption or failure
of such services incident to the making of repairs, alterations, improvements, or due to accident,
strike, or conditions or other events shall be deemed an eviction of Tenant or relieve Tenant from
any of its obligations hereunder. In no event shall Landlord be liable to Tenant for any damage to
the Premises or for any loss, damage or injury to any property therein or thereon occasioned by
bursting, rupture, leakage or overflow of any plumbing or other pipes (including, without
limitation, water, steam, and/or refrigerant lines), sprinklers, tanks, drains, drinking fountains
or washstands, or other similar cause in, above, upon or about the Premises, the Building, or the
Project.
6.
Late Charge
Notwithstanding any other provision of this Lease, Tenant hereby acknowledges that late
payment to Landlord of Rent, or other amounts due hereunder will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. If
any Rent or other sums due from Tenant are not received by Landlord or by Landlords designated
agent within three (3) days after their due date, then Tenant shall pay to Landlord a late charge
equal to ten percent (10%) of such overdue amount, plus any costs and attorneys fees incurred by
Landlord by reason of Tenants failure to pay Rent and/or other charges when due hereunder.
Landlord and Tenant hereby agree that such late charges represent a fair and reasonable estimate of
the cost that Landlord will incur by reason of Tenants late payment and shall not be construed as
a penalty. Landlords acceptance of such late charges shall not constitute a waiver
8
of Tenants default with respect to such overdue amount or estop Landlord from exercising any of
the other rights and remedies granted under this Lease.
Initials: Landlord CDS Tenant JM
7.
Letter of Credit
(a) Upon execution of this Lease, Tenant shall deliver to Landlord, at Tenants sole cost and
expense, the Letter of Credit described below in the amount specified in the Basic Lease
Information (the LC Face Amount) as security for Tenants performance of all of Tenants
covenants and obligations under this Lease, which security shall be in addition to the Security
Deposit provided pursuant to Paragraph 8 below; provided, however, that neither the Letter of
Credit nor any Letter of Credit Proceeds (as defined below) shall be deemed an advance rent deposit
or an advance payment of any other kind, or a measure of Landlords damages upon Tenants Default.
The Letter of Credit shall be maintained in effect from the date hereof through the date that is
sixty (60) days after the Expiration Date (the LC Termination Date). On the LC Termination
Date, Landlord shall return to Tenant the Letter of Credit and any Letter of Credit Proceeds then
held by Landlord (other than those Letter of Credit Proceeds Landlord is entitled to retain under
the terms of this Paragraph 7(a)); provided, however, that in no event shall any such return be
construed as an admission by Landlord that Tenant has performed all of its obligations hereunder.
Landlord shall not be required to segregate the Letter of Credit Proceeds from its other funds and
no interest shall accrue or be payable to Tenant with respect thereto. Landlord may (but shall not
be required to) draw upon the Letter of Credit and use the proceeds therefrom (the Letter of
Credit Proceeds) or any portion thereof to cure any Default under this Lease and to compensate
Landlord for any damage Landlord incurs as a result of such Default, and for any other purpose for
which Landlord is entitled to use, apply or retain the Security Deposit or any portion thereof
pursuant to Paragraph 8 below, it being understood that any use of the Letter of Credit Proceeds
shall not constitute a bar or defense to any of Landlords remedies set forth in Paragraph 26
below. In such event and upon written notice from Landlord to Tenant specifying the amount of the
Letter of Credit Proceeds so utilized by Landlord and the particular purpose for which such amount
was applied, Tenant shall immediately deliver to Landlord an amendment to the Letter of Credit or a
replacement Letter of Credit in an amount equal to the full LC Face Amount. Tenants failure to
deliver such replacement Letter of Credit to Landlord within ten (10) days of Landlords notice
shall constitute a Default hereunder.
(b) Upon the third (3rd) anniversary of the Commencement Date, Landlord shall review Tenants
financial statements and other information requested by Landlord regarding the prospects for
Tenants continued business operations throughout the remainder of the Term (collectively,
Tenants Financials). In the
9
event Tenants Financials are acceptable to Landlord in its sole and absolute discretion, then
Landlord shall permit Tenant to reduce the LC Face Amount to an amount equal to six (6) months of
Base Rent at the time of such reduction.
(c) As used herein, Letter of Credit shall mean an unconditional, stand-by irrevocable
letter of credit (herein referred to as the Letter of Credit) issued by the San Francisco office
of a major national bank insured by the Federal Deposit Insurance Corporation and otherwise
satisfactory to Landlord (the Bank), naming Landlord as beneficiary, in the amount of the LC Face
Amount, and otherwise in form and substance satisfactory to Landlord. The Letter of Credit shall be
for a one-year term and shall provide: (i) that Landlord may make partial and multiple draws
thereunder, up to the face amount thereof, (ii) that Landlord may draw upon the Letter of Credit up
to the full amount thereof and the Bank will pay to Landlord the amount of such draw upon receipt
by the Bank of a sight draft signed by Landlord and accompanied by a written certification from
Landlord to the Bank stating either that: (A) a Default has occurred and is continuing under this
Lease and any applicable grace period has expired, or (B) Landlord has not received notice from the
Bank at least thirty (30) days prior to the then current expiry date of the Letter of Credit that
the Letter of Credit will be renewed by the Bank for at least one (1) year beyond the relevant
annual expiration date or, in the case of the last year of the Term, sixty (60) days after the
Expiration Date, together with a replacement Letter of Credit or a modification to the existing
Letter of Credit effectuating such renewal, and Tenant has not otherwise furnished Landlord with a
replacement Letter of Credit as hereinafter provided; and (iii) that, in the event of Landlords
assignment or other transfer of its interest in this Lease, the Letter of Credit shall be freely
transferable by Landlord, without recourse and without the payment of any fee or consideration, to
the assignee or transferee of such interest and the Bank shall confirm the same to Landlord and
such assignee or transferee. In the event that the Bank shall fail to (y) notify Landlord that the
Letter of Credit will be renewed for at least one (1) year beyond the then applicable expiration
date, and (z) deliver to Landlord a replacement Letter of Credit or a modification to the existing
Letter of Credit effectuating such renewal, and Tenant shall not have otherwise delivered to
Landlord, at least thirty (30) days prior to the relevant annual expiration date, a replacement
Letter of Credit in the amount required hereunder and otherwise meeting the requirements set forth
above, then Landlord shall be entitled to draw on the Letter of Credit as provided above, and shall
hold the proceeds of such draw as Letter of Credit Proceeds pursuant to Paragraph 7(a) above.
8.
Security Deposit
Concurrently with Tenants execution of the Lease, Tenant shall deposit with Landlord, in
addition to the Letter of Credit provided pursuant to Paragraph 7 above, the Security Deposit
specified in the Basic Lease Information as security for
10
the full and faithful performance of each and every term, covenant and condition of this Lease.
Landlord may use, apply or retain the whole or any part of the Security Deposit as may be
reasonably necessary (a) to remedy any Default by Tenant under this Lease, (b) to repair damage to
the Premises caused by Tenant, (c) to clean the Premises upon termination of this Lease, (d) to
reimburse Landlord for the payment of any amount which Landlord may reasonably spend or be required
to spend by reason of Tenants Default, and (e) to compensate Landlord for any other loss or damage
which Landlord may suffer by reason of Tenants Default. Should Tenant faithfully and fully comply
with all of the terms, covenants and conditions of this Lease, within thirty (30) days following
the expiration of the Term, the Security Deposit or any balance thereof shall be returned to Tenant
or, at the option of Landlord, to the last assignee of Tenants interest in this Lease. Landlord
shall not be required to keep the Security Deposit separate from its general funds and Tenant shall
not be entitled to any interest on such deposit. If Landlord so uses or applies all or any portion
of said deposit, within five (5) days after written demand therefor Tenant shall deposit cash with
Landlord in an amount sufficient to restore the Security Deposit to the full extent of the above
amount, and Tenants failure to do so shall be a default under this Lease. In the event Landlord
transfers its interest in this Lease, Landlord shall transfer the then remaining amount of the
Security Deposit to Landlords successor in interest, and thereafter Landlord shall have no further
liability to Tenant with respect to such Security Deposit.
9.
Possession
(a)
Tenants Right of Possession.
Subject to Paragraph 9(b), Tenant shall be entitled to
possession of the Premises upon commencement of the Term.
(b)
Delay in Delivering Possession.
If for any reason whatsoever, Landlord cannot deliver
possession of the Premises to Tenant on or before the Estimated Commencement Date, this Lease shall
not be void or voidable, nor shall Landlord, or Landlords agents, advisors, employees, partners,
shareholders, directors, invitees or independent contractors (collectively, Landlords Agents),
be liable to Tenant for any loss or damage resulting therefrom. Tenant shall not be liable for Rent
until Landlord delivers possession of the Premises to Tenant. The Expiration Date shall be extended
by the same number of days that Tenants possession of the Premises was delayed beyond the
Estimated Commencement Date.
10.
Use Of Premises
(a)
Permitted Use.
The use of the Premises by Tenant and Tenants agents, advisors,
employees, partners, shareholders, directors, invitees and independent contractors (collectively,
Tenants Agents) shall be solely for the Permitted Use specified in the Basic Lease Information
and for no other use. Tenant shall not permit any objectionable or unpleasant odor, smoke, dust,
gas, noise or vibration to
11
emanate from or near the Premises. The Premises shall not be used to create any nuisance or
trespass, for any illegal purpose, for any purpose not permitted by Laws, for any purpose that
would invalidate the insurance or increase the premiums for insurance on the Premises, the Building
or the Project or for any purpose or in any manner that would interfere with other tenants use or
occupancy of the Project. If any of Tenants office machines or equipment disturb any other tenant
in the Building, then Tenant shall provide adequate insulation or take such other action as may be
necessary to eliminate the noise or disturbance. Tenant agrees to pay to Landlord, as Additional
Rent, any increases in premiums on policies resulting from Tenants Permitted Use or any other use
or action by Tenant or Tenants Agents which increases Landlords premiums or requires additional
coverage by Landlord to insure the Premises, Tenant agrees not to overload the floor(s) of the
Building.
(b)
Compliance with Governmental Regulations and Private Restrictions.
Tenant and Tenants Agents shall, at Tenants expense, faithfully observe and comply with (1) all
municipal, state and federal laws, statutes, codes, rules, regulations, ordinances, requirements,
and orders (collectively, Laws), now in force or which may hereafter be in force pertaining to
the Premises or Tenants use of the Premises, the Building or the Project; (2) all recorded
covenants, conditions and restrictions affecting the Project (Private Restrictions) now in force
or which may hereafter be in force; and (3) any and all rules and regulations set forth in
Exhibit
C
and any other rules and regulations now or hereafter promulgated by Landlord related to parking
or the operation of the Premises, the Building and/or the Project (collectively, the Rules and
Regulations). The judgment of any court of competent jurisdiction, or the admission of Tenant in
any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant
has violated any such Laws or Private Restrictions, shall be conclusive of that fact as between
Landlord and Tenant.
(c)
Compliance with Americans with Disabilities Act.
Landlord and Tenant hereby agree and
acknowledge that the Premises, the Building and/or the Project may be subject to, among other Laws,
the requirements of the Americans with Disabilities Act, a federal law codified at 42 U.S.C. 12101
et seq.,
including, but not limited to Title III thereof, and all regulations and guidelines
related thereto, together with any and all laws, rules, regulations, ordinances, codes and statutes
now or hereafter enacted by local or state agencies having jurisdiction thereof, including all
requirements of Title 24 of the State of California, as the same may be in effect on the date of
this Lease and may be hereafter modified, amended or supplemented (collectively, the ADA). Any
Tenant Improvements to be constructed hereunder shall be in compliance with the requirements of the
ADA, and all costs incurred for purposes of compliance therewith shall be a part of and included in
the costs of the Tenant Improvements. Tenant shall be solely responsible for conducting its own
independent investigation of this matter and for
12
ensuring that the design of all Tenant Improvements strictly complies with all requirements of the
ADA. Subject to reimbursement pursuant to Paragraph 4 above, if any barrier removal work or other
work is required to the Building, the Common Areas or the Project under the ADA, then such work
shall be the responsibility of Landlord; provided, if such work is required under the ADA as a
result of Tenants use of the Premises or any work or Alteration (as hereinafter defined) made to
the Premises by or on behalf of Tenant, then such work shall be performed by Landlord at the sole
cost and expense of Tenant. Except as otherwise expressly provided in this provision, Tenant shall
be responsible at its sole cost and expense for fully and faithfully complying with all applicable
requirements of the ADA, including without limitation, not discriminating against any disabled
persons in the operation of Tenants business in or about the Premises, and offering or otherwise
providing auxiliary aids and services as, and when, required by the ADA. Within ten (10) days after
receipt, Tenant shall advise Landlord in writing, and provide Landlord with copies of (as
applicable), any notices alleging violation of the ADA relating to any portion of the Premises, the
Building or the Project; any claims made or threatened orally or in writing regarding noncompliance
with the ADA and relating to any portion of the Premises, the Building, or the Project; or any
governmental or regulatory actions or investigations instituted or threatened regarding
noncompliance with the ADA and relating to any portion of the Premises, the Building or the
Project. Tenant shall and hereby agrees to protect, defend (with counsel acceptable to Landlord)
and hold Landlord and Landlords Agents harmless and indemnify Landlord and Landlords Agents from
and against all liabilities, damages, claims, losses, penalties, judgments, charges and expenses
(including attorneys fees, costs of court and expenses necessary in the prosecution or defense of
any litigation including the enforcement of this provision) arising from or in any way related to,
directly or indirectly, Tenants or Tenants Agents violation or alleged violation of the ADA.
Tenant agrees that the obligations of Tenant herein shall survive the expiration or earlier
termination of this Lease
11.
Acceptance Of Premises
(a) By entry hereunder, Tenant accepts the Premises as suitable for Tenants intended use and
as being in good and sanitary operating order, condition and repair, AS IS, and without
representation or warranty by Landlord as to the condition, use or occupancy which may be made
thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and
Tenant.
(b) Prior to the Commencement Date, Landlord shall clean the carpet and touch up the paint in
the Premises. Except for the foregoing, Landlord shall have no obligation to remodel, improve or
otherwise alter the Premises prior to or after the Commencement Date.
13
12.
Surrender
Tenant agrees that on the last day of the Term, or on the sooner termination of this Lease,
Tenant shall surrender the Premises to Landlord (a) in good condition and repair (damage by acts of
God, fire, and normal wear and tear excepted), but with all interior walls painted or cleaned so
they appear painted, any carpets cleaned, all floors cleaned and waxed and all non-working light
bulbs and ballasts replaced, and (b) otherwise in accordance with Paragraph 33(h). Normal wear and
tear shall not include any damage or deterioration to the floors of the Premises arising from the
use of forklifts in, on or about the Premises (including, without limitation, any marks or stains
on any portion of the floors) any damage or deterioration that would have been prevented by proper
maintenance by Tenant, or Tenant otherwise performing all of its obligations under this Lease. On
or before the expiration or sooner termination of this Lease, (i) Tenant shall remove all of
Tenants Property (as hereinafter defined) and Tenants signage from the Premises, the Building and
the Project and repair any damage caused by such removal, and (ii) Landlord may, by notice to
Tenant given not later than ninety (90) days prior to the Expiration Date (except in the event of a
termination of this Lease prior to the scheduled Expiration Date, in which event no advance notice
shall be required), require Tenant at Tenants expense to remove any or all Alterations and to
repair any damage caused by such removal. Any of Tenants Property not so removed by Tenant as
required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord
at Tenants expense, and Tenant waives all claims against Landlord for any damages resulting from
Landlords retention and disposition of such property; provided, however, that Tenant shall remain
liable to Landlord for all costs incurred in storing and disposing of such abandoned property of
Tenant. All Tenant Improvements and Alterations except those which Landlord requires Tenant to
remove shall remain in the Premises as the property of Landlord. If the Premises are not
surrendered at the end of the Term or sooner termination of this Lease, and in accordance with the
provisions of this Paragraph 12 and Paragraph 33(h) below, Tenant shall continue to be responsible
for the payment of Rent (as the same may be increased pursuant to Paragraph 36 below) until the
Premises are so surrendered in accordance with said Paragraphs, and Tenant shall indemnify, defend
and hold Landlord harmless from and against any and all loss or liability resulting from delay by
Tenant in so surrendering the Premises including, without limitation, any loss or liability
resulting from any claim against Landlord made by any succeeding tenant or prospective tenant
founded on or resulting from such delay and losses to Landlord due to lost opportunities to lease
any portion of the Premises to any such succeeding tenant or prospective tenant, together with, in
each case, actual attorneys fees and costs.
14
13.
Alterations And Additions
(a) Tenant shall not make, or permit to be made, any alteration, addition or improvement
(hereinafter referred to individually as an Alteration and collectively as the Alterations) to
the Premises or any part thereof without the prior written consent of Landlord, which consent
shall not be unreasonably withheld; provided, however, that Landlord shall have the right in its
sole and absolute discretion to consent or to withhold its consent to any Alteration which affects
the structural portions of the Premises, the Building or the Project or the Systems serving the
Premises, the Building and/or the Project or any portion thereof.
(b) Any Alteration to the Premises shall be at Tenants sole cost and expense, in compliance
with all applicable Laws and all requirements requested by Landlord, including, without
limitation, the requirements of any insurer providing coverage for the Premises or the Project or
any part thereof, and in accordance with plans and specifications approved in writing by Landlord,
and shall be constructed and installed by a contractor approved in writing by Landlord. As a
further condition to giving consent, Landlord may require Tenant to provide Landlord, at Tenants
sole cost and expense, a payment and performance bond in form acceptable to Landlord, in a
principal amount not less than one and one-half times the estimated costs of such Alterations, to
ensure Landlord against any liability for mechanics and materialmens liens and to ensure
completion of work. Before Alterations may begin, valid building permits or other permits or licenses required must be
furnished to Landlord, and, once the Alterations begin, Tenant will diligently and
continuously pursue their completion. Landlord may monitor construction of the Alterations and
Tenant shall reimburse Landlord for its costs (including, without limitation, the costs of any
construction manager retained by Landlord) in reviewing plans and documents and in monitoring
construction. Tenant shall maintain during the course of construction, at its sole cost and
expense, builders risk insurance for the amount of the completed value of the Alterations on
an all-risk non-reporting form covering all improvements under construction, including
building materials, and other insurance in amounts and against such risks as Landlord shall
reasonably require in connection with the Alterations. In addition to and without limitation
on the generality of the foregoing, Tenant shall ensure that its contractor(s) procure and
maintain in full force and effect during the course of construction a broad form commercial
general liability and property damage policy of insurance naming Landlord, Tenant and
Landlords lenders as additional insureds. The minimum limit of coverage of the aforesaid
policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for
injury or death of one person in any one accident or occurrence and in the amount of not less
than Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any
one accident or occurrence, and shall contain a severability of interest clause or a cross
liability endorsement. Such
15
insurance shall further insure Landlord and Tenant against liability for property damage of
at least One Million Dollars ($1,000,000.00).
(c) All Alterations, including, but not limited to, heating, lighting, electrical, air
conditioning, fixed partitioning, drapery, wall covering and paneling, built-in cabinet work and
carpeting installations made by Tenant, together with all property that has become an integral part
of the Premises or the Building, shall at once be and become the property of Landlord, and shall
not be deemed trade fixtures or Tenants Property.
(d) No private telephone systems and/or other related computer or telecommunications equipment
or lines may be installed without Landlords prior written consent. If Landlord gives such
consent, all equipment must be installed within the Premises and, at the request of Landlord made
at any time prior to the expiration of the Term, removed upon the expiration or sooner termination
of this Lease and the Premises restored to the same condition as before such installation.
(e) Notwithstanding anything herein to the contrary, before installing any equipment or lights
which generate an undue amount of heat in the Premises, or if Tenant plans to use any high-power
usage equipment in the Premises, Tenant shall obtain the written permission of Landlord. Landlord
may refuse to grant such permission unless Tenant agrees to pay the costs to Landlord for
installation of supplementary air conditioning capacity or electrical systems necessitated by such
equipment.
(f) Tenant agrees not to proceed to make any Alterations, notwithstanding consent from
Landlord to do so, until Tenant notifies Landlord in writing of the date Tenant desires to commence
construction or installation of such Alterations and Landlord has approved such date in writing, in
order that Landlord may post appropriate notices to avoid any liability to contractors or material
suppliers for payment for Tenants improvements. Tenant will at all times permit such notices to be
posted and to remain posted until the completion of work.
14.
Maintenance and Repairs Of Premises
(a)
Maintenance by Tenant.
Throughout the Term, Tenant shall, at its sole expense, subject
to Paragraphs 5(a) and 14(b) hereof, (1) keep and maintain in good order and condition the Premises
and Tenants Property, and (2) keep and maintain in good order and condition, repair and replace
all of Tenants security systems in or about or serving the Premises. Tenant shall not do nor shall
Tenant allow Tenants Agents to do anything to cause any damage, deterioration or unsightliness to
the Premises, the Building or the Project.
16
(b)
Maintenance by Landlord
.
Subject to the provisions of Paragraphs 13(a), 22 and 23, and
further subject to Tenants obligation under Paragraph 4 to reimburse Landlord, in the form of
Additional Rent, for Tenants Proportionate Share(s) of the cost and expense of the following
items, Landlord agrees to repair and maintain the following items: the roof coverings (provided
that Tenant installs no additional air conditioning or other equipment on the roof that damages the
roof coverings, in which event Tenant shall pay all costs resulting from the presence of such
additional equipment); the Systems serving the Premises and the Building; and the Parking Areas,
pavement, landscaping, sprinkler systems, sidewalks, driveways, curbs, and lighting systems in the
Common Areas. Subject to the provisions of Paragraphs 14(a), 22 and 23, Landlord, at its own cost
and expense, agrees to repair and maintain the following items: the structural portions of the roof
(specifically excluding the roof coverings), the foundation, the footings, the floor slab, and the
load bearing walls and exterior walls of the Building (excluding any glass and any routine
maintenance, including, without limitation, any painting, sealing, patching and waterproofing of
such walls). Notwithstanding anything in this Paragraph 14 to the contrary, Landlord shall have the
right to either repair or to require Tenant to repair any damage to any portion of the Premises,
the Building and/or the Project caused by or created due to any act, omission, negligence or
willful misconduct of Tenant or Tenants Agents and to restore the Premises, the Building and/or
the Project, as applicable, to the condition existing prior to the occurrence of such damage;
provided, however, that in the event Landlord elects to perform such repair and restoration work,
Tenant shall reimburse Landlord upon demand for all costs and expenses incurred by Landlord in
connection therewith. Landlords obligation hereunder to repair and maintain is subject to the
condition precedent that Landlord shall have received written notice of the need for such repairs
and maintenance and a reasonable time to perform such repair and maintenance. Tenant shall promptly
report in writing to Landlord any defective condition known to it which Landlord is required to
repair, and failure to so report such defects shall make Tenant responsible to Landlord for any
liability incurred by Landlord by reason of such condition.
(c)
Tenants Waiver of Rights
.
Tenant hereby expressly waives all rights to make repairs at
the expense of Landlord or to terminate this Lease, as provided for in California Civil Code
Sections 1941 and 1942, and 1932(1), respectively, and any similar or successor statute or law in
effect or any amendment thereof during the Term.
15.
Landlords Insurance
Landlord shall purchase and keep in force fire, extended coverage and all risk insurance
covering the Building and the Project. Tenant shall, at its sole cost and expense, comply with any
and all reasonable requirements pertaining to the Premises, the Building and the Project of any
insurer necessary for the maintenance
17
of reasonable fire and commercial general liability insurance, covering the Building and the
Project. Landlord, at Tenants cost, may maintain Loss of Rents insurance, insuring that the Rent
will be paid in a timely manner to Landlord for a period of at least twelve (12) months if the
Premises, the Building or the Project or any portion thereof are destroyed or rendered unusable or
inaccessible by any cause insured against under this Lease.
16.
Tenants Insurance
(a)
Commercial General Liability Insurance.
Tenant shall, at Tenants expense, secure and keep
in force a broad form commercial general liability insurance and property damage policy covering
the Premises, insuring Tenant, and naming Landlord and its lenders as additional insureds, against
any liability arising out of the ownership, use, occupancy or maintenance of the Premises. The
minimum limit of coverage of such policy shall be in the amount of not less than Three Million
Dollars ($3,000,000.00) for injury or death of one person in any one accident or occurrence and in
the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of more than
one person in any one accident or occurrence, shall include an extended liability endorsement
providing contractual liability coverage (which shall include coverage for Tenants indemnification
obligations in this Lease), and shall contain a severability of interest clause or a cross
liability endorsement. Such insurance shall further insure Landlord and Tenant against liability
for property damage of at least Three Million Dollars ($3,000,000.00). Landlord may from time to
time require reasonable increases in any such limits if Landlord believes that additional coverage
is necessary or desirable. The limit of any insurance shall not limit the liability of Tenant
hereunder. No policy maintained by Tenant under this Paragraph 16(a) shall contain a deductible
greater than two thousand five hundred dollars ($2,500.00). No policy shall be cancelable or
subject to reduction of coverage without thirty (30) days prior written notice to Landlord, and
loss payable clauses shall be subject to Landlords approval. Such policies of insurance shall be
issued as primary policies and not contributing with or in excess of coverage that Landlord may
carry, by an insurance company authorized to do business in the State of California for the
issuance of such type of insurance coverage and rated A:XIII or better in Bests Key Rating Guide.
(b)
Personal Property Insurance.
Tenant shall maintain in full force and effect on all of its
personal property, furniture, furnishings, trade or business fixtures and equipment (collectively,
Tenants Property) on the Premises, a policy or policies of fire and extended coverage insurance
with standard coverage endorsement to the extent of the full replacement cost thereof. No such
policy shall contain a deductible greater than two thousand five hundred dollars
($2,500.00). During the term of this Lease the proceeds from any such policy or policies of
insurance shall be used for the repair or replacement of the fixtures and
18
equipment so insured. Landlord shall have no interest in the insurance upon Tenants equipment and
fixtures and will sign all documents reasonably necessary in connection with the settlement of any
claim or loss by Tenant. Landlord will not carry insurance on Tenants possessions.
(c)
Workers Compensation Insurance; Employers Liability Insurance.
Tenant shall, at Tenants expense, maintain in full force and effect workers compensation
insurance with not less than the minimum limits required by law, and employers liability insurance
with a minimum limit of coverage of One Million Dollars ($1,000,000).
(d)
Evidence of Coverage.
Tenant shall deliver to Landlord certificates of insurance and true
and complete copies of any and all endorsements required herein for all insurance required to be
maintained by Tenant hereunder at the time of execution of this Lease by Tenant. Tenant shall, at
least thirty (30) days prior to expiration of each policy, furnish Landlord with certificates of
renewal or binders thereof. Each certificate shall expressly provide that such policies shall not
be cancellable or otherwise subject to modification except after thirty (30) days prior written
notice to Landlord and the other parties named as additional insureds as required in this Lease
(except for cancellation for nonpayment of premium, in which event cancellation shall not take
effect until at least ten (10) days notice has been given to Landlord).
17.
Indemnification
(a)
Of Landlord.
Tenant shall indemnify and hold harmless Landlord and Landlords Agents
against and from any and all claims, liabilities, judgments, costs, demands, causes of action and
expenses (including, without limitation, reasonable attorneys fees) arising from (1) the use of
the Premises, the Building or the Project by Tenant or Tenants Agents, or from any activity done,
permitted or suffered by Tenant or Tenants Agents in or about the Premises, the Building or the
Project, and (2) any act, neglect, fault, willful misconduct or omission of Tenant or Tenants
Agents, or from any breach or default in the terms of this Lease by Tenant or Tenants Agents, and
(3) any action or proceeding brought on account of any matter in items (1) or (2). If any action or
proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord,
Tenant shall defend the same at Tenants expense by counsel reasonably satisfactory to Landlord. As
a material part of the consideration to Landlord, Tenant hereby releases Landlord and Landlords
Agents from responsibility for, waives its entire claim of recovery for and assumes all risk of (i)
damage to property or injury to persons in or about the Premises, the Building or the Project from
any cause whatsoever (except that which is caused by the sole active gross negligence or willful
misconduct of Landlord or Landlords Agents or by the failure of Landlord to observe any of the
terms and conditions of this Lease, if such failure has persisted for an unreasonable period of
19
time after written notice of such failure), or (ii) loss resulting from business interruption or
loss of income at the Premises. The obligations of Tenant under this Paragraph 17 shall survive any
termination of this Lease.
(b)
No Impairment of Insurance.
The foregoing indemnity shall not relieve any insurance
carrier of its obligations under any policies required to be carried by either party pursuant to
this Lease, to the extent that such policies cover the peril or occurrence that results in the
claim that is subject to the foregoing indemnity.
18.
Subrogation
Landlord and Tenant hereby mutually waive any claim against the other and its Agents for any
loss or damage to any of their property located on or about the Premises, the Building or the
Project that is caused by or results from perils covered by property insurance carried by the
respective parties, to the extent of the proceeds of such insurance actually received with respect
to such loss or damage, whether or not due to the negligence of the other party or its Agents.
Because the foregoing waivers will preclude the assignment of any claim by way of subrogation to an insurance company or any other person, each
party now agrees to immediately give to its insurer written notice of the terms of these mutual waivers
and shall have their insurance policies endorsed to prevent the invalidation of the insurance coverage because of these waivers. Nothing in this Paragraph 18 shall relieve a party of
liability to the other for failure to carry insurance required by this Lease.
19.
Signs
Tenant shall not place or permit to be placed in, upon, or about the Premises, the Building or the Project any exterior lights, decorations, balloons, flags, pennants, banners, advertisements or notices, or erect or install any signs, windows or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior the Premises without
obtaining Landlords prior written consent
or without complying with Landlords signage criteria,
as the same may be modified by Landlord from time to time, and with all applicable Laws,
and will not conduct, or permit to be conducted, any sale by auction on the Premises or
otherwise on the Project. Tenant shall remove any sign, advertisement or notice placed on
the Premises, the Building or the Project by Tenant upon theexpiration of the Term
or sooner termination of this Lease, and Tenant shall repair any damage or injury to the
Premises, the Building or the Project caused thereby, all at Tenants expense. If any
signs are not removed, or necessary repairs not made, Landlord shall have the right to remove
the signs and repair any damage or injury to the Premises, the Building or the Project at
Tenants sole cost and expense.
20
20.
Free From Liens
Tenant shall keep the Premises, the Building and the Project free from any liens arising out
of any work performed, material furnished or obligations incurred by or for Tenant. In the event
that Tenant shall not, within ten (10) days following the imposition of any such lien, cause the
lien to be released of record by payment or posting of a proper bond, Landlord shall have in
addition to all other remedies provided herein and by law the right but not the obligation to cause
same to be released by such means as it shall deem proper, including payment of the claim giving
rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection
therewith (including, without limitation, attorneys fees) shall be payable to Landlord by Tenant
upon demand. Landlord shall have the right at all times to post and keep posted on the Premises any
notices permitted or required by law or that Landlord shall deem proper for the protection of
Landlord, the Premises, the Building and the Project, from mechanics and materialmens liens.
Tenant shall give to Landlord at least five (5) business days prior written notice of commencement
of any repair or construction on the Premises.
21.
Entry By Landlord
Tenant shall permit Landlord and Landlords Agents to enter into and upon the Premises at all
reasonable times, upon reasonable notice (except in the case of an emergency, for which no notice
shall be required), and subject to Tenants reasonable security arrangements, for the purpose of
inspecting the same or showing the Premises to prospective purchasers, lenders or tenants or to
alter, improve, maintain and repair the Premises or the Building as required or permitted of
Landlord under the terms hereof, or for any other business purpose, without any rebate of Rent and
without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises
thereby occasioned (except for actual damages resulting from the sole active gross negligence or
willful misconduct of Landlord); and Tenant shall permit Landlord to post notices of
non-responsibility and ordinary for sale or for lease signs. No such entry shall be construed
to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant
from the Premises. Landlord may temporarily close entrances, doors, corridors, elevators or other
facilities without liability to Tenant by reason of such closure in the case of an emergency and
when Landlord otherwise deems such closure necessary.
22.
Destruction And Damage
(a) If the Premises are damaged by fire or other perils covered by extended coverage
insurance, Landlord shall, at Landlords option:
21
(1) In the event of total destruction (which shall mean destruction or
damage in excess of twenty-five percent (25%) of the full insurable value thereof)
of the Premises, elect either to commence promptly to repair and restore the
Premises and prosecute the same diligently to completion, in which event this
Lease shall remain in full force and effect; or not to repair or restore the Premises,
in which event this Lease shall terminate. Landlord shall give Tenant written notice
of its intention within sixty (60) days after the date (the Casualty Discovery
Date) Landlord obtains actual knowledge of such destruction. If Landlord elects
not to restore the Premises, this Lease shall be deemed to have terminated as of the
date of such total destruction.
(2) In the event of a partial destruction (which shall mean destruction or
damage to an extent not exceeding twenty-five percent (25%) of the full insurable
value thereof) of the Premises for which Landlord will receive insurance proceeds
sufficient to cover the cost to repair and restore such partial destruction and, if the
damage thereto is such that the Premises may be substantially repaired or restored
to its condition existing immediately prior to such damage or destruction within
one hundred eighty (180) days from the Casualty Discovery Date, Landlord shall
commence and proceed diligently with the work of repair and restoration, in which
event the Lease shall continue in full force and effect. If such repair and
restoration requires longer than one hundred eighty (180) days or if the insurance
proceeds therefor (plus any amounts Tenant may elect or is obligated to contribute)
are not sufficient to cover the cost of such repair and restoration, Landlord may
elect either to so repair and restore, in which event the Lease shall continue in full
force and effect, or not to repair or restore, in which event the Lease shall
terminate. In either case, Landlord shall give written notice to Tenant of its
intention within sixty (60) days after the Casualty Discovery Date. If Landlord
elects not to restore the Premises, this Lease shall be deemed to have terminated as
of the date of such partial destruction.
(3) Notwithstanding anything to the contrary contained in this Paragraph,
in the event of damage to the Premises occurring during the last twelve (12) months
of the Term, Landlord may elect to terminate this Lease by written notice of such
election given to Tenant within thirty (30) days after the Casualty Discovery Date.
(b) If the Premises are damaged by any peril not covered by extended coverage insurance, and
the cost to repair such damage exceeds any amount Tenant may agree to contribute, Landlord may
elect either to commence promptly to repair and restore the Premises and prosecute the same
diligently to completion, in which event this Lease shall remain in full force and effect; or not
to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give
Tenant written notice of its intention within sixty (60) days after the Casualty Discovery Date. If
Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of
the date on which Tenant surrenders possession of the
22
Premises to Landlord, except that if the damage to the Premises materially impairs Tenants
ability to continue its business operations in the Premises, then this Lease shall be deemed to
have terminated as of the date such damage occurred.
(c) Notwithstanding anything to the contrary in this Paragraph 22, Landlord
shall have the option to terminate this Lease, exercisable by notice to Tenant within
sixty (60) days after the Casualty Discovery Date, in each of the following
instances:
(1) If more than twenty-five percent (25%) of the full insurable value of
the Building or the Project is damaged or destroyed, regardless of whether or not
the Premises are destroyed.
(2) If the Building or the Project or any portion thereof is damaged or
destroyed and the repair and restoration of such damage requires longer than one
hundred eighty (180) days from the Casualty Discovery Date.
(3) If the Building or the Project or any portion thereof is damaged or
destroyed and the insurance proceeds therefor are not sufficient to cover the costs
of repair and restoration.
(4) If the Building or the Project or any portion thereof is damaged or
destroyed during the last twelve (12) months of the Term.
(d) In the event of repair and restoration as herein provided, the monthly
installments of Base Rent shall be abated proportionately in the ratio which
Tenants use of the Premises is impaired during the period of such repair or
restoration, but only to the extent of rental abatement insurance proceeds received
by Landlord; provided, however, that Tenant shall not be entitled to such abatement
to the extent that such damage or destruction resulted from the acts or inaction of
Tenant or Tenants Agents. Except as expressly provided in the immediately
preceding sentence with respect to abatement of Base Rent, Tenant shall have no
claim against Landlord for, and hereby releases Landlord and Landlords Agents
from responsibility for and waives its entire claim of recovery for any cost, loss or
expense suffered or incurred by Tenant as a result of any damage to or destruction
of the Premises, the Building or the Project or the repair or restoration thereof,
including, without limitation, any cost, loss or expense resulting from any loss of
use of the whole or any part of the Premises, the Building or the Project and/or any
inconvenience or annoyance occasioned by such damage, repair or restoration.
(e) If Landlord is obligated to or elects to repair or restore as herein provided,
Landlord shall repair or restore only the initial tenant improvements, if any,
constructed by Landlord in the Premises pursuant to the terms of this Lease,
substantially to their condition existing immediately prior to the occurrence of the
23
damage or destruction; and Tenant shall promptly repair and restore, at Tenants expense,
Tenants Alterations which were not constructed by Landlord.
(f) Tenant hereby waives the provisions of California Civil Code Section 1932(2) and Section
1933(4) which permit termination of a lease upon destruction of the leased premises, and the
provisions of any similar law now or hereinafter in effect, and the provisions of this Paragraph 22
shall govern exclusively in case of such destruction.
23.
Condemnation
(a) If twenty-five percent (25%) or more of either the Premises, the Building or the
Project or the parking areas for the Building or the Project is taken for any public or
quasi-public purpose by any lawful governmental power or authority, by exercise of the right of
appropriation, inverse condemnation, condemnation or eminent domain, or sold to prevent such
taking (each such event being referred to as a Condemnation), Landlord may, at its option,
terminate this Lease as of the date title vests in the condemning party. If twenty-five percent
(25%) or more of the Premises is taken and if the Premises remaining after such Condemnation and
any repairs by Landlord would be untenantable for the conduct of Tenants business operations,
Tenant shall have the right to terminate this Lease as of the date title vests in the condemning
party. If either party elects to terminate this Lease as provided herein, such election shall be
made by written notice to the other party given within thirty (30) days after the nature and
extent of such Condemnation have been finally determined. If neither Landlord nor Tenant elects
to terminate this Lease to the extent permitted above, Landlord shall promptly proceed to restore
the Premises, to the extent of any Condemnation award received by Landlord, to substantially the
same condition as existed prior to such Condemnation, allowing for the reasonable effects of such
Condemnation, arid a proportionate abatement shall be made to the Base Rent corresponding to the
time during which, and to the portion of the floor area of the Premises (adjusted for any
increase thereto resulting from any reconstruction) of which, Tenant is deprived on account of
such Condemnation and restoration, as reasonably determined by Landlord. Except as expressly
provided in the immediately preceding sentence with respect to abatement of Base Rent, Tenant
shall have no claim against Landlord for, and hereby releases Landlord and Landlords Agents from
responsibility for and waives its entire claim of recovery for any cost, loss or expense suffered
or incurred by Tenant as a result of any Condemnation or the repair or restoration of the
Premises, the Building or the Project or the parking areas for the Building or the Project
following such Condemnation, including, without limitation, any cost, loss or expense resulting
from any loss of use of the whole or any part of the Premises, the Building, the Project or the
parking areas and/or any inconvenience or annoyance occasioned by such Condemnation, repair or
restoration. The provisions of California Code of Civil Procedure
24
Section 1265.130, which allows either party to petition the Superior Court to terminate the Lease
in the event of a partial taking of the Premises, the Building or the Project or the parking
areas for the Building or the Project, and any other applicable law now or hereafter enacted, are
hereby waived by Tenant.
(b) Landlord shall be entitled to any and all compensation, damages, income, rent, awards,
or any interest therein whatsoever which may be paid or made in connection with any Condemnation,
and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease
or otherwise; provided, however, that Tenant shall be entitled to receive any award separately
allocated by the condemning authority to Tenant for Tenants relocation expenses or the value of
Tenants Property (specifically excluding fixtures, Alterations and other components of the
Premises which under this Lease or by law are or at the expiration of the Term will become the
property of Landlord), provided that such award does not reduce any award otherwise allocable or
payable to Landlord.
24.
Assignment And Subletting
(a) Tenant shall not voluntarily or by operation of law, (1) mortgage, pledge, hypothecate
or encumber this Lease or any interest herein, (2) assign or transfer this Lease or any interest
herein, sublease the Premises or any part thereof, or any right or privilege appurtenant thereto,
or allow any other person (the employees and invitees of Tenant excepted) to occupy or use the
Premises, or any portion thereof, without first obtaining the written consent of Landlord, which
consent shall not be withheld unreasonably provided that (i) Tenant is not then in Default under
this Lease nor is any event then occurring which with the giving of notice or the passage of
time, or both, would constitute a Default hereunder, and (ii) except for a Limited Sublease (as
hereinafter defined), Tenant has not previously assigned or transferred this Lease or any
interest herein or subleased the Premises or any part thereof. When Tenant requests Landlords
consent to such assignment or subletting, it shall notify Landlord in writing of the name and
address of the proposed assignee or subtenant and the nature and character of the business of the
proposed assignee or subtenant and shall provide current and prior financial statements for the
proposed assignee or subtenant prepared in accordance with generally accepted accounting
principles. Tenant shall also provide Landlord with a copy of the proposed sublease or assignment
agreement, including all material terms and conditions thereof. Landlord shall have the option,
to be exercised within thirty (30) days of receipt of the foregoing, to (1) terminate this Lease
as of the commencement date stated in the proposed sublease or assignment (provided that Landlord
shall not have the right to terminate this Lease under this clause (1) in the event of a Limited
Sublease), (2) sublease or take an assignment, as the case may be, from Tenant of the interest,
or any portion thereof, in this Lease arid/or the Premises that Tenant proposes to assign or
sublease, on the same terms and conditions as stated in the proposed sublet or assignment
agreement, (3) consent to
25
the proposed assignment or sublease, or (4) refuse its consent to the proposed assignment or
sublease, providing that such consent shall not be unreasonably withheld so long as Tenant is not
then in Default under this Lease nor is any event then occurring which with the giving of notice or
the passage of time, or both, would constitute a Default hereunder. In the event Landlord elects to
terminate this Lease or sublease or take an assignment from Tenant of the interest, or portion
thereof, in the Lease and/or the Premises that Tenant proposes to assign or sublease as provided in
the foregoing clauses (1) and (2), respectively, then Landlord shall have the additional right to
negotiate directly with Tenants proposed assignee or subtenant and to enter into a direct lease or
occupancy agreement with such party on such terms as shall be acceptable to Landlord in its sole
and absolute discretion, and Tenant hereby waives any claims against Landlord related thereto,
including, without limitation, any claims for any compensation or profit related to such lease or
occupancy agreement.
(b) Without otherwise limiting the criteria upon which Landlord may
withhold its consent, Landlord shall be entitled to consider all reasonable criteria
including, but not limited to, the following: (1) whether or not the proposed
subtenant or assignee is engaged in a business which, and the use of the Premises
will be in an manner which, is in keeping with the then character and nature of all
other tenancies in the Project, (2) whether the use to be made of the Premises by
the proposed subtenant or assignee will conflict with any so-called exclusive use
then in favor of any other tenant of the Building or the Project, and whether such
use would be prohibited by any other portion of this Lease, including, but not
limited to, any rules and regulations then in effect, or under applicable Laws, and
whether such use imposes a greater load upon the Premises and the Building and
Project services then imposed by Tenant, (3) the business reputation of the
proposed individuals who will be managing and operating the business operations
of the assignee or subtenant, and the long-term financial and competitive business
prospects of the proposed assignee or subtenant, and (4) the creditworthiness and
financial stability of the proposed assignee or subtenant in light of the
responsibilities involved. In any event, Landlord may withhold its consent to any
assignment or sublease, if (i) the actual use proposed to be conducted in the
Premises or portion thereof conflicts with the provisions of Paragraph 10(a) or (b)
above or with any other lease which restricts the use to which any space in the
Building or the Project may be put, or (ii) the proposed assignment or sublease
requires alterations, improvements or additions to the Premises or portions thereof.
(c) If Landlord approves an assignment or subletting as herein provided,
Tenant shall pay to Landlord, as Additional Rent, the difference, if any, between
(1) the Base Rent plus Additional Rent allocable to that part of the Premises
affected by such assignment or sublease pursuant to the provisions of this Lease,
and (2) the rent and any additional rent payable by the assignee or sublessee to
Tenant, less reasonable legal fees (not to exceed the sum of five thousand dollars
26
($5,000.00) and reasonable and customary market-based leasing commissions, if any, incurred by
Tenant in connection with such assignment or sublease. The assignment or sublease agreement, as
the case may be, after approval by Landlord, shall not be amended without Landlords prior written
consent, and shall contain a provision directing the assignee or subtenant to pay the rent and
other sums due thereunder directly to Landlord upon receiving written notice from Landlord that
Tenant is in default under this Lease with respect to the payment of Rent. In the event that,
notwithstanding the giving of such notice, Tenant collects any rent or other sums from the assignee
or subtenant, then Tenant shall hold such sums in trust for the benefit of Landlord and shall
immediately forward the same to Landlord. Landlords collection of such rent and other sums shall
not constitute an acceptance by Landlord of attornment by such assignee or subtenant. A consent to
one assignment, subletting, occupation or use shall not be deemed to be a consent to any other or
subsequent assignment, subletting, occupation or use, and consent to any assignment or subletting
shall in no way relieve Tenant of any liability under this Lease. Any assignment or subletting
without Landlords consent shall be void, and shall, at the option of Landlord, constitute a
Default under this Lease.
(d) Notwithstanding any assignment or subletting, Tenant and any guarantor
or surety of Tenants obligations under this Lease shall at all times remain fully
responsible and liable for the payment of the Rent and for compliance with all of
Tenants other obligations under this Lease (regardless of whether Landlords
approval has been obtained for any such assignment or subletting).
(e) Tenant shall pay Landlords reasonable fees (including, without
limitation, the fees of Landlords counsel), incurred in connection with Landlords
review and processing of documents regarding any proposed assignment or
sublease.
(f) Notwithstanding anything in this Lease to the contrary, in the event
Landlord consents to an assignment or subletting (including, without limitation, a
Limited Sublease) by Tenant in accordance with the terms of this Paragraph 24,
Tenants assignee or subtenant shall have no right to further assign this Lease or
any interest therein or thereunder or to further sublease all or any portion of the
Premises. In furtherance of the foregoing, Tenant acknowledges and agrees on
behalf of itself and any assignee or subtenant claiming under it (and any such
assignee or subtenant by accepting such assignment or sublease shall be deemed to
acknowledge and agree) that no sub-subleases or further assignments of this Lease
shall be permitted at any time.
(g) Tenant acknowledges and agrees that the restrictions, conditions and
limitations imposed by this Paragraph 24 on Tenants ability to assign or transfer
this Lease or any interest herein, to sublet the Premises or any part thereof, to
transfer or assign any right or privilege appurtenant to the Premises, or to allow any
27
other person to occupy or use the Premises or any portion thereof, are, for the purposes of
California Civil Code Section 1951.4, as amended from time to time, and for all other purposes,
reasonable at the time that the Lease was entered into, and shall be deemed to be reasonable at
the time that Tenant seeks to assign or transfer this Lease or any interest herein, to sublet the
Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the
Premises, or to allow any other person to occupy or use the Premises or any portion thereof.
(h) Notwithstanding anything in Paragraph 24(a) above to the contrary, Tenant shall have the
right with the consent of Landlord, which consent shall not be unreasonably withheld, to sublet up
to three thousand rentable square feet (3,000) of the Premises for a term commencing not later
than the first (1st) anniversary of the Commencement Date and expiring not later than the third
(3rd) anniversary of the Commencement Date (the Limited Sublease). Except as otherwise expressly
set forth in this Paragraph 24, the Limited Sublease shall be subject to all of the terms and
conditions of this Paragraph 24.
25.
Tenants Default
The occurrence of any one of the following events shall constitute an event of default on the
part of Tenant (Default):
(a) The vacation or abandonment of the Premises by Tenant for a period of
ten (10) consecutive days or any vacation or abandonment of the Premises by
Tenant which would cause any insurance policy to be invalidated or otherwise
lapse, or the failure of Tenant to continuously operate Tenants business in the
Premises, in each of the foregoing cases irrespective of whether or not Tenant is
then in monetary default under this Lease. Tenant agrees to notice and service of
notice as provided for in this Lease and waives any right to any other or further
notice or service of notice which Tenant may have under any statute or law now or
hereafter in effect;
(b) Failure to pay any installment of Rent or any other monies due and
payable hereunder, said failure continuing for a period of three (3) days after the
same is due;
(c) A general assignment by Tenant or any guarantor or surety of Tenants
obligations hereunder (collectively, Guarantor) for the benefit of creditors;
(d) The filing of a voluntary petition in bankruptcy by Tenant or any
Guarantor, the filing by Tenant or any Guarantor of a voluntary petition for an
arrangement, the filing by or against Tenant or any Guarantor of a petition,
voluntary or involuntary, for reorganization, or the filing of an involuntary petition
28
by the creditors of Tenant or any Guarantor, said involuntary petition remaining undischarged for a
period of sixty (60) days;
(e) Receivership, attachment, or other judicial seizure of substantially all of
Tenants assets on the Premises, such attachment or other seizure remaining
undismissed or undischarged for a period of sixty (60) days after the levy thereof;
(f) Death or disability of Tenant or any Guarantor, if Tenant or such
Guarantor is a natural person, or the failure by Tenant or any Guarantor to maintain
its legal existence, if Tenant or such Guarantor is a corporation, partnership,
limited liability company, trust or other legal entity;
(g) Failure of Tenant to execute and deliver to Landlord any estoppel
certificate, subordination agreement, or lease amendment within the time periods
and in the manner required by Paragraphs 31 or 32 or 42;
(h) An assignment or sublease, or attempted assignment or sublease, of this Lease or the
Premises by Tenant contrary to the provision of Paragraph 24, unless such assignment or sublease is
expressly conditioned upon Tenant having received Landlords consent thereto;
(i) Failure of Tenant to restore the Letter of Credit or the Security Deposit to the amount
and within the time period provided in Paragraph 7 or Paragraph 8, respectively, above;
(j) Failure in the performance of any of Tenants covenants, agreements or obligations
hereunder (except those failures specified as events of Default in subparagraphs (b), (1) or (m)
above or any other subparagraphs of this Paragraph 25, which shall be governed by such other
Paragraphs), which failure continues for ten (10) days after written notice thereof from Landlord
to Tenant, provided that, if Tenant has exercised reasonable diligence to cure such failure and
such failure cannot be cured within such ten (10) day period despite reasonable diligence, Tenant
shall not be in default under this subparagraph so long as Tenant thereafter diligently and
continuously prosecutes the cure to completion and actually completes such cure within thirty (30)
days after the giving of the aforesaid written notice;
(k) Chronic delinquency by Tenant in the payment of Rent, or any other periodic payments
required to be paid by Tenant under this Lease. Chronic delinquency shall mean failure by Tenant
to pay Rent, or any other payments required to be paid by Tenant under this Lease within three (3)
days after written notice thereof for any three (3) months (consecutive or nonconsecutive) during
any period of twelve (12) months. In the event of a Chronic Delinquency, in addition to Landlords
other remedies for Default provided in this Lease, at Landlords
29
option, Landlord shall have the right to require that Rent be paid by Tenant quarterly, in
advance;
(1) Chronic overuse by Tenant or Tenants Agents of the number of undesignated parking
spaces set forth in the Basic Lease Information. Chronic Overuse shall mean use by Tenant or
Tenants Agents of a number of parking spaces greater than the number of parking spaces set
forth in the Basic Lease Information more than three (3) times during the Term after written
notice by Landlord;
(m) Any insurance required to be maintained by Tenant pursuant to this Lease shall be
canceled or terminated or shall expire or be reduced or materially changed, except as permitted
in this Lease; and
(n) Any failure by Tenant to discharge any lien or encumbrance placed on the Project or any
part thereof in violation of this Lease within ten (10) days after the date such lien or
encumbrance is filed or recorded against the Project or any part thereof.
Tenant agrees that any notice given by Landlord pursuant to Paragraph 25(j), (k) or (l)
above shall satisfy the requirements for notice under California Code of Civil Procedure Section
1161, and Landlord shall not be required to give any additional notice in order to be entitled to
commence an unlawful detainer proceeding.
26.
Landlords Remedies
(a)
Termination.
In the event of any Default by Tenant, then in addition to any other
remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the
immediate option to terminate this Lease and all rights of Tenant hereunder by giving written
notice of such intention to terminate. In the event that Landlord shall elect to so terminate
this Lease then Landlord may recover from Tenant:
(1) the worth at the time of award of any unpaid Rent and any other sums
due and payable which have been earned at the time of such termination; plus
(2) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable which would have been earned after
termination until the time of award exceeds the amount of such rental loss Tenant
proves could have been reasonably avoided; plus
(3) the worth at the time of award of the amount by which the unpaid
Rent and any other sums due and payable for the balance of the term of this Lease
30
after the time of award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided; plus
(4) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenants failure to perform its obligations under
this Lease or which in the ordinary course would be likely to result therefrom,
including, without limitation, (A) any costs or expenses incurred by Landlord (1) in
retaking possession of the Premises; (2) in maintaining, repairing, preserving,
restoring, replacing, cleaning, altering, remodeling or rehabilitating the Premises or
any affected portions of the Building or the Project, including such actions
undertaken in connection with the reletting or attempted reletting of the Premises
to a new tenant or tenants; (3) for leasing commissions, advertising costs and other
expenses of reletting the Premises; or (4) in carrying the Premises, including taxes,
insurance premiums, utilities and security precautions; (B) any unearned brokerage
commissions paid in connection with this Lease; (C) reimbursement of any
previously waived or abated Base Rent or Additional Rent or any free rent or
reduced rental rate granted hereunder; and (D) any concession made or paid by
Landlord to the benefit of Tenant in consideration of this Lease including, but not
limited to, any moving allowances, contributions, payments or loans by Landlord
for tenant improvements or build-out allowances (including without limitation, any
unamortized portion of the Tenant Improvement Allowance (such Tenant
Improvement Allowance to be amortized over the Term in the manner reasonably
determined by Landlord), if any, and any outstanding balance (principal and
accrued interest) of the Tenant Improvement Loan, if any), or assumptions by
Landlord of any of Tenants previous lease obligations; plus
(5) such reasonable attorneys fees incurred by Landlord as a result of a
Default, and costs in the event suit is filed by Landlord to enforce such remedy; and plus
(6) at Landlords election, such other amounts in addition to or in lieu of
the foregoing as may be permitted from time to time by applicable law.
As used in subparagraphs (1) and (2) above, the worth at the time of award is computed by
allowing interest at an annual rate equal to twelve percent (12%) per annum or the maximum rate
permitted by law, whichever is less. As used in subparagraph (3) above, the worth at the time of
award is computed by discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award, plus one percent (1 %). Tenant waives redemption or relief
from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other
pertinent present or future Law, in the event Tenant is evicted or Landlord takes possession of the
Premises by reason of any Default of Tenant hereunder.
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(b)
Continuation of Lease.
In the event of any Default by Tenant, then in
addition to any other remedies available to Landlord at law or in equity and under
this Lease, Landlord shall have the remedy described in California Civil Code
Section 1951.4 (Landlord may continue this Lease in effect after Tenants Default
and abandonment and recover Rent as it becomes due, provided Tenant has the
right to sublet or assign, subject only to reasonable limitations). In addition,
Landlord shall not be liable in any way whatsoever for its failure or refusal to relet
the Premises. For purposes of this Paragraph 26(b), the following acts by Landlord
will not constitute the termination of Tenants right to possession of the Premises:
(1) Acts of maintenance or preservation or efforts to relet the Premises,
including, but not limited to, alterations, remodeling, redecorating, repairs,
replacements and/or painting as Landlord shall consider advisable for the purpose
of reletting the Premises or any part thereof; or
(2) The appointment of a receiver upon the initiative of Landlord to
protect Landlords interest under this Lease or in the Premises.
(c)
Re-entry.
In the event of any Default by Tenant, Landlord shall also have
the right, with or without terminating this Lease, in compliance with applicable
law, to re-enter the Premises and remove all persons and property from the
Premises; such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant.
(d)
Reletting.
In the event of the abandonment of the Premises by Tenant or
in the event that Landlord shall elect to re-enter as provided in Paragraph 26(c) or
shall take possession of the Premises pursuant to legal proceeding or pursuant to
any notice provided by law, then if Landlord does not elect to terminate this Lease
as provided in Paragraph 26(a), Landlord may from time to time, without
terminating this Lease, relet the Premises or any part thereof for such term or terms
and at such rental or rentals and upon such other terms and conditions as Landlord
in its sole discretion may deem advisable with the right to make alterations and
repairs to the Premises in Landlords sole discretion. In the event that Landlord
shall elect to so relet, then rentals received by Landlord from such reletting shall be
applied in the following order: (1) to reasonable attorneys fees incurred by
Landlord as a result of a Default and costs in the event suit is filed by Landlord to
enforce such remedies; (2) to the payment of any indebtedness other than Rent due
hereunder from Tenant to Landlord; (3) to the payment of any costs of such
reletting; (4) to the payment of the costs of any alterations and repairs to the
Premises; (5) to the payment of Rent due and unpaid hereunder; and (6) the
residue, if any, shall be held by Landlord and applied in payment of future Rent
and other sums payable by Tenant hereunder as the same may become due and
payable hereunder. Should that portion of such rentals received from such reletting
during any month, which is applied to the payment of Rent hereunder, be less than
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the Rent payable during the month by Tenant hereunder, then Tenant shall pay such deficiency to
Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord,
as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making
such alterations and repairs not covered by the rentals received from such reletting.
(e)
Termination.
No re-entry or taking of possession of the Premises by
Landlord pursuant to this Paragraph 26 shall be construed as an election to
terminate this Lease unless a written notice of such intention is given to Tenant or
unless the termination thereof is decreed by a court of competent jurisdiction.
Notwithstanding any reletting without termination by Landlord because of any
Default by Tenant, Landlord may at any time after such reletting elect to terminate
this Lease for any such Default.
(f)
Cumulative Remedies.
The remedies herein provided are not exclusive
and Landlord shall have any and all other remedies provided herein or by law or in
equity.
(g)
No Surrender.
No act or conduct of Landlord, whether consisting of the
acceptance of the keys to the Premises, or otherwise, shall be deemed to be or constitute an
acceptance of the surrender of the Premises by Tenant prior to the expiration of the Term, and such
acceptance by Landlord of surrender by Tenant shall only flow from and must be evidenced by a
written acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease
by Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing that
such merger take place, but shall operate as an assignment to Landlord of any and all existing
subleases, or Landlord may, at its option, elect in writing to treat such surrender as a merger
terminating Tenants estate under this Lease, and thereupon Landlord may terminate any or all such
subleases by notifying the sublessee of its election so to do within five (5) days after such
surrender.
27.
Landlords Right To Perform Tenants Obligations
(a) Without limiting the rights and remedies of Landlord contained in Paragraph 26 above, if
Tenant shall be in Default in the performance of any of the terms, provisions, covenants or
conditions to be performed or complied with by Tenant pursuant to this Lease, then Landlord may at
Landlords option, without any obligation to do so, and without notice to Tenant perform any such
term, provision, covenant, or condition, or make any such payment and Landlord by reason of so
doing shall not be liable or responsible for any loss or damage thereby sustained by Tenant or
anyone holding under or through Tenant or any of Tenants Agents.
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(b) Without limiting the rights of Landlord under Paragraph 27(a) above,
Landlord shall have the right at Landlords option, without any obligation to do
so, to perform any of Tenants covenants or obligations under this Lease without
notice to Tenant in the case of an emergency, as determined by Landlord in its
sole and absolute judgment, or if Landlord otherwise determines in its sole
discretion that such performance is necessary or desirable for the proper
management and operation of the Building or the Project or for the preservation of
the rights and interests or safety of other tenants of the Building or the Project.
(c) If Landlord performs any of Tenants obligations hereunder in accordance
with this Paragraph 27, the full amount of the cost and expense incurred or the
payment so made or the amount of the loss so sustained shall immediately be
owing by Tenant to Landlord, and Tenant shall promptly pay to Landlord upon
demand, as Additional Rent, the full amount thereof with interest thereon from the
date of payment by Landlord at the lower of (1) ten percent (10%) per annum, or
(2) the highest rate permitted by applicable law.
28.
Attorneys Fees
(a) If either party hereto fails to perform any of its obligations under this
Lease or if any dispute arises between the parties hereto concerning the meaning or
interpretation of any provision of this Lease, then the defaulting party or the party
not prevailing in such dispute, as the case may be, shall pay any and all costs and
expenses incurred by the other party on account of such default and/or in enforcing
or establishing its rights hereunder, including, without limitation, court costs and
reasonable attorneys fees and disbursements. Any such attorneys fees and other
expenses incurred by either party in enforcing a judgment in its favor under this
Lease shall be recoverable separately from and in addition to any other amount
included in such judgment, and such attorneys fees obligation is intended to be
severable from the other provisions of this Lease and to survive and not be merged
into any such judgment.
(b) Without limiting the generality of Paragraph 27(a) above, if Landlord
utilizes the services of an attorney for the purpose of collecting any Rent due and
unpaid by Tenant or in connection with any other breach of this Lease by Tenant,
Tenant agrees to pay Landlord actual attorneys fees as determined by Landlord for
such services, regardless of the fact that no legal action may be commenced or filed
by Landlord.
29.
Taxes
Tenant shall be liable for and shall pay, prior to delinquency, all taxes levied against
Tenants Property. If any Alteration installed by Tenant pursuant to Paragraph 13 or any of
Tenants Property is assessed and taxed with the Project or
34
Building, Tenant shall pay such taxes to Landlord within ten (10) days after delivery to
Tenant of a statement therefor.
30.
Effect Of Conveyance
The term Landlord as used in this Lease means, from time to time, the then current owner of
the Building or the Project containing the Premises, so that, in the event of any sale of the
Building or the Project, Landlord shall be and hereby is entirely freed and relieved of all
covenants and obligations of Landlord hereunder, and it shall be deemed and construed, without
further agreement between the parties and the purchaser at any such sale, that the purchaser of
the Building or the Project has assumed and agreed to carry out any and all covenants and
obligations of Landlord hereunder.
31.
Tenants Estoppel Certificate
From time to time, upon written request of Landlord, Tenant shall execute, acknowledge and
deliver to Landlord or its designee, a written certificate stating (a) the date this Lease was
executed, the Commencement Date of the Term and the date the Term expires; (b) the date Tenant
entered into occupancy of the Premises; (c) the amount of Rent and the date to which such Rent has
been paid; (d) that this Lease is in full force and effect and has not been assigned, modified,
supplemented or amended in any way (or, if assigned, modified, supplemented or amended, specifying
the date and terms of any agreement so affecting this Lease); (e) that this Lease represents the
entire agreement between the parties with respect to Tenants right to use and occupy the Premises
(or specifying such other agreements, if any); (f) that all obligations under this Lease to be
performed by Landlord as of the date of such certificate have been satisfied (or specifying those
as to which Tenant claims that Landlord has yet to perform); (g) that all required contributions by
Landlord to Tenant on account of Tenants improvements have been received (or stating exceptions
thereto); (h) that on such date there exist no defenses or offsets that Tenant has against the
enforcement of this Lease by Landlord (or stating exceptions thereto); (i) that no Rent or other
sum payable by Tenant hereunder has been paid more than one (1) month in advance (or stating
exceptions thereto); (j) that security has been deposited with Landlord, stating the original
amount thereof and any increases thereto; and (k) any other matters evidencing the status of this
Lease that may be required either by a lender making a loan to Landlord to be secured by a deed of
trust covering the Building or the Project or by a purchaser of the Building or the Project. Any
such certificate delivered pursuant to this Paragraph 31 may be relied upon by a prospective
purchaser of Landlords interest or a mortgagee of Landlords interest or assignee of any mortgage
upon Landlords interest in the Premises. If Tenant shall fail to provide such certificate within
ten (10) days of receipt by Tenant of a written request by Landlord as herein provided, such
failure shall, at Landlords election,
35
constitute a Default under this Lease, and Tenant shall be deemed to have given such certificate as
above provided without modification and shall be deemed to have admitted the accuracy of any
information supplied by Landlord to a prospective purchaser or mortgagee.
32.
Subordination
Landlord shall have the right to cause this Lease to be and remain subject and subordinate to
any and all mortgages, deeds of trust and ground leases, if any (Encumbrances) that are now or
may hereafter be executed covering the Premises, or any renewals, modifications, consolidations,
replacements or extensions thereof, for the full amount of all advances made or to be made
thereunder and without regard to the time or character of such advances, together with interest
thereon and subject to all the terms and provisions thereof; provided only, that in the event of
termination of any such ground lease or upon the foreclosure of any such mortgage or deed of trust,
so long as Tenant is not in default, the holder thereof (Holder) shall agree to recognize
Tenants rights under this Lease as long as Tenant shall pay the Rent and observe and perform all
the provisions of this Lease to be observed and performed by Tenant. Within ten (10) days after
Landlords written request, Tenant shall execute, acknowledge and deliver any and all reasonable
documents required by Landlord or the Holder to effectuate such subordination. If Tenant fails to
do so, such failure shall constitute a Default by Tenant under this Lease. Notwithstanding anything
to the contrary set forth in this Paragraph 32, Tenant hereby attorns and agrees to attorn to any
person or entity purchasing or otherwise acquiring the Premises at any sale or other proceeding or
pursuant to the exercise of any other rights, powers or remedies under such Encumbrance.
33.
Environmental Covenants
(a) Prior to executing this Lease, Tenant has completed, executed and delivered to Landlord a
Hazardous Materials Disclosure Certificate (Initial Disclosure Certificate), a fully completed
copy of which is attached hereto as
Exhibit D
and incorporated herein by this reference. Tenant
covenants, represents and warrants to Landlord that the information on the Initial Disclosure
Certificate is true and correct and accurately describes the Hazardous Materials which will be
manufactured, treated, used or stored on or about the Premises by Tenant or Tenants Agents. Tenant
shall, on each anniversary of the Commencement Date and at such other times as Tenant desires to
manufacture, treat, use or store on or about the Premises new or additional Hazardous Materials
which were not listed on the Initial Disclosure Certificate, complete, execute and deliver to
Landlord an updated Disclosure Certificate (each, an Updated Disclosure Certificate) describing
Tenants then current and proposed future uses of Hazardous Materials on or about the Premises,
which Updated Disclosure Certificates shall be in the
36
same format as that which is set forth in
Exhibit D
or in such updated format as Landlord may
require from time to time. Tenant shall deliver an Updated Disclosure Certificate to Landlord not
less than thirty (30) days prior to the date Tenant intends to commence the manufacture, treatment,
use or storage of new or additional Hazardous Materials on or about the Premises, and Landlord
shall have the right to approve or disapprove such new or additional Hazardous Materials in its
sole and absolute discretion. Tenant shall make no use of Hazardous Materials on or about the
Premises except as described in the Initial Disclosure Certificate or as otherwise approved by
Landlord in writing in accordance with this Paragraph 33(a).
(b) As used in this Lease, the term Hazardous Materials shall mean and
include any substance that is or contains (1) any hazardous substance as now or
hereafter defined in § 101(14) of the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended (CERCLA) (42 U.S.C.
§ 9601
et seq.)
or any regulations promulgated under CERCLA; (2) any hazardous waste as now or
hereafter defined in the Resource Conservation and Recovery Act, as amended (RCRA) (42 U.S.C. §
6901
et seq.)
or any regulations promulgated under RCRA; (3) any substance now or hereafter
regulated by the Toxic Substances Control Act, as amended (TSCA) (15 U.S.C. § 2601
et seq.)
or
any regulations promulgated under TSCA; (4) petroleum, petroleum by-products, gasoline, diesel
fuel, or other petroleum hydrocarbons; (5) asbestos and asbestos-containing material, in any form,
whether friable or non-friable; (6) polychlorinated biphenyls; (7) lead and lead-containing
materials; or (8) any additional substance, material or waste (A) the presence of which on or about
the Premises (i) requires reporting, investigation or remediation under any Environmental Laws (as
hereinafter defined), (ii) causes or threatens to cause a nuisance on the Premises or any adjacent
area or property or poses or threatens to pose a hazard to the health or safety of persons on the
Premises or any adjacent area or property, or (iii) which, if it emanated or migrated from the
Premises, could constitute a trespass, or . (B) which is now or is hereafter classified or
considered to be hazardous or toxic under any Environmental Laws.
(c) As used in this Lease, the term Environmental Laws shall mean and
include (1) CERCLA, RCRA and TSCA; and (2) any other federal, state or local
laws, ordinances, statutes, codes, rules, regulations, orders or decrees now or
hereinafter in effect relating to (A) pollution, (B) the protection or regulation of
human health, natural resources or the environment, (C) the treatment, storage or
disposal of Hazardous Materials, or (D) the emission, discharge, release or
threatened release of Hazardous Materials into the environment.
(d) Tenant agrees that during its use and occupancy of the Premises it will
(1) not (A) permit Hazardous Materials to be present on or about the Premises
except in a manner and quantity necessary for the ordinary performance of Tenants
37
business or (B) release, discharge or dispose of any Hazardous Materials on, in, at, under, or
emanating from, the Premises, the Building or the Project; (2) comply with all Environmental Laws
relating to the Premises and the use of Hazardous Materials on or about the Premises and not engage
in or permit others to engage in any activity at the Premises in violation of any Environmental
Laws; and (3) immediately notify Landlord of (A) any inquiry, test, investigation or enforcement
proceeding by any governmental agency or authority against Tenant, Landlord or the Premises,
Building or Project relating to any Hazardous Materials or under any Environmental Laws or (B) the
occurrence of any event or existence of any condition that would cause a breach of any of the
covenants set forth in this Paragraph 33.
(e) If Tenants use of Hazardous Materials on or about the Premises results in
a release, discharge or disposal of Hazardous Materials on, in, at, under, or
emanating from, the Premises, the Building or the Project, Tenant agrees to
investigate, clean up, remove or remediate such Hazardous Materials in full
compliance with (1) the requirements of (A) all Environmental Laws and (B) any
governmental agency or authority responsible for the enforcement of any
Environmental Laws; and (2) any additional requirements of Landlord that are
reasonably necessary to protect the value of the Premises, the Building or the
Project.
(f) Upon reasonable notice to Tenant, Landlord may inspect the Premises and
surrounding areas for the purpose of determining whether there exists on or about
the Premises any Hazardous Material or other condition or activity that is in
violation of the requirements of this Lease or of any Environmental Laws. Such
inspections may include, but are not limited to, entering the Premises or adjacent
property with drill rigs or other machinery for the purpose of obtaining laboratory
samples. Landlord shall not be limited in the number of such inspections during
the Term of this Lease. In the event (1) such inspections reveal the presence of any
such Hazardous Material or other condition or activity in violation of the
requirements of this Lease or of any Environmental Laws, or (2) Tenant or its
Agents contribute or knowingly consent to the presence of any Hazardous Materials
in, on, under, through or about the Premises, the Building or the Project or
exacerbate the condition of or the conditions caused by any Hazardous Materials in,
on, under, through or about the Premises, the Building or the Project, Tenant shall
reimburse Landlord for the cost of such inspections within ten (10) days of receipt
of a written statement therefor. Tenant will supply to Landlord such historical and
operational information regarding the Premises and surrounding areas as may be
reasonably requested to facilitate any such inspection and will make available for
meetings appropriate personnel having knowledge of such matters. Tenant agrees
to give Landlord at least sixty (60) days prior notice of its intention to vacate the
Premises so that Landlord will have an opportunity to perform such an inspection
prior to such vacation. The right granted to Landlord herein to perform inspections
38
shall not create a duty on Landlords part to inspect the Premises, or liability on the part of
Landlord for Tenants use, storage, treatment or disposal of Hazardous Materials, it being
understood that Tenant shall be solely responsible for all liability in connection therewith.
(g) Landlord shall have the right, but not the obligation, prior or subsequent to a Default,
without in any way limiting Landlords other rights and remedies under this Lease, to enter upon
the Premises, or to take such other actions as it deems necessary or advisable, to investigate,
clean up, remove or remediate any Hazardous Materials or contamination by Hazardous Materials
present on, in, at, under, or emanating from, the Premises, the Building or the Project in
violation of Tenants obligations under this Lease or under any Environmental Laws. Notwithstanding
any other provision of this Lease, Landlord shall also have the right, at its election, in its own
name or as Tenants agent, to negotiate, defend, approve and appeal, at Tenants expense, any
action taken or order issued by any governmental agency or authority with regard to any such
Hazardous Materials or contamination by Hazardous Materials. All costs and expenses paid or
incurred by Landlord in the exercise of the rights set forth in this Paragraph 33 shall be payable
by Tenant upon demand.
(h) Tenant shall surrender the Premises to Landlord upon the expiration or earlier
termination of this Lease free of debris, waste or Hazardous Materials placed on, about or near the
Premises by Tenant or Tenants Agents and, to the extent of any such debris, waste or Hazardous
Materials, in a condition which complies with all Environmental Laws and any additional
requirements of Landlord that are reasonably necessary to protect the value of the Premises, the
Building or the Project, including, without limitation, the obtaining of any closure permits or
other governmental permits or approvals related to Tenants use of Hazardous Materials in or about
the Premises. Tenants obligations and liabilities pursuant to the provisions of this Paragraph 33
shall survive the expiration or earlier termination of this Lease. If it is determined by Landlord
that the condition of all or any portion of the Premises, the Building, and/or the Project is not
in compliance with the provisions of this Lease with respect to Hazardous Materials, including,
without limitation, all Environmental Laws, at the expiration or earlier termination of this Lease,
then at Landlords sole option, Landlord may require Tenant to hold over possession of the
Premises until Tenant can surrender the Premises to Landlord in the condition in which the Premises
existed as of the Commencement Date and prior to the appearance of such Hazardous Materials except
for normal wear and tear, including, without limitation, the conduct or performance of any closures
as required by any Environmental Laws. The burden of proof hereunder shall be upon Tenant. For
purposes hereof, the term normal wear and tear shall not include any deterioration in the
condition or diminution of the value of any portion of the Premises, the Building, and/or the
Project in any manner whatsoever related to directly, or indirectly, Hazardous Materials. Any
39
such holdover by Tenant will be with Landlords consent, will not be terminable by Tenant in any
event or circumstance and will otherwise be subject to the provisions of Paragraph 36 of this
Lease.
(i) Tenant agrees to indemnify and hold harmless Landlord from and against any and all
claims, losses (including, without limitation, loss in value of the Premises, the Building or the
Project, liabilities and expenses (including attorneys fees)) sustained by Landlord attributable
to (1) any Hazardous Materials placed on or about the Premises, the Building or the Project by
Tenant or Tenants Agents, or (2) Tenants breach of any provision of this Paragraph 33.
(j) The provisions of this Paragraph 33 shall survive the expiration or earlier termination
of this Lease.
34.
Notices
All notices and demands which are required or may be permitted to be given to either party by
the other hereunder shall be in writing and shall be sent by United States mail, postage prepaid,
certified, or by personal delivery or overnight courier, addressed to the addressee at Tenants
Address or Landlords Address as specified in the Basic Lease Information, or to such other place
as either party may from time to time designate in a notice to the other party given as provided
herein. Copies of all notices and demands given to Landlord shall additionally be sent to
Landlords property manager at the address specified in the Basic Lease Information or at such
other address as Landlord may specify in writing from time to time. Notice shall be deemed given
upon actual receipt (or attempted delivery if delivery is refused ), if personally delivered, or
one (1) business day following deposit with a reputable overnight courier that provides a receipt,
or on the third (3rd) day following deposit in the United States mail in the manner described
above.
35.
Waiver
The waiver of any breach of any term, covenant or condition of this Lease shall not be deemed
to be a waiver of such term, covenant or condition or of any subsequent breach of the same or any
other term, covenant or condition herein contained. The subsequent acceptance of Rent by Landlord
shall not be deemed to be a waiver of any preceding breach by Tenant, other than the failure of
Tenant to pay the particular rental so accepted, regardless of Landlords knowledge of such
preceding breach at the time of acceptance of such Rent. No delay or omission in the exercise of
any right or remedy of Landlord in regard to any Default by Tenant shall impair such a right or
remedy or be construed as a waiver. Any waiver by Landlord of any Default must be in writing and
shall not be a waiver of any other Default concerning the same or any other provisions of this
Lease.
40
36.
Holding Over
Any holding over after the expiration of the Term, without the express written consent of
Landlord, shall constitute a Default and, without limiting Landlords remedies provided in this
Lease, such holding over shall be construed to be a tenancy at sufferance, at a rental rate of one
hundred fifty percent (150%) of the Base Rent last due in this Lease, plus Additional Rent, and
shall otherwise be on the terms and conditions herein specified, so far as applicable; provided,
however, in no event shall any renewal or expansion option or other similar right or option
contained in this Lease be deemed applicable to any such tenancy at sufferance. If the Premises are
not surrendered at the end of the Term or sooner termination of this Lease, and in accordance with
the provisions of Paragraphs 12 and 33(h), Tenant shall indemnify, defend and hold Landlord
harmless from and against any and all loss or liability resulting from delay by Tenant in so
surrendering the Premises including, without limitation, any loss or liability resulting from any
claim against Landlord made by any succeeding tenant or prospective tenant founded on or resulting
from such delay and losses to Landlord due to lost opportunities to lease any portion of the
Premises to any such succeeding tenant or prospective tenant, together with, in each case, actual
attorneys fees and costs.
37.
Successors And Assigns
The terms, covenants and conditions of this Lease shall, subject to the provisions as to
assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all
of the parties hereto. If Tenant shall consist of more than one entity or person, the obligations
of Tenant under this Lease shall be joint and several.
38.
Time
Time is of the essence of this Lease and each and every term, condition and provision herein.
39.
Brokers
Landlord and Tenant each represents and warrants to the other that neither it nor its officers
or agents nor anyone acting on its behalf has dealt with any real estate broker except the
Broker(s) specified in the Basic Lease Information in the negotiating or making of this Lease, and
each party agrees to indemnify and hold harmless the other from any claim or claims, and costs and
expenses, including attorneys fees, incurred by the indemnified party in conjunction with any such
claim or claims of any other broker or brokers to a commission in connection with this Lease as a
result of the actions of the indemnifying party. Landlord shall be responsible for a commission
payable to Landlords Broker in connection with the
41
execution of this Lease pursuant to a separate written agreement between Landlord and Landlords
Broker, and Landlords Broker shall be solely responsible for any commission or fee payable to
Tenants Broker in connection with this Lease or the subject matter hereof.
40.
Limitation Of Liability
Tenant agrees that, in the event of any default or breach by Landlord with respect to any of
the terms of the Lease to be observed and performed by Landlord (1) Tenant shall look solely to the
then-current landlords interest in the Building for the satisfaction of Tenants remedies for the
collection of a judgment (or other judicial process) requiring the payment of money by Landlord;
(2) no other property or assets of Landlord, its partners, shareholders, officers, directors,
employees, investment advisors, or any successor in interest of any of them (collectively, the
Landlord Parties) shall be subject to levy, execution or other enforcement procedure for the
satisfaction of Tenants remedies; (3) no personal liability shall at any time be asserted or
enforceable against the Landlord Parties; and (4) no judgment will be taken against the Landlord
Parties. The provisions of this section shall apply only to the Landlord and the parties herein
described, and shall not be for the benefit of any insurer nor any other third party.
41.
Financial Statements
Within ten (10) days after Landlords request, Tenant shall deliver to Landlord the then
current financial statements of Tenant (including interim periods following the end of the last
fiscal year for which annual statements are available), prepared or compiled by a certified public
accountant, including a balance sheet and profit and loss statement for the most recent prior year,
all prepared in accordance with generally accepted accounting principles consistently applied.
42.
Rules And Regulations
Tenant agrees to comply with such reasonable rules and regulations as Landlord may adopt from
time to time for the orderly and proper operation of the Building and the Project. Such rules may
include but shall not be limited to the following: (a) restriction of employee parking to a
limited, designated area or areas; and (b) regulation of the removal, storage and disposal of
Tenants refuse and other rubbish at the sole cost and expense of Tenant. The then current rules
and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord
shall not be responsible to Tenant for the failure of any other person to observe and abide by any
of said rules and regulations. Landlords current rules and regulations are attached to this Lease
as
Exhibit C.
42
43.
Mortgagee Protection
(a)
Modifications for Lender.
If, in connection with obtaining financing for
the Project or any portion thereof, Landlords lender shall request reasonable
modifications to this Lease as a condition to such financing, Tenant shall not
unreasonably withhold, delay or defer its consent to such modifications, provided
such modifications do not materially adversely affect Tenants rights or increase
Tenants obligations under this Lease.
(b)
Rights to Cure.
Tenant agrees to give to any trust deed or mortgage
holder (Holder), by registered mail, at the same time as it is given to Landlord, a
copy of any notice of default given to Landlord, provided that prior to such notice
Tenant has been notified, in writing, (by way of notice of assignment of rents and
leases, or otherwise) of the address of such Holder. Tenant further agrees that if
Landlord shall have failed to cure such default within the time provided for in this
Lease, then the Holder shall have an additional twenty (20) days after expiration of
such period, or after receipt of such notice from Tenant (if such notice to the Holder is
required by this Paragraph 43(b)), whichever shall last occur within which to cure such
default or if such default cannot be cured within that time, then such additional time as may
be necessary if within such twenty (20) days, any Holder has commenced and is diligently
pursuing the remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings, if necessary to effect such cure), in which event
this Lease shall not be terminated.
44.
Entire Agreement
This Lease, including the Exhibits and any Addenda attached hereto, which are hereby
incorporated herein by this reference, contains the entire agreement of the parties hereto, and no
representations, inducements, promises or agreements, oral or otherwise, between the parties, not
embodied herein or therein, shall be of any force and effect.
45.
Interest
Any installment of Rent and any other sum due from Tenant under this Lease which is not
received by Landlord within ten (10) days from when the same is due shall bear interest from the
date such payment was originally due under this Lease until paid at an annual rate equal to the
maximum rate of interest permitted by law. Payment of such, interest shall not excuse or cure any
Default by Tenant. In addition, Tenant shall pay all costs and attorneys fees incurred by Landlord
in collection of such amounts.
43
46.
Construction
This Lease shall be construed and interpreted in accordance with the laws of the State of
California. The parties acknowledge and agree that no rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall be employed in the interpretation
of this Lease, including the Exhibits and any Addenda attached hereto. All captions in this Lease
are for reference only and shall not be used in the interpretation of this Lease. Whenever required
by the context of this Lease, the singular shall include the plural, the masculine shall include
the feminine, and vice versa. If any provision of this Lease shall be determined to be illegal or
unenforceable, such determination shall not affect any other provision of this Lease and all such
other provisions shall remain in full force and effect.
47.
Representations And Warranties Of Tenant
Tenant hereby makes the following representations and warranties, each of which is material
and being relied upon by Landlord, is true in all respects as of the date of this Lease, and shall
survive the expiration or termination of the Lease.
(a) If Tenant is an entity, Tenant is duly organized, validly existing and in
good standing under the laws of the state of its organization and the persons
executing this Lease on behalf of Tenant have the full right and authority to
execute this Lease on behalf of Tenant and to bind Tenant without the consent or
approval of any other person or entity. Tenant has full power, capacity, authority
and legal right to execute and deliver this Lease and to perform all of its
obligations hereunder. This Lease is a legal, valid and binding obligation of
Tenant, enforceable in accordance with its terms.
(b) Tenant has not (1) made a general assignment for the benefit of creditors,
(2) filed any voluntary petition in bankruptcy or suffered the filing of an
involuntary petition by any creditors, (3) suffered the appointment of a receiver to
take possession of all or substantially all of its assets, (4) suffered the attachment
or other judicial seizure of all or substantially all of its assets, (5) admitted in
writing its inability to pay its debts as they come due, or (6) made an offer of
settlement, extension or composition to its creditors generally.
48.
Security
(a) Tenant acknowledges and agrees that, while Landlord may engage security personnel to
patrol the Building or the Project, Landlord is not providing any security services with respect to
the Premises, the Building or the Project and that Landlord shall not be liable to Tenant for, and
Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage
suffered or incurred
44
by Tenant in connection with any unauthorized entry into the Premises or any other breach of
security with respect to the Premises, the Building or the Project.
(b) Tenant hereby agrees to the exercise by Landlord and Landlords Agents, within their
sole discretion, of such security measures as, but not limited to, the evacuation of the Premises,
the Building or the Project for cause, suspected cause or for drill purposes, the denial of any
access to the Premises, the Building or the Project and other similarly related actions that it
deems necessary to prevent any threat of property damage or bodily injury. The exercise of such
security measures by Landlord and Landlords Agents, and the resulting interruption of service and
cessation of Tenants business, if any, shall not be deemed an eviction or disturbance of Tenants
use and possession of the Premises, or any part thereof, or render Landlord or Landlords Agents
liable to Tenant for any resulting damages or relieve Tenant from Tenants obligations under this
Lease.
49.
Jury Trial Waiver
Tenant hereby waives any right to trial by jury with respect to any action or proceeding (i)
brought by Landlord, Tenant or any other party, relating to (A) this Lease and/or any
understandings or prior dealings between the parties hereto, or (B) the Premises, the Building or
the Project or any part thereof, or (ii) to which Landlord is a party. Tenant hereby agrees that
this Lease constitutes a written consent to waiver of trial by jury pursuant to the provisions of
California Code of Civil Procedure Section 631, and Tenant does hereby constitute and appoint
Landlord its true and lawful attorney-in-fact, which appointment is coupled with an interest, and
Tenant does hereby authorize and empower Landlord, in the name, place and stead of Tenant, to file
this Lease with the clerk or judge of any court of competent jurisdiction as a statutory written
consent to waiver of trial by jury.
Landlord and Tenant have executed and delivered this Lease as of the Lease Date specified in
the Basic Lease Information.
45
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Landlord:
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Tenant:
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Harbor Investment Partners,
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Financial Engines, Inc.,
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a California general partnership
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a California corporation
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By:
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Aetna Life Insurance Company,
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a Connecticut corporation,
General Partner
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By:
Print Name:
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/s/ Jeff Maggioncalda
Jeff Maggioncalda
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By:
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Allegis Realty Investors
llc
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Its:
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President CEO
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Its Investment Advisor and Agent
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By:
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By:
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/s/ Cynthia Stevenin
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Print Name:
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Cynthia Stevenin
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Its:
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Vice President
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46
Exhibit B
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Commencement and Expiration Date Memorandum
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Landlord:
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Harbor Investment Partners
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Tenant:
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Financial Engines, Inc.
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Lease Date:
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July 14, 1997
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Premises:
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Located at 1804 Embarcadero Road, Suite 200,
Palo Alto, California 94303
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Tenant hereby accepts the Premises as being in the condition required under the Lease, with all
Tenant Improvements completed (except for minor punchlist items which Landlord agrees to complete).
The
Commencement Date of the Lease is hereby established as
,
1997 and the Expiration Date is
,
___.
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Tenant:
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Financial Engines, Inc.,
a California corporation
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By:
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/s/ Jeff Maggioncalda
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Print Name:
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JEFF MAGGIONCALDA
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Its:
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PRESIDENT
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Approved and Agreed:
LandLord:
Harbor Investment Partners,
a California general partnership
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By:
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Its: _______________________________
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B-1
Exhibit C
Rules And Regulations
This exhibit,
entitled Rules and Regulations, is and shall constitute
Exhibit C
to the Lease
Agreement, dated as of the Lease Date, by and between landlord and Tenant for the Premises. The
terms and conditions of this
Exhibit C
are hereby incorporated into and are made a part of the
Lease. Capitalized terms used, but not otherwise defined, in this
Exhibit C
have the meanings
ascribed to such terms in the Lease.
1. Tenant shall not use any
method of heating or air conditioning other than that supplied by
Landlord without the consent of Landlord.
2. All window coverings
installed by Tenant and visible from the outside of the building require the
prior written approval of Landlord.
3. Tenant shall not use, keep
or permit to be used or kept any foul or noxious gas or substance or
any flammable or combustible materials on or around the Premises, except to the extent that Tenant
is permitted to use the same under the terms of Paragraph 33 of the Lease.
4. Tenant shall not alter any
lock or install any new locks or bolts on any door at the Premises
without the prior consent of Landlord.
5. Tenant shall not make any duplicate keys without the prior consent of Landlord.
6. Tenant shall park motor vehicles in parking areas designated by Landlord except for loading and
unloading. During those periods of loading and unloading, Tenant shall not unreasonably interfere
with traffic flow around the Building or the Project and loading and unloading areas of other
tenants. Tenant shall not park motor vehicles in designated parking areas after the conclusion of
normal daily business activity.
7. Tenant shall not disturb, solicit or canvas any tenant or other occupant of the Building or
Project and shall cooperate to prevent same.
8. No person shall go on the roof without Landlords permission.
9. Business machines and mechanical equipment belonging to Tenant which cause noise or vibration
that may be transmitted to the structure of the Building, to such a degree as to be objectionable
to Landlord or other tenants, shall be placed and maintained by Tenant, at Tenants expense, on
vibration eliminators or in
C-1
noise-dampening housing or other devices sufficient to eliminate noise or vibration.
10. All goods, including material used to store goods, delivered to the
Premises of Tenant shall be immediately moved into the Premises and shall not be
left in parking or receiving areas overnight.
11. Tractor trailers which must be unhooked or parked with dolly wheels
beyond the concrete loading areas must use steel plates or wood blocks under the
dolly wheels to prevent damage to the asphalt paving surfaces. No parking or
storing of such trailers will be permitted in the auto parking areas of the Project or
on streets adjacent thereto.
12. Forklifts which operate on asphalt paving areas shall not have solid rubber
tires and shall only use tires that do not damage the asphalt.
13. Tenant is responsible for the storage and removal of all trash and refuse.
All such trash and refuse shall be contained in suitable receptacles stored behind
screened enclosures at locations approved by Landlord.
14. Tenant shall not store or permit the storage or placement of goods or
merchandise in or around the common areas surrounding the Premises. No displays or sales of merchandise shall be allowed in the parking lots or other common areas.
15. Tenant shall not permit any animals, including but not limited to, any
household pets, to be brought or kept in or about the Premises, the Building, the
Project or any of the common areas.
Initials:
Tenant:
JM
Landlord:
CDC
C-2
Exhibit
D
Hazardous Materials Disclosure Certificate
Your cooperation in this matter is appreciated. Initially, the information provided by you in
this Hazardous Materials Disclosure Certificate is necessary for the Landlord to evaluate your
proposed uses of the premises (the Premises) and to determine whether to enter into a lease
agreement with you as tenant. If a lease agreement is signed by you and the Landlord (the Lease
Agreement), on an annual basis in accordance with the provisions of Paragraph 33 of the Lease
Agreement, you are to provide an update to the information initially provided by you in this
certificate. Any questions regarding this certificate should be directed to, and when completed,
the certificate should be delivered to:
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Landlord:
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Harbor Investment Partners
c/o Allegis Realty Investors LLC
455 Market, Suite 1540
San Francisco, California 94105
Attention: Cynthia Stevenin
Phone: (415) 538-4800
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Name of (Prospective) Tenant: Financial Engines, Inc.
Mailing Address: 1961 Laudingo Drive Mountain View, CA 94043
Contact
Person, Title and Telephone Number(s): Tara Raydar, Operations and Resource Manager 415-962-1887 x 16
Contact Person for Hazardous Waste Materials Management and Manifests and
Telephone Number(s): Same
Address of (Prospective) Premises: 1804 Embarcadero Rd. Palo Alto CA 94303
Length of (Prospective) initial Term: 60 months
D-l
Describe the proposed operations to take place in, on, or about the Premises,
including, without limitation, principal products processed, manufactured or
assembled, and services and activities to be provided or otherwise conducted.
Existing tenants should describe any proposed changes to on-going operations.
Financial
planning software
(non-manufacturing)
2.
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USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS
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2.1
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Will any Hazardous Materials (as hereinafter defined) be used,
generated, treated, stored or disposed of in, on or about the Premises?
Existing tenants should describe any Hazardous Materials, which
continue to be used, generated, treated, stored or disposed of in, on or
about the Premises.
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Wastes
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Yes
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No
þ
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Chemical Products
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Yes
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No
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Other
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Yes
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No
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If Yes is marked, please explain:
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2.2
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If Yes is marked in Section 2.1, attach a list of any Hazardous
Materials to be used, generated, treated, stored or disposed of in, on
or about the Premises, including the applicable hazard class and an
estimate of the quantities of such Hazardous Materials to be present
on or about the Premises at any given time; estimated annual
throughput; the proposed location(s) and method of storage
(excluding nominal amounts of ordinary household cleaners and
janitorial supplies which are not regulated by any Environmental
Laws, as hereinafter defined); and the proposed location(s) and
method(s) of treatment or disposal for each Hazardous Material,
including, the estimated frequency, and the proposed contractors or
subcontractors. Existing tenants should attach a list setting forth the
information requested above and such list should include actual data
from on-going operations and the identification of any variations in
such information from the prior years certificate.
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D-2
3.
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STORAGE TANKS AND SUMPS
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3.1
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Is any above or below ground storage or treatment of gasoline, diesel,
petroleum, or other Hazardous Materials in tanks or sumps proposed in, on or
about the Premises? Existing tenants should describe any such actual or proposed
activities.
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Yes
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No
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If yes, please explain:
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4.1
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Has your company been issued an EPA Hazardous Waste Generator
I.D. Number? Existing tenants should describe any additional
identification numbers issued since the previous certificate.
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Yes
o
No
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4.2
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Has your company filed a biennial or quarterly reports as a hazardous
waste generator? Existing tenants should describe any new reports
filed.
Yes
o
No
þ
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If yes, attach a copy of the most recent report filed.
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5.
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WASTEWATER TREATMENT AND DISCHARGE
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5.1
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Will your company discharge wastewater or other wastes
to:
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storm drain?
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o
sewer?
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surface water?
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þ
no wastewater or other wastes discharged.
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Existing tenants should indicate any actual discharges. If so,
describe the nature of any proposed or actual discharge(s).
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D-3
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5.2
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Will any such wastewater or waste be treated before discharge?
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Yes
o
No
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If yes, describe the type of treatment proposed to be conducted. Existing
tenants should describe the actual treatment conducted.
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6.1
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Do you plan for any air filtration systems or stacks to be used in your
companys operations in, on or about the Premises that will discharge
into the air; and will such air emissions be monitored? Existing
tenants should indicate whether or not there are any such air filtration
systems or stacks in use in, on or about the Premises which discharge
into the air and whether such air emissions are being monitored.
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Yes
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No
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If yes, please describe:
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6.2
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Do you propose to operate any of the following types of equipment,
or any other equipment requiring an air emissions permit? Existing
tenants should specify any such equipment being operated in, on or
about the Premises.
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Spray booth(s)
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o
Incinerator(s)
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Dip tank(s)
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o
Other (Please describe)
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Drying oven(s)
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þ
No Equipment Requiring Air Permits
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D-4
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6.3
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Please describe (and submit copies of with this Hazardous Materials
Disclosure Certificate) any reports you have filed in the past [thirty-six]
months with any governmental or quasi-governmental agencies or authorities
related to air discharges or clean air requirements and any such reports which
have been issued during such period by any such agencies or authorities with
respect to you or your business operations.
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7.
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HAZARDOUS MATERIALS DISCLOSURES
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7.1
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Has your company prepared or will it be required to prepare a
Hazardous Materials management plan (Management Plan) or
Hazardous Materials Business Plan and Inventory (Business Plan)
pursuant to Fire Department or other governmental or regulatory
agencies requirements? Existing tenants should indicate whether or
not a Management Plan is required and has been prepared.
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Yes
o
No
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If yes, attach a copy of the Management Plan or Business Plan. Existing
tenants should attach a copy of any required updates to the Management Plan
or Business Plan.
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7.2
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Are any of the Hazardous Materials, and in particular chemicals,
proposed to be used in your operations in, on or about the Premises
listed or regulated under Proposition 65? Existing tenants should
indicate whether or not there are any new Hazardous Materials being
so used which are listed or regulated under Proposition 65.
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Yes
o
No
þ
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If yes, please explain:
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D-5
8.
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ENFORCEMENT ACTIONS AND COMPLAINTS
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8.1
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With respect to Hazardous Materials or Environmental Laws, has
your company ever been subject to any agency enforcement actions,
administrative orders, or consent decrees or has your company
received requests for information, notice or demand letters, or any
other inquiries regarding its operations? Existing tenants should
indicate whether or not any such actions, orders or decrees
have been,
or are in the process of being, undertaken or if any such requests have
been received.
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Yes
o
No
þ
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If yes, describe the actions, orders or decrees and any continuing compliance
obligations imposed as a result of these actions, orders or decrees and also
describe any requests, notices or demands, and attach a copy of all such
documents. Existing tenants should describe and attach a copy of any new actions,
orders, decrees, requests, notices or demands not already delivered to Landlord
pursuant to the provisions of Paragraph 33 of the Lease Agreement.
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8.2
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Have there ever been, or are there now pending, any lawsuits against
your company regarding any environmental or health and safety
concerns?
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Yes
o
No
þ
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If yes, describe any such lawsuits and attach copies of the complaint(s),
cross-complaint(s), pleadings and other documents related thereto as requested by
Landlord. Existing tenants should describe and attach a copy of any new
complaint(s), cross-complaint(s), pleadings and other related documents not already
delivered to Landlord pursuant to the provisions of Paragraph 33 of
the Lease Agreement.
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D-6
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8.3
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Have there been any problems or complaints from adjacent tenants, owners or
other neighbors at your companys current facility with regard to environmental or
health and safety concerns? Existing tenants should indicate whether or not there
have been any such problems or complaints from adjacent tenants, owners or other
neighbors at, about or near the Premises and the current status of any such
problems or complaints.
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Yes
o
No
þ
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If yes, please describe. Existing tenants should describe any such problems or
complaints not already disclosed to Landlord under the provisions of the signed
Lease Agreement and the current status of any such problems or complaints.
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9.1
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Attach copies of all permits and licenses issued to your company
with respect to its proposed operations in, on or about the Premises,
including, without limitation, any Hazardous Materials permits,
wastewater discharge permits, air emissions permits, and use permits
or approvals. Existing tenants should attach copies of any new
permits and licenses as well as any renewals of permits or licenses
previously issued.
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As used herein, Hazardous Materials shall mean and include any substance that is or contains
(a) any hazardous substance as now or hereafter defined in § 101(14) of the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA) (42 U.S.C. §
9601
et seq.)
or any regulations promulgated under CERCLA; (b) any hazardous waste as now or
hereafter defined in the Resource Conservation and Recovery Act, as amended (RCRA) (42 U.S.C. §
6901
et seq.)
or any regulations promulgated under RCRA; (c) any substance now or hereafter
regulated by the Toxic Substances Control Act, as amended (TSCA) (15 U.S.C. § 2601
et seq.)
or
any regulations promulgated under TSCA; (d) petroleum, petroleum by-products, gasoline, diesel
fuel, or other petroleum hydrocarbons; (e) asbestos and asbestos-containing material, in any form,
whether friable or non-friable; (f) polychlorinated biphenyls; (g) lead and lead-containing
materials; or (h) any additional substance, material or waste (A) the presence of which on or about
the Premises (i) requires reporting, investigation or remediation under any Environmental Laws (as
hereinafter defined), (ii) causes or threatens to cause a nuisance on the Premises or any adjacent
property or poses or
D-7
threatens to pose a hazard to the health or safety of persons on the Premises or any adjacent
property, or (iii) which, if it emanated or migrated from the Premises, could constitute a
trespass, or (B) which is now or is hereafter classified or considered to be hazardous or toxic
under any Environmental Laws; and Environmental Laws shall mean and include (a) CERCLA, RCRA and
TSCA; and (b) any other federal, state or local laws, ordinances, statutes, codes, rules,
regulations, orders or decrees now or hereinafter in effect relating to (i) pollution, (ii)
the protection or regulation of human health, natural resources or the environment, (iii) the
treatment, storage or disposal of Hazardous Materials, or (iv) the emission, discharge, release or
threatened release of Hazardous Materials into the environment.
The undersigned hereby acknowledges and agrees that this Hazardous Materials Disclosure
Certificate is being delivered to Landlord in connection with the evaluation of a Lease Agreement
and, if such Lease Agreement is executed, will be attached thereto as an exhibit. The undersigned
further acknowledges and agrees that if such Lease Agreement is executed, this Hazardous Materials
Disclosure Certificate will be updated from time to time in accordance with Paragraph 33 of the
Lease Agreement. The undersigned further acknowledges and agrees that the Landlord and its
partners, lenders and representatives may, and will, rely upon the statements, representations,
warranties, and certifications made herein and the truthfulness thereof in entering into the Lease
Agreement and the continuance thereof throughout the term, and any renewals thereof, of the Lease
Agreement. I [print name] JEFF MAGGIONCALDA acting with full authority to bind the (proposed) Tenant
and on behalf of the (proposed) Tenant, certify, represent and warrant that the information
contained in this certificate is true and correct.
D-8
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(PROSPECTIVE) TENANT:
Financial Engines, Inc.,
a California corporation
|
|
|
By:
|
/s/ Jeff Maggioncalda
|
|
|
|
Title: PRESIDENT
|
|
|
|
Date:
|
7/14/97
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|
INITIALS
:
TENANT: JM
LANDLORD: CDS
D-9
First Amendment to Lease Agreement
This
First Amendment To Lease Agreement
(this
Amendment
) is made as of November 24,
1998, by and between
Harbor Investment Partners,
a California general partnership
(
Landlord
), and
Financial Engines, Inc.,
a California corporation (
Tenant
).
Recitals
A. Landlord and Tenant have previously entered into that certain Lease Agreement, dated as of
July 14, 1997 (the
Lease
), which Lease covers certain premises consisting of approximately eleven
thousand one hundred forty-five (11,145) rentable square feet located at 1804 Embarcadero Road,
Suite 200, Palo Alto, California (the
Existing Premises
). Capitalized terms used but not defined
herein shall have the meanings ascribed to them in the Lease.
B. Tenant desires to expand the Existing Premises by leasing that certain additional space
(the
New Premises
) consisting of seventeen thousand six hundred seventy-two (17,672) rentable
square feet, located at 1804 Embarcadero Road, Suite 100, Palo Alto, California, as more
particularly shown on
Exhibit A
attached hereto, effective as of December 15, 1998 (the
New
Premises Commencement Date
) and continuing through December 14, 2001 (the
New Premises Expiration
Date
). Except as stated herein to the contrary, during the New Premises Term (as defined below),
the Premises, as used in the Lease, shall be deemed to include the Existing Premises and the New
Premises.
C. Landlord and Tenant desire to amend the Lease to provide for the addition of the New
Premises for the New Premises Term (as defined below), all upon and subject to the terms, covenants
and conditions hereinafter set forth.
Agreement
Now Therefore,
in consideration of the agreements of Landlord and Tenant herein
contained and other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1.
New Premises
Effective as of the New Premises Commencement Date, Landlord hereby leases to Tenant and
Tenant hereby leases from Landlord the New Premises for a term of thirty-six (36) months (the
New
Premises Term
). Prior to the New Premises Commencement Date, Landlord shall paint and carpet the
New Premises with Building-standard paint and carpeting (the
Tenant Improvements
). Except for the
foregoing Tenant Improvements, Landlord shall deliver the New Premises to Tenant in its AS-IS
condition and Landlord shall have no obligation to improve, remodel or otherwise alter
1
the New Premises prior to or after the New Premises Commencement Date. Notwithstanding the
foregoing, Landlord shall cause the roof to be in good condition and the building systems including
the HVAC, electrical and plumbing systems serving the Premises to be in good working order on the
New Premises Commencement Date. Any claims by Tenant under the preceding sentence shall be made in
writing not later than the thirtieth (30th) day after the New Premises Commencement Date. In the
event Tenant fails to deliver a written claim to Landlord on or before such thirtieth (30th) day,
then Landlord shall be conclusively deemed to have satisfied its obligations under this Paragraph
1.
2.
Early Occupancy
Notwithstanding anything to the contrary contained herein, Tenant shall have the right to
enter upon the New Premises beginning on November 1, 1998, for the sole purpose of preparing the
New Premises for occupancy, provided that Tenant shall not conduct its business in the Premises
during such period, and provided further, that such entry shall be subject to all of the terms and
conditions of the Lease, excluding only the obligation to pay Rent.
3.
Base Monthly Rent for New Premises
Notwithstanding anything to the contrary contained in the Lease, during the New Premises Term
in addition to all Rent due under the Lease, Tenant shall pay Base Rent for the New Premises in the
amounts set forth below:
|
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|
|
|
|
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Rent per Square
|
|
|
Term:
|
|
Foot per Month:
|
|
Base Rent:
|
December 15, 1998 December 14,
1999
|
|
$
|
3.95
|
|
|
$
|
69,804.40
|
|
December 15, 1999 December 14,
2000
|
|
$
|
4.11
|
|
|
$
|
72,631.92
|
|
December 15, 2000 December 14, 2001
|
|
$
|
4.27
|
|
|
$
|
75,459.44
|
|
4.
Additional Rent; Proportionate Shares
During the New Premises Term, Tenant shall pay Additional Rent with respect to the New
Premises in accordance with the terms of Paragraph 4(b) of the Lease. With respect to the New
Premises, Tenants Proportionate Shares of the Building and the Project shall be 44.2% and 6.8%,
respectively.
2
5.
Prepaid Rent
Concurrently with the execution of this Amendment, Tenant shall pay to Landlord the Rent owing
with respect to the New Premises for the first month following the New Premises Commencement Date.
6.
Renewal Option
(a) Tenant shall have one (1) option (the
Renewal Option
) to extend the New Premises Term
for a period of two (2) years beyond the New Premises Expiration Date (the
Renewal Term
). The
Renewal Option shall be effective only if Tenant is not in Default under the Lease, nor has any
event occurred which with the giving of notice or the passage of time, or both, would constitute a
Default thereunder, either at the time of exercise of the Renewal Option or the time of
commencement of the Renewal Term. The Renewal Option must be exercised, if at all, by written
notice (the
Election Notice
) from Tenant to Landlord given not more than nine (9) months nor less
than six (6) months prior to the expiration of the New Premises Term. Except as hereinafter
provided in this Paragraph 6, any such notice given by Tenant to Landlord shall be irrevocable. If
Tenant fails to exercise the Renewal Option in a timely manner as provided for above, the Renewal
Option shall be void (time being of the essence) and this Agreement shall automatically terminate
on the New Premises Expiration Date without the necessity of notice from either party to the other.
Tenants lease of the New Premises during the Renewal Term shall be upon the same terms and
conditions as during the New Premises Term, except that the annual Base Rent during the Renewal
Term shall be equal to the prevailing market rate for space in similarly situated buildings in the
vicinity of the Building comparable to the New Premises in location, size, condition, quality and
type at the commencement of the Renewal Term; provided however that in no event shall the Base Rent
for the Renewal Term be less than the Base Rent for the last month of the New Premises Term. As
used herein, the term prevailing market rate shall mean the base annual rental for such
comparable space, taking into account any additional rental and all other payments and escalations
payable hereunder and by tenants under leases of such comparable space. Landlord shall notify
Tenant in writing (such notice being hereinafter referred to as the
Renewal Rate Notice
) of the
prevailing market rate for the Renewal Term within sixty (60) days after Landlords receipt of the
Election Notice. Tenant shall have ten (10) days after receipt of the Renewal Rate Notice (the
Response Period
) to advise Landlord whether or not Tenant agrees with Landlords determination of
the prevailing market rate. If Tenant agrees with Landlords determination, then Landlord and
Tenant shall promptly enter into an amendment to the Lease providing for the lease of the New
Premises by Tenant during the Renewal Term upon the terms stated in the Renewal Rate Notice. If
Tenant disputes Landlords determination of the prevailing market rate, Tenant shall have the right
to rescind its Election Notice in writing within the Response Period and neither party shall have
any further rights or obligations under this Paragraph 6(a). If Tenant fails to provide Landlord
with written notice of rescission prior to the expiration of the
3
Response Period, then Tenant shall be deemed to have accepted Landlords
determination of the prevailing market rate.
(b) Except as expressly provided in Paragraph 6(a) above with respect to the New Premises,
Tenant shall have no options or rights to renew or extend the Term of the Lease.
7.
Parking
During the New Premises Term, the number of non-exclusive and undesignated parking spaces
allocated to Tenant with respect to the New Premises shall be fifty-eight (58).
8.
Expansion
In the event that the suite immediately adjacent to the New Premises which contains
approximately 2,117 square feet (
Expansion Space
) shall be available for lease any time between
May 15, 1999 (or such earlier date as the existing tenant vacates the Expansion Space) and the New
Premises Expiration Date, Landlord shall immediately lease to Tenant and Tenant shall immediately
lease from Landlord the Expansion Space in its AS-IS condition (except that Landlord shall paint
and carpet the Expansion Space with Building-standard paint and carpeting) and at the
per-square-foot Base Rent in effect hereunder from time to time. Tenant shall pay Additional Rent
with respect to the Expansion Space on the terms specified in Paragraph 4 above. In the event
Tenant leases the Expansion Space as provided herein, the parties shall promptly execute an
amendment to the Lease providing for the lease of such Expansion Space, which amendment shall be
substantially similar in form to this Amendment. Tenant acknowledges and agrees that its
willingness to lease the Expansion Space from Landlord in accordance with this Paragraph 8 is an
integral part of the consideration to Landlord for the execution of this Amendment and that
Landlord would not execute this Amendment but for Tenants willingness to lease the Expansion
Space. Any failure of Tenant to lease the Expansion Space from Landlord in accordance with this
Paragraph 8 shall constitute an immediate Default under the Lease and shall entitle Landlord to all
of its rights and remedies thereunder.
9.
Brokers
Landlord and Tenant each represents and warrants to the other that neither it nor its officers
or agents nor anyone acting on its behalf has dealt with any real estate broker except Cornish &
Carey Commercial and BT Commercial (collectively,
Landlords Broker
) and BT Commercial (
Tenants
Broker
) in the negotiating or making of this Amendment, and each party agrees to indemnify and
hold harmless the other from any claim or claims, and costs and expenses, including attorneys
fees, incurred by the indemnified party in conjunction with any such claim or claims of any other
broker or brokers to a commission in connection with this Amendment as a result of the actions
4
of the indemnifying party. Landlord shall be responsible for a commission payable to Landlords
Broker in connection with the execution of this Amendment pursuant to a separate written agreement
between Landlord and Landlords Broker, and Landlords Broker shall be solely responsible for any
commission or fee payable to Tenants Broker in connection with this Amendment or the subject
matter hereof.
10.
Subletting
Paragraph 24(h) of the Lease shall not apply to the New Premises.
11.
Miscellaneous
(a) As amended hereby, the Lease is hereby ratified and confirmed in all respects.
In the event of any inconsistencies between the terms of this Amendment and the Lease,
the terms of this Amendment shall prevail.
(b) This Amendment shall bind and inure to the benefit of Landlord and Tenant
and their respective legal representatives and successors and assigns.
In Witness Whereof,
Landlord and Tenant have executed this Amendment as of the date
first above written.
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|
|
|
|
Landlord:
|
Harbor Investment Partners,
a California general partnership
|
|
|
By:
|
Aetna Life Insurance Company,
a Connecticut corporation,
General Partner
|
|
|
|
By:
|
Allegis Realty Investors
llc
,
Its Investment Advisor and Agent
|
|
|
|
By:
|
/s/ Cynthia Stevenin
|
|
|
|
Cynthia Stevenin
|
|
|
|
Vice President
|
|
|
Tenant:
|
Financial Engines, Inc.
a California corporation
|
|
|
By:
|
/s/ Jeff Maggioncalda
|
|
|
|
Its: PRESIDENT & CEO
|
|
|
|
|
|
5
Second Amendment to Lease Agreement
This Second Amendment To Lease Agreement
(this
Amendment
) is made effective as of
November 15, 1999 (the
Effective Date
), by and between
Harbor Investment Partners
, a
California general partnership (
Landlord
), and
Financial Engines
,
Inc.,
a
California corporation (
Tenant
).
Recitals
A. Landlord and Tenant have previously entered into that certain Lease Agreement, dated as of
July 14, 1997 (the
Master Lease
), as amended by that certain First Amendment to Lease Agreement
(the
First Amendment
), dated as of November 24, 1998 (the Master Lease as amended by the First
Amendment is referred to herein as the
Lease
), which Lease covers certain premises consisting of
approximately (i) eleven thousand one hundred forty-five (11,145) rentable square feet located at
1804 Embarcadero Road, Suite 200, Palo Alto, California (the
Original Premises
), and (ii)
seventeen thousand six hundred seventy-two (17,672) rentable square feet located at 1804
Embarcadero Road, Suite 100, Palo Alto, California (the
Additional Premises
; the Original
Premises and the Additional Premises are collectively referred to herein as the
Existing
Premises
). Capitalized terms used but not defined herein shall have the meanings ascribed to them
in the Lease.
B. The suite immediately adjacent to the Additional Premises became available, and pursuant to
Paragraph 8 of the First Amendment, Landlord is required to immediately lease to Tenant and Tenant
is required to immediately lease from Landlord that certain expansion space (the
Suite 102
Expansion Premises
) consisting of approximately two thousand one hundred seventeen (2,117)
rentable square feet, located at 1804 Embarcadero Road, Suite 102, Palo Alto, California, as more
particularly shown on
Exhibit A
attached hereto, effective as of the Effective Date (the
Suite 102
Expansion Premises Commencement Date
). Except as stated herein to the contrary, during the Suite
102 Expansion Premises Term (as defined below), the
Premises
, as used in the Lease, shall be
deemed to include the Existing Premises and the Suite 102 Expansion Premises.
C. Landlord and Tenant desire to amend the Lease to provide for the addition of the Suite 102
Expansion Premises for the Suite 102 Expansion Premises Term, all upon and subject to the terms,
covenants and conditions hereinafter set forth.
Agreement
Now Therefore
, in consideration of the agreements of Landlord and Tenant herein
contained and other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1.
Suite
102
Expansion Premises
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Suite 102
Expansion Premises for a term commencing on the Suite 102 Expansion Premises Commencement Date and
expiring on December 14, 2001 (the
Suite 102 Expansion Premises
1
Term
). Prior to the Suite 102 Expansion Premises Commencement Date, Landlord has painted and
carpeted the Suite 102 Expansion Premises with Building-standard paint and carpeting (the
Tenant
Improvements
). Except for the foregoing Tenant Improvements, Landlord has delivered the Suite 102
Expansion Premises to Tenant in its AS-IS condition and Landlord has no obligation to improve,
remodel or otherwise alter the Suite 102 Expansion Premises prior to or after the Suite 102
Expansion Premises Commencement Date.
2.
Base Monthly Rent for Suite
102
Expansion Premises
Notwithstanding anything to the contrary contained in the Lease, during the Suite 102
Expansion Premises Term, in addition to all Rent due under the Lease, Tenant shall pay Base Rent
for the Suite 102 Expansion Premises in the amounts set forth below:
|
|
|
|
|
|
|
|
|
|
|
Rent per Square
|
|
|
Term:
|
|
Foot per Month:
|
|
Base Rent:
|
November 15, 1999 December 14, 1999
|
|
$
|
3.95
|
|
|
$
|
8,362.15
|
|
December 15,
1999 December 14, 2000
|
|
$
|
4.11
|
|
|
$
|
8,700.87
|
|
December 15,
2000 December 14, 2001
|
|
$
|
4.27
|
|
|
$
|
9,039.59
|
|
3.
Additional Rent; Proportionate Shares
During the Suite 102 Expansion Premises Term, Tenant shall pay Additional Rent with respect to
the Suite 102 Expansion Premises in accordance with the terms of Paragraph 4(b) of the Lease. With
respect to the Suite 102 Expansion Premises, Tenants Proportionate Shares of the Building and the
Project shall be 5.2% and .82%, respectively. With respect to the Premises, Tenants Proportionate
Share of the Building shall be 77.33%.
4.
Parking
During the Suite 102 Expansion Premises Term, the number of non-exclusive and
undesignated parking spaces allocated to Tenant with respect to the Suite 102 Expansion
Premises shall be seven (7).
5.
Brokers
Landlord and Tenant each represents and warrants to the other that neither it nor its officers
or agents nor anyone acting on its behalf has dealt with any real estate broker except BT
Commercial (
Landlords Broker
) and BT Commercial (
Tenants Broker
) in the negotiating or making
of this Amendment, and each party agrees to indemnify and hold harmless the other from any claim or
claims, and costs and expenses, including attorneys fees, incurred by the indemnified party in
conjunction with any such claim or claims of any other broker or
2
brokers to a commission in connection with this Amendment as a result of the actions of the
indemnifying party. Landlord shall be responsible for a commission payable to Landlords
Broker in connection with the execution of this Amendment pursuant to a separate written
agreement between Landlord and Landlords Broker, and Landlords Broker shall be solely
responsible for any commission or fee payable to Tenants Broker in connection with this
Amendment or the subject matter hereof.
6.
Subletting
Paragraph 24(h) of the Lease shall not apply to the Suite 102 Expansion Premises.
7.
Miscellaneous
(a) As amended hereby, the Lease is hereby ratified and confirmed in all respects. In the
event of any inconsistencies between the terms of this Amendment and the Lease, the terms of this
Amendment shall prevail.
(b) This Amendment shall bind and inure to the benefit of Landlord and Tenant and their
respective legal representatives and successors and assigns.
(c) This Amendment may be executed in multiple counterparts and by the parties in separate
counterparts, each of which shall be deemed to be an original and all of which shall together
constitute one and the same agreement. The parties may execute and deliver this Amendment by
forwarding signed facsimile copies of this Amendment. Such facsimile signatures shall have the same
binding effect as original signatures, and the parties hereby waive any defense to validity based
on any such copies of signatures.
3
In Witness Whereof
, Landlord and Tenant have executed this Amendment as of the date
first above written.
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Landlord:
|
|
Harbor Investment Partners,
a
California general partnership
|
|
|
|
|
|
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By:
|
Aetna Life Insurance Company,
|
|
|
|
a Connecticut corporation,
|
|
|
|
Its General Partner
|
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|
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|
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By:
|
UBS Brinson Realty Investors
llc,
|
|
|
|
Its Investment Advisor and Agent
|
|
|
|
|
|
|
|
By:
|
/s/ Cynthia Stevenin
|
|
|
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Cynthia Stevenin
|
|
|
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Director
|
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Tenant:
|
|
Financial Engines, Inc.,
a California corporation
|
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By:
|
/s/ Raymond Sims
|
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|
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Name:
|
Raymond Sims
|
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|
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Title:
|
Vice President & CFO
|
|
4
Third Amendment to Lease
This Third Amendment To Lease
(this
Third Amendment
) is made as of June 5, 2000, by
and between
Harbor Investment Partners,
a California general partnership (
Landlord
), and
Financial Engines, Inc.,
a California corporation (
Tenant
).
Recitals
A. Landlord and Tenant have previously entered into that certain Lease Agreement, dated as of
July 14, 1997, as amended by that certain First Amendment to Lease Agreement, dated as of November
24, 1998, and that certain Second Amendment to Lease Agreement, effective as of November 15, 1999
(as amended, the
Lease
), which Lease covers certain premises consisting of approximately (i)
eleven thousand one hundred forty-five (11,145) rentable square feet located at 1804 Embarcadero
Road, Suite 200, Palo Alto, California (the
Original Premises
), (ii) seventeen thousand six
hundred seventy-two (17,672) rentable square feet located at 1804 Embarcadero Road, Suite 100, Palo
Alto, California, and (iii) two thousand one hundred seventeen (2,117) rentable square feet located
at 1804 Embarcadero Road, Suite 102, Palo Alto, California (Suites 100 and 102 are collectively
referred to herein as the
Expansion Premises
; the Original Premises and the Expansion Premises
are collectively referred to herein as the
Existing Premises
). Capitalized terms used but not
defined herein shall have the meanings ascribed to them in the Lease.
B. Tenant desires to expand the Existing Premises by leasing that certain additional space
(the
Suite 202 Premises
) consisting of three thousand eighty-one (3,081) rentable square feet,
located at 1804 Embarcadero Road, Suite 202, Palo Alto, California, as more particularly shown on
Exhibit A
attached hereto, effective as of the date Landlord delivers possession of the Suite 202
Premises to Tenant (the
Suite 202 Premises Commencement Date
). Except as stated herein to the
contrary, during the Suite 202 Premises Term (as defined below), the
Premises
, as used in the
Lease, shall be deemed to include the Existing Premises and the Suite 202 Premises.
C. Tenant also desires to extend the Lease term and amend the base monthly rent amount with
respect to the Expansion Premises.
D. Landlord and Tenant desire to amend the Lease to provide for the addition of the Suite 202
Premises and extend the term and amend the base monthly rent amount with respect to the Expansion
Premises, all upon and subject to the terms, covenants and conditions hereinafter set forth.
Agreement
Now Therefore,
in consideration of the agreements of Landlord and Tenant
herein contained and other valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Landlord and Tenant hereby agree as follows:
1.
Suite 202 Premises
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Suite 202 Premises
for a term commencing on the Suite 202 Premises Commencement Date and expiring on August 6, 2002
(the
Suite 202 Premises Term
). Promptly following the Suite 202 Premises Commencement Date,
Landlord and Tenant shall execute a Suite 202 Premises Commencement Date Memorandum in the form of
Exhibit B
hereto. Landlord shall deliver the Suite 202 Premises to Tenant in its AS-IS condition
and Landlord shall have no obligation to improve, remodel or otherwise alter the Suite 202.
Premises prior to or after the Suite 202 Premises Commencement Date: Notwithstanding the
foregoing, Landlord shall cause the roof on the Suite 202 Premises to be in good condition and the
HVAC, electrical and plumbing systems serving the Suite 202 Premises to be in good working order on
the Suite 202 Premises Commencement Date. Any claims by Tenant under the preceding sentence shall
be made in writing not later than the fifteenth (15th) day after the Suite 202 Premises
Commencement Date. In the event Tenant fails to deliver a written claim to Landlord on or before
such fifteenth (15th) day, then Landlord shall be conclusively deemed to have satisfied its
obligations under this Paragraph 1.
2.
Base Monthly Rent for Suite 202 Premises
Notwithstanding anything to the contrary contained in the Lease, during the Suite 202 Premises
Term in addition to all Rent due under the Lease, Tenant shall pay Base Rent for the Suite 202
Premises in accordance with the schedule set forth below:
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Rental Rate Per
|
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Period
|
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Sq. Ft.
|
|
Sq. Ft.
|
|
Monthly Rent
|
Suite 202 Premises
Commencement Date
Day immediately
preceding first
anniversary of
Suite 202 Premises
Commencement Date
|
|
|
3,081
|
|
|
$
|
8.00
|
|
|
$
|
24,648.00
|
|
First Anniversary
of Suite 202
Premises
Commencement Date
Day immediately
preceding second
anniversary of
Suite 202 Premises
Commencement Date
|
|
|
3,081
|
|
|
$
|
8.32
|
|
|
$
|
25,633.92
|
|
Second Anniversary
of Suite 202
Premises
Commencement Date
August 6, 2002
|
|
|
3,081
|
|
|
$
|
8.65
|
|
|
$
|
26,650.65
|
|
2
3.
Additional Rent
During the Suite 202 Premises Term, Tenant shall pay Additional Rent with respect to the Suite
202 Premises in accordance with the terms of Paragraph 4(b) of the Lease. With respect to the Suite
202 Premises, Tenants Proportionate Shares of the Building and the Project shall be 7.70% and
1.19%, respectively. With respect to the Premises, Tenants Proportionate Shares of the Building
shall be 85.03%.
4.
Prepaid Rent
Concurrently with the execution of this Third Amendment, Tenant shall pay to Landlord the Base
Rent and Additional Rent owing with respect to the Suite 202 Premises for the first month following
the Suite 202 Premises Commencement Date.
5.
Parking
During the Suite 202 Premises Term, the number of non-exclusive and undesignated parking
spaces allocated to Tenant with respect to the Suite 202 Premises shall be ten (10).
6.
Security Deposit
Landlord currently holds a Letter of Credit in the amount of Four Hundred Sixty-Eight Thousand
Ninety and 00/100 Dollars ($468,090.00) and a cash Security Deposit in the amount of Forty-Seven
Thousand Four Hundred Thirteen and 86/100 Dollars ($47,413.86). Upon Tenants execution of this
Third Amendment, Tenant shall deposit with Landlord funds sufficient to increase the cash Security
Deposit held by Landlord pursuant to Paragraph 8 of the Lease to the total sum of One Hundred
Thousand Seven Hundred Fifteen and 16/100 Dollars ($100,715.16). Landlord may use, apply or retain
the whole or any part of the Security Deposit in accordance with Paragraph 8 of the Lease.
7.
Expansion Premises Term
The term of the Lease with respect to the Expansion Premises is hereby extended to and shall
expire on August 6, 2002 (the
Expansion Premises Term Expiration
) (the
Extended Term
). All
references in the Lease to the Term with respect to the Expansion Premises shall mean the Term, as
extended through the Extended Term. During the Extended Term, Tenant shall continue to lease the
Expansion Premises in its AS-IS condition and Landlord shall have no obligation to remodel,
improve or otherwise alter the Expansion Premises either prior to or after the Extended Term
Commencement Date.
3
8.
Base Monthly Rent for the Expansion Premises During Extended Term
Tenant shall pay monthly Base Rent with respect to the Expansion Premises for the
Extended Term in accordance with the schedule set forth below:
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Rental Rate Per
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Period
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Sq. Ft.
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Sq. Ft.
|
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Monthly Rent
|
December
15, 2001 August 6,
2002
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19,789
|
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$
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8.32
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$
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164,644.48
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9.
Miscellaneous
(a) As amended hereby, the Lease is hereby ratified and confirmed in all respects. In the
event of any inconsistencies between the terms of this Third Amendment and the Lease, the
terms of this Third Amendment shall prevail.
(b) Tenant and Landlord each represents and warrants to the other party that neither it nor
its officers or agents nor anyone acting on its behalf has dealt with any real estate broker
or finder in the negotiating or making of this Third Amendment and each party agrees to
indemnify and hold harmless the other party from any claim or claims, and costs and expenses, including
attorneys fees, incurred by the indemnified party in conjunction with any claim or claims of
any broker or brokers to a commission in connection with this Third Amendment as a result of the
actions of the indemnifying party or its officers, agents or anyone acting on its behalf.
(c) This Third Amendment shall bind and inure to the benefit of Landlord and Tenant and
their respective legal representatives and successors and assigns.
(d) This Third Amendment may be executed in counterparts each of which counterparts
when taken together shall constitute one and the same agreement.
(e) Except as set forth in this Third Amendment, all terms and conditions of the Lease
shall remain in full force and effect.
4
In Witness Whereof
, Landlord and Tenant have executed this Third Amendment to Lease
as of the date first above written.
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Landlord:
|
Harbor Investment Partners,
a California general partnership
|
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By:
|
Aetna Life Insurance Company,
a Connecticut corporation,
Its General Partner
|
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By:
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UBS Brinson Realty Investors
llc,
Its Investment Advisor and Agent
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By:
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/s/ Cynthia Stevenin
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Cynthia Stevenin
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Director
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Tenant
:
|
Financial Engines, Inc.
,
a California corporation
|
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By:
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/s/ Raymond Sims
|
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Name:
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Raymond Sims
|
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|
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Title:
|
Vice President & CFO
|
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5
Exhibit
B
Commencement Date Memorandum
(Suite
202
Premises)
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Landlord:
|
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Harbor Investment Partners
|
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Tenant:
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Financial Engines
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Third Amendment Date:
|
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May ___, 2000
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Premises:
|
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Located at 1804 Embarcadero Road, Palo Alto, California
|
Tenant hereby accepts the Suite 202 Premises as being in the condition required under the Third Amendment.
The Commencement Date of the Third Amendment with respect to the Suite 202 Premises is hereby established as
, 2000.
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Tenant:
|
Financial Engines, Inc.,
a California corporation
|
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By:
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/s/ Raymond Sims
|
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Name:
|
Raymond Sims
|
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Title:
|
Vice President & CFO
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Approved and Agreed:
Landlord:
Harbor Investment Partners,
a California general partnership
|
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By:
|
Aetna Life Insurance Company,
a Connecticut corporation,
Its General Partner
|
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By:
|
UBS Brinson Realty Investors
llc,
Its Investment Advisor and Agent
|
|
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By:
|
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Cynthia Stevenin
|
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Director
|
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Fourth Amendment to Lease Agreement
This Fourth Amendment to Lease Agreement
(this
Amendment
) is made as of March 15,
2002, by and between
Harbor Investment Partners
, a California general partnership
(
Landlord
), and
Financial Engines, Inc
., a California corporation (
Tenant
).
Recitals
A. Landlord and Tenant have previously entered into that certain Lease Agreement, dated
as of July 14, 1997, as amended by that certain First Amendment to Lease Agreement, dated as
of November 24, 1998, that certain Second Amendment to Lease Agreement, dated as of
November 15,1999, that certain Third Amendment to Lease Agreement, dated as of June 5,
2000, and that certain Partial Lease Termination Agreement, dated as of May 16, 2001 (as
amended, the
Lease
), which Lease covers certain premises consisting of approximately
(i) seventeen thousand six hundred seventy-two (17,672) rentable square feet located at 1804
Embarcadero Road, Suite 100, Palo Alto, California (
Suite 100
), (ii) two thousand one hundred
seventeen (2,117) rentable square feet located at 1804 Embarcadero Road, Suite 102, Palo Alto,
California (
Suite 102
), and (iii) three thousand eighty-one (3,081) rentable square feet, located
at 1804 Embarcadero Road, Suite 202, Palo Alto, California (
Suite 202
). Capitalized terms used
but not defined herein shall have the meanings ascribed to them in the Lease.
B. Landlord and Tenant desire to extend the Term of the Lease and amend the Base Rent
with respect to Suite 100 and Suite 102, and to terminate the Lease with respect to Suite 202.
C. Landlord and Tenant desire to amend the Lease to reflect the extension of the Term of
the Lease and amendment of the Base Rent with respect to Suite 100 and Suite 102 and the
termination of the Lease with respect to Suite 202.
Agreement
Now Therefore
, in consideration of the agreements of Landlord and Tenant herein
contained and other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1.
Extension of Term
The term of the Lease with respect to Suite 100 and Suite 102 is hereby extended for a period
of sixty-one (61) months, commencing on April 1, 2002 and expiring on April 30, 2007 (the
Extension Period
). All references in the Lease to the Term of the Lease shall mean the previous
term of the Lease as extended through the Extension Period. During the Extension Period, all
references to Premises contained in the Lease shall be deemed to refer to Suite 100 and Suite
102.
1
2.
Monthly Base Rent During Extension Period
Notwithstanding anything to the contrary contained in the Lease, during the Extension Period,
Tenant shall pay Monthly Base Rent for Suite 100 and Suite 102 in the amount described below:
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Monthly Base
|
|
Monthly Base
|
Monthly Base Rent:
|
|
Months
|
|
Sq. Ft.
|
|
Rate
|
|
Rent
|
|
|
|
1-30
|
|
|
|
19,789
|
|
|
|
x $3.00
|
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|
= $59,367.00
|
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31-61
|
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19,789
|
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x $3.20
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= $63,325.00
|
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3.
Additional Rent; Base Year
(a) During the Extension Period, Tenant shall pay Additional Rent with respect to Suite 100
and Suite 102 in accordance with the terms of Paragraph 4(b) of the Lease. Tenants
Proportionate Shares of the Building and the Project shall be 49.5% and 7.63%, respectively.
(b) Effective as of the commencement of the Extension Period, the Base Year shall be
calendar year 2002.
4.
Parking
During the Extension Period, Tenant shall have the right to use sixty-five (65)
nonexclusive and undesignated parking spaces in the Parking Areas on the terms and subject to
the conditions set forth in the Lease.
5.
Refurbishment Allowance
Landlord shall provide an allowance to Tenant in the amount of Fifty Nine Thousand Three
Hundred Sixty-Seven Dollars ($59,367.00) (the
Refurbishment Allowance
) to be applied toward the
cost of painting and carpeting the Premises (the
Work
). The Refurbishment Allowance shall be
available to Tenant any time within the initial forty-two (42) months of the Extension Period. Any
portion of the Refurbishment Allowance which has not been disbursed to Tenant within said
forty-two (42) month period shall no longer be available to Tenant. The Refurbishment Allowance
shall be the maximum contribution by Landlord toward the cost of the Work. Should the actual cost
of the Work be less than the Refurbishment Allowance, the Refurbishment Allowance shall be reduced
to an amount equal to said actual cost. Landlord shall disburse the Refurbishment Allowance to
Tenant following the completion of the Work and the delivery to Landlord of invoices, lien waivers
and other documents reasonably requested by Landlord to substantiate the cost and the lien-free
completion of the Work.
2
6.
As-Is Possession
Tenant shall continue to occupy Suite 100 and Suite 102 during the Extension Period in their
AS-IS condition and, except as expressly set forth in the Lease, Landlord shall have no
obligation to improve, remodel or otherwise alter the Premises at any time prior to or during the
Extension Period.
7.
Letter of Credit
(a) Paragraph 7 of the Lease is hereby deleted in its entirety and the following provisions
are hereby substituted therefor:
(i) Promptly following the execution of the Fourth Amendment to Lease Agreement, Tenant
shall deliver to Landlord, at Tenants sole cost and expense, the Letter of Credit described below
in the amount of One Hundred Seventy-Eight Thousand One Hundred One Dollars ($178,101.00) (the
LC
Face Amount
) as security for Tenants performance of all of Tenants covenants and obligations
under this Lease; provided, however, that neither the Letter of Credit nor any Letter of Credit
Proceeds (as defined below) shall be deemed an advance rent deposit or an advance payment of any
other kind, or a measure of Landlords damages upon Tenants Default. The Letter of Credit shall be
maintained in effect from the date hereof through the date that is forty-five (45) days after the
Expiration Date (the
LC Termination Date
). On the LC Termination Date, Landlord shall return to
Tenant the Letter of Credit and any Letter of Credit Proceeds then held by Landlord (other than
those Letter of Credit Proceeds Landlord is entitled to retain under the terms of this Paragraph
7(a)); provided, however, that in no event shall any such return be construed as an admission by
Landlord that Tenant has performed all of its obligations hereunder. Landlord shall not be required
to segregate the Letter of Credit Proceeds from its other funds and no interest shall accrue or be
payable to Tenant with respect thereto. Landlord may (but shall not be required to) draw upon the
Letter of Credit in such amount as is necessary, and may use the proceeds therefrom (the
Letter of
Credit Proceeds
) or any portion thereof, (i) to cure any Default under this Lease and to
compensate Landlord for any loss or damage Landlord incurs as a result of such Default, (ii) to
repair damage to the Premises caused by Tenant, (iii) to clean the Premises upon termination of
this Lease, (iv) to reimburse Landlord for the payment of any amount which Landlord may reasonably
spend or be required to spend by reason of Tenants Default, and (v) to compensate Landlord for any
other loss or damage which Landlord may suffer by reason of Tenants Default, it being understood
that any use of the Letter of Credit Proceeds shall not constitute a bar or defense to any of
Landlords remedies set forth in Paragraph 26 below. In such event and upon written notice from
Landlord to Tenant specifying the amount of the Letter of Credit Proceeds so utilized by Landlord
and the particular purpose for which such amount was applied, Tenant shall immediately deliver to
Landlord an amendment to the Letter of Credit or a replacement Letter of Credit so that the Letter
of Credit is again in the full LC Face Amount. Tenants failure to deliver such an amendment or
replacement Letter of Credit to Landlord within ten (10) days of Landlords notice shall constitute
an immediate Default hereunder. In the event Landlord transfers its interest in this Lease,
Landlord shall transfer the Letter of Credit and any Letter of Credit Proceeds then held by
Landlord to Landlords successor in interest, and thereafter Landlord shall have no further
liability to Tenant with respect to such Letter of Credit or Letter of Credit Proceeds.
3
(i) As used herein, Letter of Credit shall mean an unconditional, stand-by irrevocable
letter of credit (herein referred to as the
Letter of Credit
) issued by the San Francisco
office of a major national bank insured by the Federal Deposit Insurance Corporation with assets
of not less than Fifty Billion Dollars ($50,000,000,000.00) and otherwise reasonably satisfactory
to Landlord (the
Bank
), naming Landlord as beneficiary, in the amount of the LC Face Amount,
and otherwise in form and substance satisfactory to Landlord. If at any time during the Term of
this Lease, Landlord notifies Tenant of Landlords disapproval of the Bank (notwithstanding
Landlords prior approval of such institution), then Tenant shall replace the Letter of Credit
with a substitute Letter of Credit issued by a bank approved by Landlord and otherwise satisfying
the requirements of this Paragraph 7. The Letter of Credit shall be for a one-year term and shall
provide: (i) that Landlord may make partial and multiple draws thereunder, up to the face amount
thereof, (ii) that Landlord may draw upon the Letter of Credit up to the full amount thereof and
the Bank will pay to Landlord the amount of such draw upon receipt by the Bank of a sight draft
signed by Landlord or UBS Realty Investors
llc
(
UBS
), Landlords investment advisor
and agent, and accompanied by a written certification from Landlord or UBS to the Bank stating
either that: (A) a Default has occurred and is continuing under this Lease and any applicable
grace period has expired or Landlord is otherwise entitled to draw on the Letter of Credit, or
(B) Landlord has not received notice from the Bank at least thirty (30) days prior to the then
current expiry date of the Letter of Credit that the Letter of Credit will be renewed by the Bank
for at least one (1) year beyond the relevant annual expiration date or, in the case of the last
year of the Term, forty-five (45) days after the Expiration Date, together with a replacement
Letter of Credit or a modification to the existing Letter of Credit effectuating such renewal,
and Tenant has not otherwise furnished Landlord with a replacement Letter of Credit as
hereinafter provided; and (iii) that the beneficial interest under the Letter of Credit shall be
freely transferable one or more times and, therefore, in the event of Landlords (or any
successor Landlords) assignment or other transfer of its interest in this Lease, the Letter of
Credit shall be freely transferable by Landlord (or any successor Landlord), without recourse and
without the payment of any fee or consideration by Landlord, to the assignee or transferee of
such interest and the Bank shall confirm the same to Landlord (or such successor) and such
assignee or transferee. In the event that the Bank shall fail to (y) notify Landlord that the
Letter of Credit will be renewed for at least one (1) year beyond the then applicable expiration
date (or, in the case of the last year of the Term, within forty-five (45) days of the Expiration
Date), and (z) deliver to Landlord a replacement Letter of Credit or a modification to the
existing Letter of Credit effectuating such renewal, and Tenant shall not have otherwise
delivered to Landlord, at least thirty (30) days prior to the relevant annual expiration date, a
replacement Letter of Credit in the amount required hereunder and otherwise meeting the
requirements set forth above, then Landlord shall be entitled to draw on the Letter of Credit as
provided above, and shall hold the proceeds of such draw as Letter of Credit Proceeds pursuant to
Paragraph 7(a) above.
(b) Promptly following Landlords receipt of the Letter of Credit, Landlord shall return to
Tenant the Security Deposit in the amount of Fifty Three Thousand Three Hundred One and
30/100 Dollars ($53,301.30) and the letter of credit in the amount of Three Hundred Thousand
Dollars ($300,000.00) currently held by Landlord under the terms of the Lease.
(c) Paragraph 8 of the Lease is hereby deleted in its entirety.
4
8.
Termination of Lease with respect to Suite
202
(a) Subject to the terms and conditions set forth in this Paragraph 8, Landlord and Tenant
hereby agree that the Lease shall be terminated only with respect to Suite 202 effective as of
the later of (i) the close of business on March 31, 2002, or (ii) the satisfaction of the
termination conditions set forth in Paragraph 9 below (the
Suite 202 Termination Date
). On or before the
Suite 202 Termination Date, Tenant shall vacate and surrender possession of Suite 202 to
Landlord in accordance with the terms of the Lease.
(b) Upon termination of the Lease with respect to the Suite 202, the vacation and surrender
of Suite 202 by Tenant, and satisfaction of the Suite 202 Termination Conditions (as hereafter
defined), Landlord and Tenant shall have no further rights, obligations or claims with respect
to each other arising under the Lease with respect to Suite 202 except for (i) the
indemnification obligations of Tenant contained in the Lease, (ii) the obligation of Tenant to pay any
remaining Additional Rent owed for calendar years 2001 and 2002 when billed to Tenant or the obligation
of Landlord to repay or credit to Tenant any overpayment by Tenant of Additional Rent, as
applicable, in accordance with Paragraph 4(c) of the Lease, and (iii) any obligations of
Tenant or Landlord under the Lease which expressly survive the termination of the Lease (such
obligations described in the foregoing-clauses (i), (ii) and (iii) being herein referred to as the
"
Surviving Obligations
). The Surviving Obligations shall survive the execution of this Agreement and the
termination of the Lease with respect to Suite 202.
(c) Landlord and Tenant agree and acknowledge that, notwithstanding the cancellation and
termination of the Lease with respect to Suite 202, this Agreement shall have no effect on the
rights and obligations of either Landlord or Tenant with respect to Suite 100 or Suite 102,
and the Lease shall remain in full force and effect with respect to Suite 100 and Suite 102,.
9.
Suite
202
Termination Conditions
The following conditions shall be conditions precedent to the termination of the Lease with
respect to Suite 202 on the Suite 202 Termination Date (collectively, the
Suite 202 Termination
Conditions
):
(a)
Performance by Tenant
.
Tenant shall have performed all of its obligations under the
Lease through the Suite 202 Termination Date, as and when such obligations shall have become
due, including, without limitation, the payment of monthly installments of base rent,
additional rent and any other sums required to be paid by Tenant to Landlord.
(b)
Surrender of Suite 202
.
Tenant shall have vacated and surrendered Suite 202 to
Landlord in accordance with the provisions of the Lease on or before the Suite 202 Termination
Date, including, without limitation, the removal by Tenant of all of its personal property.
The Termination Conditions are for the sole benefit of Landlord and may, at the sole discretion of
Landlord, be waived by Landlord. If any or all of the Termination Conditions are not satisfied as
required, then Landlord may unilaterally reinstate the Lease with respect to Suite 202 or Landlord
may consider the Lease with respect to Suite 202 terminated as of the Suite 202 Termination Date;
provided, however, that if either or both of the conditions precedent set forth in Paragraphs 9(a)
and 9(b) above are not fully satisfied when the Lease is terminated as of the
5
Suite 202 Termination Date, then Tenant shall immediately pay to Landlord any and all damages
arising from the failure or satisfaction of such condition(s) precedent. Tenant agrees to take all
actions necessary to cause the conditions set forth in Paragraphs 9(a) and 9(b) above to be fully
satisfied.
10.
Abandoned Property
In addition to any rights Landlord may have under the Lease or this Amendment, Landlord, at
its sole option, may deem any furniture, fixtures, shelving, cabinets, tables, equipment, lighting,
and other fixtures or personal property in, on or attached to Suite 202 and remaining in or on
Suite 202 after the Suite 202 Termination Date (the
Abandoned Property
), whether or not belonging
to Tenant, to be abandoned, and Landlord may dispose of the Abandoned Property as it, in its sole
discretion, deems appropriate. Tenant shall not be entitled to any proceeds received by Landlord as
a result of the disposition of the Abandoned Property. Tenant waives, to the greatest extent
permitted by law, all of its rights under California Civil Code Sections 1980,
et seq.
as the same
may be amended from time to time, and any related and successor statutes thereto.
11.
Brokers
Landlord and Tenant each represents and warrants to the other that neither it nor its officers
or agents nor anyone acting on its behalf has dealt with any real estate broker except
Insignia/ESG, Inc. (
Landlords Broker
) and BT Commercial Real Estate (
Tenants Broker
) in the
negotiating or making of this Amendment, and each party agrees to indemnify and hold harmless the
other from any claim or claims, and costs and expenses, including attorneys fees, incurred by the
indemnified party in conjunction with any claim or claims of any other broker or brokers to a
commission in connection with this Amendment as a result of the actions of the indemnifying party.
Landlords Broker and Tenants Broker shall be collectively referred to herein as the
Brokers.
Provided that this Amendment is fully executed by the parties hereto, then Landlord shall pay a
commission to the Brokers in accordance with Landlords separate written agreements with the
Brokers.
12.
Miscellaneous
(a) Landlord and Tenant acknowledge and agree that this Amendment does not relate to or
affect the Lease Agreement by and between Landlord and Tenant, dated as of December 7, 1999,
relating to certain premises consisting of Thirty Two Thousand Seven Hundred Forty-Two
square feet at 1830 Embarcadero Road (the
1830 Lease
). The 1830 Lease shall remain
unmodified and in full force and effect.
(b) Tenant acknowledges that it has no option to renew or extend the Term of the Lease
beyond the Extension Period. Tenants rights under Paragraph 6 of the First Amendment have
previously expired or are hereby terminated.
(c) As amended hereby, the Lease is hereby ratified and confirmed in all respects. In the
event of any inconsistencies between the terms of this Amendment and the Lease, the terms of
this Amendment shall prevail.
6
(d) This Amendment shall bind and inure to the benefit of Landlord and Tenant and
their respective legal representatives and successors and assigns.
In Witness Whereof
, Landlord and Tenant have executed this Amendment as of
the date first above written.
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Landlord:
|
Harbor Investment Partners,
a California general partnership,
|
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By:
|
Embarcadero Road Invest
|
|
|
|
LLC, a Delaware limited liability company
|
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|
General Partner
|
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|
By:
|
UBS Realty Investors
llc
,
|
|
|
|
a Massachusetts limited liability company
|
|
|
|
its Investment Advisor and Agent
|
|
|
|
|
|
|
By:
|
/s/ Cynthia Stevenin
|
|
|
|
Name:
|
Cynthia Stevenin
|
|
|
|
Title:
|
Director
|
|
|
Tenant
:
|
Financial Engines, Inc.,
a California corporation
|
|
|
By:
|
/s/ Raymond Sims
|
|
|
|
Name:
|
RAYMOND J. SIMS
|
|
|
|
Its:
|
EVP & CFO
|
|
|
7
Fifth Amendment to Lease
This Fifth Amendment to Lease
(this
Amendment
) is entered into effective as of
September 1, 2006 (the
Effective Date
), by and between
Harbor Investment Partners
, a
California general partnership (
Landlord
), and
Financial Engines, Inc
., a California
corporation (
Tenant
).
Recitals
A. Tenant and Landlord entered into that certain Lease Agreement, dated as of July 14, 1997,
as amended by a First Amendment to Lease, dated as of November 24, 1998, a Second Amendment to
Lease, dated as of November 15, 1999, a Third Amendment to Lease, dated as of June 5, 2000, and a
Fourth Amendment to Lease, dated as of March 15, 2002 (collectively, the Lease), which Lease
covers certain premises consisting of approximately nineteen thousand seven hundred eighty-nine
(19,789) rentable square feet located at 1804 Embarcadero Road, Palo Alto, California 94303 (the
Premises
). Capitalized terms used but not defined herein shall have the meanings ascribed to them
in the Lease.
B. Landlord and Tenant have also previously entered into that certain Lease Agreement dated
December 7, 1999 (the
1830 Lease
), which covers certain premises consisting of approximately
thirty-two thousand seven hundred forty-two (32,742) rentable square feet (the
1830 Premises
) in
the building located at 1830 Embarcadero Road, Palo Alto, California.
C. The Lease and the 1830 Lease currently expire on April 30, 2007.
D. Landlord and Tenant desire to amend the Lease to modify the Base Rent and extend the Term,
subject to each of the terms, conditions, and provisions set forth herein.
Agreement
Now Therefore
, in consideration of the agreements of Landlord and Tenant herein
contained and other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1.
Lease Term
The Term of the Lease is hereby extended for a period of approximately sixty-four (64) months,
commencing on May 1, 2007 and ending on August 31, 2012.
2.
Base Rent
(a) Commencing on the Effective Date, the Base Rent shall be payable by Tenant to
Landlord in accordance with the schedule set forth below:
1
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Monthly
|
Monthly
|
Period
|
|
Sq. Ft.
|
|
Base Rate
|
Base Rent
|
|
September 1, 2006 August 31, 2007
|
|
|
19,789
|
|
|
|
x $2.30
|
|
|
|
= $45,514.70
|
|
September 1, 2007 August 31, 2008
|
|
|
19,789
|
|
|
|
x $2.35
|
|
|
|
= $46,504.15
|
|
September 1, 2008 August 31, 2009
|
|
|
19,789
|
|
|
|
x $2.40
|
|
|
|
= $47,493.60
|
|
September 1, 2009 August 31, 2010
|
|
|
19,789
|
|
|
|
x $2.45
|
|
|
|
= $48,483.05
|
|
September 1, 2010 August 31, 2011
|
|
|
19,789
|
|
|
|
x $2.50
|
|
|
|
= $49,472.50
|
|
September 1, 2011 August 31, 2012
|
|
|
19,789
|
|
|
|
x $2.55
|
|
|
|
= $50,461.95
|
|
(b) Within five (5) business days following the execution of this Amendment by the parties
hereto, Landlord shall return to Tenant an amount equal to the difference between the Base Rent
actually paid by Tenant and the Base Rent set forth above, in each case for the months of September
and October, 2006.
(c) The second paragraph of Paragraph 4(a) of the Lease shall be of no further force or
effect.
3.
Additional Rent
(a)
Adjustment of Base Year.
Tenant shall continue to pay Additional Rent to Landlord in
accordance with Paragraph 4(b) of the Lease; provided, however, that from and after the Effective
Date to the expiration of the Term or the Renewal Term (as hereinafter defined), if applicable, the
Base Year shall be deemed to be calendar year 2007.
(b)
Exclusions from Additional Rent; Tenants Audit Rights.
The following provisions are
hereby added to the Lease as new Paragraphs (4)(e), (f) and (g):
(e)
Statements Binding.
Every statement given by Landlord pursuant to
the third sentence of Paragraph 4(c)(l) above (each, an
Expense Statement)
shall be conclusive and binding upon Tenant unless (i) within sixty (60) days
after the receipt of such Expense Statement Tenant shall notify Landlord that
it disputes the correctness thereof, specifying the particular respects in
which the Expense Statement is claimed to be incorrect, and (ii) if such
dispute shall not have been settled by agreement, Tenant shall submit the
dispute to arbitration within ninety (90) days after receipt of the Expense
Statement. Pending the determination of such dispute by agreement or
arbitration as aforesaid, Tenant shall, within ten (10) days after receipt of
such Expense Statement, pay Additional Rent in accordance with Landlords
Expense Statement and such payment shall be without prejudice to Tenants
position. If the dispute shall be determined in Tenants favor, Landlord shall
forthwith pay or credit to Tenant the amount of Tenants overpayment of
Additional Rent resulting from compliance with Landlords Expense Statement.
2
(f)
Audit Rights.
Provided Tenant is not then in Default under the terms of this Lease
(nor is any event occurring which with the giving of notice or the passage of time, or both,
would constitute a Default hereunder), Tenant, at its sole expense, shall have the right
within thirty (30) days after the delivery of each Expense Statement (as hereinafter defined)
to review and audit Landlords books and records regarding such Expense Statement for the
sole purpose of determining the accuracy thereof. Such review or audit shall be performed by
a nationally recognized accounting firm that calculates its fees with respect to hours
actually worked and that does not discount its time or rate (as opposed to a calculation
based upon percentage of recoveries or other incentive arrangement), shall take place during
normal business hours in the office of Landlord or Landlords property manager and shall be
completed within three (3) business days after the commencement thereof. If Tenant does not
so review or audit Landlords books and records, Landlords Expense Statement shall be final
and binding upon Tenant. In the event that Tenant determines on the basis of its review of
Landlords books and records that the amount of Expenses paid by Tenant pursuant to this
Paragraph
Error! Reference source not found.
for the period covered by such Expense Statement
is less than or greater than the actual amount properly payable by Tenant under the terms of
this Lease, Tenant shall promptly pay any deficiency to Landlord or, if Landlord concurs with
the results of such audit, Landlord shall promptly refund any excess payment to Tenant, as
the case may be. As used herein,
Expense Statement
means the statement of actual Additional
Rent provided by Landlord to Tenant at the beginning of each calendar year (relating to the
actual Expenses for the prior calendar year) pursuant to Paragraph 4(c)(1) of the Lease.
(g)
Exclusions from Additional Rent.
Notwithstanding anything to the contrary
contained in Paragraph 4(f), the following items shall be specifically excluded from the
definition of Expenses:
(i) Repairs or other work occasioned by fire, acts of God, or other casualties or damage to
the extent Landlord is actually reimbursed by insurance (less costs of collection) for the costs of
restoration;
(ii) Payments of principal and interest on mortgage indebtedness encumbering the Project;
(iii) Space planning and other costs incurred in renovating or otherwise improving,
painting or redecorating rentable space at the Project for other tenants;
(iv) Legal fees and other related expenses associated with the negotiation or
enforcement of leases;
(v) The costs of any goods or services provided separately to or performed separately for any
other tenant of the Project, but solely to the extent that Landlord
3
recovers the costs thereof from such tenant and that Tenant receives no benefits from the
services provided to such tenant;
(vi) Leasing commissions paid and advertising expenses incurred in connection with
the leasing of space at the Project;
(vii) Costs of remediating contamination caused by Hazardous Materials (as
hereinafter defined);
(viii) Penalties and damages assessed against Landlord as a result of the
intentional violation by Landlord of any leases affecting the Project (provided, however,
that the cost of correcting such violation, as opposed to penalties assessed in excess of
such corrective costs and which would not be incurred but for such intentional violation,
shall be included within the definition of Expenses hereunder);
(ix) Costs associated with the operation of the business of the entity which
constitutes Landlord, as opposed to the operation of the Project;
(x) All salaries for any employees above the rank of senior property manager and
reasonable allocation of the salaries of all employees at or below the rank of senior
property manager whose duties include work on other buildings or projects; and
(xi) Political or charitable donations or contributions.
Nothing contained in this Paragraph 4(g) shall be deemed to limit, modify or
otherwise affect Tenants obligations under any other provisions of this
Lease, including, without limitation, Paragraphs 7 and 33.
4.
Improvements to Premises and 1830 Premises
(a) Tenant has notified Landlord of Tenants desire to make Alterations to the Premises and
the 1830 Premises, generally described as follows (collectively, the
Specified Alterations
):
(i) Carpeting shall be cleaned or replaced in high traffic areas;
(ii) Interior walls shall be touched up with fresh paint where required;
(iii) The window in the server room in the 1830 Premises (the
1830 Server Room)
shall be
replaced with a wall;
(iv) The walls around the 1830 Server Room shall be extended to the ceiling;
(v) The
carpeting in the 1830 Server Room shall be replaced with vinyl flooring;
(vi) The exterior windows in the telecommunications room in the 1830 Premises (the
1830 Telco
Room
) shall be replaced with a wall;
(vii) All telecommunications drop points in the 1830 Telco Room that do not support Tenant
shall be removed or relocated; and
4
(viii) Such additional improvements as may be requested by Tenant and approved by Landlord in
accordance with Paragraph 13(a) of the Lease.
(b) Tenant shall have the right to make the Specified Alterations, provided that the same are
performed and constructed in full compliance with the terms and conditions of Paragraphs 13(b)
through (f) of the Lease, including, without limitation, to the extent applicable, the review and
approval by Landlord of plans and specifications (which approval shall not be unreasonably
withheld, conditioned or delayed) and the obtaining by Tenant of all required governmental permits
and approvals. Landlord shall have the right to approve the general contractor employed in the
construction and installation of the Improvements (which approval shall not be unreasonably
withheld, conditioned or delayed).
(c) Tenant shall be entitled to an improvement allowance (the
Allowance
) to pay the cost of
the Specified Alterations in the Premises and the 1830 Premises. The Allowance shall be in the
aggregate amount of up to Two Hundred Ten Thousand One Hundred Twenty-Four Dollars ($210,124.00).
For purposes of clarification, the Allowance described herein is the same Allowance that is
provided under the 1830 Lease and Tenant shall be entitled to a total sum not to exceed Two Hundred
Ten Thousand One Hundred Twenty-Four Dollars ($210,124.00). The Allowance shall be applied solely
toward the hard and soft costs incurred by Tenant in designing and constructing the Specified
Alterations, but shall not be used to pay for Tenants personal property, equipment or other items
of Tenants Property. Landlord shall disburse the Allowance to Tenant following the completion of
the Specified Alterations in a lien-free condition and in accordance with all Laws (to the extent
applicable), and the delivery to Landlord of receipts, lien waivers and other documents reasonably
requested by Landlord to substantiate the actual cost of the Specified Alterations. In the event
the costs of the Specified Alterations shall be less than the amount of the Allowance, then the
Allowance shall be reduced to the actual amount of the Specified Alterations.
(d) The following sentence is hereby added to the end of Paragraph 13(a) of the Lease:
Landlord shall endeavor to respond to Tenants request for consent within
thirty (30) days after Tenant submits to Landlord a written request for
approval, together with the other documents and information required by this
Paragraph 13.
5.
Surrender
Provided that Landlord approves all Alterations hereafter made to the Premises by Tenant
(excluding the Specified Alterations), and provided further that any future Alterations are office
and R&D improvements similar to the improvements then existing in similar buildings in the vicinity
of the Project (as determined by Landlord in good faith), then notwithstanding anything to the
contrary contained in the Lease, Landlord shall not have the right to require Tenant to remove such
Alterations (or any Alterations previously made by Tenant to the Premises) at the expiration of the
Term, and Tenant shall surrender all such Alterations to Landlord at the expiration or sooner
termination of the Lease.
5
6.
Letter of Credit; Return of Existing Security Deposit
(a) Landlord currently holds a Security Deposit from Tenant, consisting of cash and letters of
credit (collectively, the
Existing Letters of Credit
), pursuant to the terms of the Lease and the
1830 Lease, in the aggregate amount of One Million Forty-Three Thousand Three Hundred Ninety-Five
Dollars ($1,043,395.00) (the
Existing Security Deposit
). Concurrently with the execution of this
Amendment and the cancellation of the Existing Letters of Credit, Tenant shall deliver to Landlord,
at Tenants sole cost and expense, the Letter of Credit described below in the amount of Five
Hundred Fifty Thousand Dollars ($550,000.00) (the
LC Face Amount
) as security for Tenants
performance of all of Tenants covenants and obligations under the Lease and the 1830 Lease;
provided, however, that neither the Letter of Credit nor any Letter of Credit Proceeds (as defined
below) shall be deemed an advance rent deposit or an advance payment of any other kind, or a
measure of Landlords damages upon Tenants Default hereunder or under the 1830 Lease. The Letter
of Credit (or a replacement thereof satisfying the requirements of this Section) shall be
maintained in effect from the date hereof through the date that is thirty (30) days after the
expiration of the of the Lease and the 1830 Lease (the
LC Termination Date
). On the LC
Termination Date, Landlord shall return to Tenant the Letter of Credit and any Letter of Credit
Proceeds then held by Landlord (other than those Letter of Credit Proceeds Landlord is entitled to
retain under the terms of this Section); provided, however, that in no event shall any such return
be construed as an admission by Landlord that Tenant has performed all of its obligations hereunder
or under the 1830 Lease. Landlord shall not be required to segregate the Letter of Credit Proceeds
from its other funds and no interest shall accrue or be payable to Tenant with respect thereto.
Landlord may (but shall not be required to) draw upon the Letter of Credit in such amount as is
necessary, and shall use the proceeds therefrom (the
Letter of Credit Proceeds
) or any portion
thereof, to cure any default under the Lease and/or under the 1830 Lease and to compensate Landlord
for any loss or damage Landlord incurs as a result of such default, it being understood that any
use of the Letter of Credit Proceeds shall not constitute a bar or defense to any of Landlords
remedies set forth under the Lease or under the 1830 Lease. In such event and upon written notice
from Landlord to Tenant specifying the amount of the Letter of Credit Proceeds so utilized by
Landlord and the particular purpose for which such amount was applied, Tenant shall immediately
deliver to Landlord an amendment to the Letter of Credit or a replacement Letter of Credit in an
amount equal to the full LC Face Amount. Tenants failure to deliver such replacement Letter of
Credit to Landlord within ten (10) days of Landlords notice shall constitute a Default hereunder
and under the 1830 Lease. In the event Landlord transfers its interest in the Lease and the 1830
Lease, Landlord shall transfer the Letter of Credit and any Letter of Credit Proceeds then held by
Landlord to Landlords successor in interest, and thereafter Landlord shall have no further
liability to Tenant with respect to such Letter of Credit or Letter of Credit Proceeds.
(b) As used herein, Letter of Credit shall mean an unconditional, stand-by irrevocable letter
of credit (herein referred to as the
Letter of Credit
) issued by Silicon Valley Bank or the San
Francisco Bay Area office of a major national bank insured by the Federal Deposit Insurance
Corporation and otherwise reasonably satisfactory to Landlord (the
Bank
), naming Landlord as
beneficiary, in the amount of the LC Face Amount, and otherwise in form and substance satisfactory
to Landlord. The Letter of Credit shall be for a one-year term and shall provide:
(i) that Landlord may make partial and multiple draws thereunder, up to the face amount thereof,
(ii) that Landlord may draw upon the Letter of Credit up to the full amount thereof and the Bank
6
will pay to Landlord the amount of such draw upon receipt by the Bank of a sight draft signed by
Landlord and accompanied by a written certification from Landlord to the Bank stating either that:
(A) a Default has occurred and is continuing under the Lease and/or under the 1830 Lease and any
applicable grace period has expired, or (B) Landlord has not received notice from the Bank at least
thirty (30) days prior to the then current expiry date of the Letter of Credit that the Letter of
Credit will be renewed by the Bank for at least one (1) year beyond the relevant annual expiration
date or, in the case of the last year of the Term, thirty (30) days after the Expiration Date,
together with a replacement Letter of Credit or a modification to the existing Letter of Credit
effectuating such renewal, and Tenant has not otherwise furnished Landlord with a replacement
Letter of Credit as hereinafter provided; and (iii) that the beneficial interest under the Letter
of Credit shall be transferable one or more times without cost (other than a transfer fee assessed
by the Bank in an amount not to exceed
1
/
4
of one percent (1%) of the LC Face Amount at the time
of the transfer, which fee shall be paid by Landlord) and, therefore, in the event of Landlords
(or any successor Landlords) assignment or other transfer of its interest in the Lease, the Letter
of Credit shall be transferable by Landlord (or any successor Landlord), without recourse, to the
assignee or transferee of such interest and the Bank shall confirm the same to Landlord (or such
successor) and such assignee or transferee. In the event that the Bank shall fail to (y) notify
Landlord that the Letter of Credit will be renewed for at least one (1) year beyond the then
applicable expiration date, and (z) deliver to Landlord a replacement Letter of Credit or a
modification to the existing Letter of Credit effectuating such renewal, and Tenant shall not have
otherwise delivered to Landlord, at least thirty (30) days prior to the relevant annual expiration
date, a replacement Letter of Credit in the amount required hereunder and otherwise meeting the
requirements set forth above, then Landlord shall be entitled to draw on the Letter of Credit as
provided above, and shall hold the proceeds of such draw as Letter of Credit Proceeds pursuant to
Section 6(a) above.
(c) Tenant hereby waives the provisions of California Civil Code Section 1950.7 (other than
subsection (b) thereof) )and/or any successor statute, it being expressly agreed that Landlord may
apply all or any portion of the Letter of Credit or the proceeds thereof in payment of any and all
sums reasonably necessary to compensate Landlord for any other loss or damage, foreseeable or
unforeseeable, caused by the act or omission of Tenant or any officer, employee, agent or invitee
of Tenant, and that following a Default by Tenant, all or any portion of the Letter of Credit or
the proceeds thereof may be retained by Landlord following a termination of the Lease and applied
to future damages, including damages for future rent, pending determination of the same
(d) Within five (5) business days following Landlords receipt of the Letter of Credit
specified under Section 6(a) above, Landlord shall return the Existing Security Deposit to Tenant
(excluding the Existing Letters of Credit, which shall be cancelled as provided in Section 6(a)
above), and Paragraphs 7 and 8 of the Lease and Paragraphs 7 and 8 of the 1830 Lease shall be of no
further force and effect.
7.
Destruction and Damage
The following provision is hereby added to the Lease as new Paragraph 22(g):
7
If the Premises is damaged or destroyed to the extent that the Premises cannot be
substantially repaired or restored by Landlord within two hundred ten (210) days after the
Casualty Discovery Date, Tenant may terminate this Lease immediately upon notice thereof to
Landlord, which notice shall be given, if at all, not later than fifteen (15) days after
Landlord notifies Tenant of Landlords estimate of the period of time required to repair such
damage or destruction.
8.
Assignment and Subletting
Paragraph 24 of the Lease is hereby deleted in its entirety and the following provision is
hereby substituted therefor:
(a) Tenant shall not voluntarily or by operation of law, (i) mortgage, pledge,
hypothecate or encumber this Lease or any interest herein, (ii) assign or transfer
this Lease or any interest herein, sublease the Premises or any part thereof, or
any right or privilege appurtenant thereto, or allow any other person (the
employees and invitees of Tenant excepted) to occupy or use the Premises, or any
portion thereof, without first obtaining the written consent of Landlord, which
consent shall not be unreasonably withheld, as set forth below in this Paragraph
24; provided, however, that Tenant is not then in Default under this Lease nor is
any event then occurring which with the giving of notice or the passage of time, or
both, would constitute a Default hereunder. Any other provision of the Lease
notwithstanding, Tenant shall have the right to market the Premises in a manner
consistent with other sublease marketing campaigns approved by other landlords of
similarly- situated premises similar in quality to, and in the vicinity of, the
Project, including, if applicable, the use of sublease marketing signage, subject
to the reasonable approval of Landlord.
(b) When Tenant requests Landlords consent to an assignment or subletting, it
shall notify Landlord in writing of the name and address of the proposed assignee
or subtenant and the nature and character of the business of the proposed assignee
or subtenant and shall provide current and one (1) years prior financial
statements for the proposed assignee or subtenant, which financial statements shall
be audited to the extent available and shall in any event be prepared in accordance
with generally accepted accounting principles. Tenant shall also provide Landlord
with a copy of the proposed sublease or assignment agreement, including all
material terms and conditions thereof. Landlord shall have the option, to be
exercised within fifteen (15) business days of receipt of the foregoing, to consent
to the proposed assignment or sublease, or refuse its consent to the proposed
assignment or sublease, provided that (A) such consent shall not be unreasonably
withheld so long as Tenant is not then in Default under this Lease nor is any event
then occurring which, with the giving of notice or the passage of time, or both,
would constitute a Default hereunder, and (B) as a condition to providing such
consent, Landlord may require attornment from the proposed subtenant on terms and
conditions acceptable to Landlord.
8
(c) Without otherwise limiting the criteria upon which Landlord may withhold its consent,
Landlord shall be entitled to consider all reasonable criteria including, but not limited to, the
following: (i) whether or not the proposed subtenant or assignee is engaged in a business which,
and the use of the Premises will be in an manner which, is in keeping with the then character and
nature of all other tenancies in the Project; (ii) whether the use to be made of the Premises by
the proposed subtenant or assignee will conflict with any so-called exclusive use then in favor
of any other tenant of the Building or the Project, and whether such use would be prohibited by any
other portion of this Lease, including, but not limited to, any rules and regulations then in
effect, or under applicable Laws, and whether such use imposes a greater load upon the Premises and
the Building and the Project services than imposed generally by other tenancies in the Project; and
(iii) the creditworthiness and financial stability of the proposed assignee or subtenant in light
of the responsibilities involved. In any event, Landlord may withhold its consent to any assignment
or sublease, if (A) the actual use proposed to be conducted in the Premises or portion thereof
conflicts with the provisions of Paragraphs 10(a) or (b) above or with any other lease which
restricts the use to which any space in the Building or the Project may be put; (B) the proposed
assignment or sublease requires alterations, improvements or additions to the Premises or portions
thereof; (C) the portion of the Premises proposed to be sublet is irregular in shape and/or does
not permit safe or otherwise appropriate means of ingress and egress, or does not comply with
governmental safety and other codes; or (D) the proposed sublessee or assignee is either a
governmental or quasi-governmental agency or instrumentality thereof.
(d) If Landlord approves an assignment or subletting as herein provided, Tenant shall pay to
Landlord, as Additional Rent, fifty percent (50%) of the excess, if any, of (i) the rent and any
additional rent payable by the assignee or sublessee to Tenant, less reasonable and customary
marketing expenditures, brokerage commissions and attorneys fees incurred by Tenant in connection
with such assignment or sublease; minus (ii) Base Rent plus Additional Rent allocable to that part
of the Premises affected by such assignment or sublease pursuant to the provisions of this Lease,
which costs shall, for purposes of the aforesaid calculation, be amortized on a straight- line
basis over the term of such assignment or sublease. The assignment or sublease agreement, as the
case may be, after approval by Landlord, shall not be amended without Landlords prior written
consent, and shall contain a provision directing the assignee or subtenant to pay the rent and
other sums due thereunder directly to Landlord upon receiving written notice from Landlord that
Tenant is in default under this Lease with respect to the payment of Rent. In the event that,
notwithstanding the giving of such notice, Tenant collects any rent or other sums from the assignee
or subtenant, then Tenant shall hold such sums in trust for the benefit of Landlord and shall
immediately forward the same to Landlord. Landlords collection of
9
such rent and other sums shall not constitute an acceptance by Landlord of attornment by
such assignee or subtenant.
(e) Notwithstanding any assignment or subletting, Tenant and any guarantor or surety of
Tenants obligations under this Lease shall at all times remain fully and primarily responsible and
liable for the payment of the Rent and for compliance with all of Tenants other obligations under
this Lease (regardless of whether Landlords approval has been obtained for any such assignment or
subletting).
(f) Tenant shall reimburse Landlord for its out-of-pocket, reasonable costs (including,
without limitation, the reasonable fees of Landlords counsel), actually incurred in connection
with Landlords review and processing of documents regarding any proposed assignment or sublease.
(g) A consent to one assignment, subletting, occupation or use shall not be deemed to be a
consent to any other or subsequent assignment, subletting, occupation or use, and consent to any
assignment or subletting shall in no way relieve Tenant of any liability under this Lease. Any
assignment or subletting without Landlords consent shall be void, and shall, at the option of
Landlord, constitute a Default under this Lease.
(h) Tenant acknowledges and agrees that the restrictions, conditions and limitations imposed
by this Paragraph 24 on Tenants ability to assign or transfer this Lease or any interest herein,
to sublet the Premises or any part thereof, to transfer or assign any right or privilege
appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any
portion thereof, are, for the purposes of California Civil Code Section 1951.4, as amended from
time to time, and for all other purposes, reasonable at the time that this Lease was entered into,
and shall be deemed to be reasonable at the time that Tenant seeks to assign or transfer this Lease
or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right
or privilege appurtenant to the Premises, or to allow any other person to occupy or use the
Premises or any portion thereof.
(i) If this Lease is assigned, whether or not in violation of the provisions of this Lease,
Landlord may collect Rent from the assignee. If the Premises or any part thereof is sublet or used
or occupied by anyone other than Tenant, whether or not in violation of this Lease, Landlord may,
after a Default by Tenant, collect Rent from the subtenant or occupant. In either event, Landlord
may apply the net amount collected to Rent, but no such assignment, subletting, occupancy or
collection shall be deemed a waiver of any of the provisions of this Paragraph 24, or the
acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the
further performance by Tenant of Tenants obligations under this Lease. The consent by Landlord to
an assignment, mortgaging, pledging, encumbering, transfer, use, occupancy or subletting pursuant
to any provision of this Lease
10
shall not, except as otherwise provided herein, in any way be considered
to relieve Tenant from obtaining the express consent of Landlord to any other
or further assignment, mortgaging, pledging, encumbering, transfer, use,
occupancy or subletting. References in this Lease to use or occupancy by anyone
other than Tenant shall not be construed as limited to subtenants and those
claiming under or through subtenants but as including also licensees or others
claiming under or through Tenant, immediately or remotely. The listing of any
name other than that of Tenant on any door of the Premises or on any directory
or in any elevator in the Building, or otherwise, shall not, except as
otherwise provided herein, operate to vest in the person so named any right or
interest in this Lease or in the Premises, or be deemed to constitute, or serve
as a substitute for, or any waiver of, any prior consent of Landlord required
under this Paragraph 24.
(j) Each subletting and/or assignment pursuant to this Paragraph shall
be subject to all of the covenants, agreements, terms, provisions and
conditions contained in this Lease. If Landlord shall consent to, or reasonably
withhold its consent to, any proposed assignment or sublease, Tenant shall
indemnify, defend and hold harmless Landlord against and from any and all loss,
liability, damages, costs and expenses (including reasonable counsel fees)
resulting from any claims that may be made against Landlord by the proposed
assignee or sublessee or by any brokers or other persons claiming a commission
or similar fee in connection with the proposed assignment or sublease.
9.
Option to Renew
(a) All previous rights or options to renew contained in the Lease are null, void and of no
force or effect from and after the date hereof.
(b) Tenant shall have one (1) option (the
Renewal Option
) to extend the Term for a period of
five (5) years beyond the Expiration Date (the
Renewal Term
). The Renewal Option is personal to
Financial Engines, Inc. and may not be exercised by any other sublessee or assignee, or by any
other successor or assign of Financial Engines, Inc. The Renewal Option shall be effective only if
Tenant is not in Default under the Lease, nor has any event occurred which with the giving of
notice or the passage of time, or both, would constitute a default hereunder, either at the time of
exercise of the Renewal Option or at the commencement of the Renewal Term. The Renewal Option must
be exercised, if at all, by written notice (
Election Notice
) from Tenant to Landlord given not
more than twelve (12) months nor less than nine (9) months prior to the expiration of the Term. Any
such notice given by Tenant to Landlord shall be irrevocable. If Tenant fails to exercise the
Renewal Option in a timely manner as provided for above, the Renewal Option shall be void. The
Renewal Term shall be upon the same terms and conditions as the initial Term, except that (i) no
further Renewal Option shall be available to Tenant at the expiration of the Renewal Term, and (ii)
the Base Rent during the Renewal Term (the
Renewal Rate
) shall be equal to one hundred percent
(100%) of the prevailing market rate for space in similarly situated buildings in the vicinity of
the Project comparable to the Building in location, condition, quality and type at the commencement
of the Renewal Term (the
Prevailing Rate
).
11
The term prevailing market rate shall mean the base rental for such comparable space,
taking into account any additional rental and all other payments and escalations payable hereunder
and by tenants under leases of such comparable space. The Prevailing Rate shall be determined in
accordance with Section 9(c) below.
(c) Within thirty (30) days after Landlords receipt of the Election Notice or as soon
thereafter as is reasonably practicable, Landlord shall notify Tenant in writing (the
Renewal Rate
Notice
) of Landlords determination of the Renewal Rate for the Renewal Term. Tenant shall have
thirty (30) days (the
Response Period
) after receipt of the Renewal Rate Notice to advise
Landlord whether or not Tenant agrees with Landlords Renewal Rate. If Tenant does not respond to
Landlord in writing within the Response Period, then Tenant shall be deemed to have accepted the
Renewal Rate specified by Landlord in the Renewal Rate Notice. If Tenant agrees or is deemed to
have agreed with Landlords determination of the Renewal Rate, then such determination shall be
final and binding on the parties. If Tenant notifies Landlord in writing during the Response Period
that Tenant disagrees with Landlords determination of the Renewal Rate, then within twenty (20)
days after Landlords receipt of Tenants written notice, Landlord and Tenant shall each retain a
licensed commercial real estate broker with at least five (5) years experience negotiating lease
transactions for similar properties in the City of Palo Alto. If only one broker is appointed by
the parties during such twenty (20) day period, then such broker shall, within twenty (20) days
after his or her appointment, determine the Prevailing Rate, and the Renewal Rate shall be the
Prevailing Rate so determined by such broker. If Landlord and Tenant each appoint a broker during
such twenty (20) day period as contemplated hereunder, then the brokers shall meet at least two (2)
times during the thirty (30) day period commencing on the date on which the last of the brokers has
been appointed (the
Broker Negotiation Period
) to attempt to mutually agree upon the Prevailing
Rate. If the brokers agree upon the Prevailing Rate on or before the expiration of the Broker
Negotiation Period, then the Prevailing Rate so determined by the brokers shall be the Renewal
Rate for all purposes of the Lease. If the brokers cannot agree upon the Prevailing Rate at the
expiration of the Broker Negotiation Period, but if the determinations of such brokers differ by
less than five percent (5%) of the higher of the two, the Prevailing Rate shall be the average of
the two determinations. In the event such determinations differ by more than five percent (5%) of
the higher of the two, then such appraisers shall within twenty (20) days designate a third broker,
who shall have the same qualifications required for the initial two brokers. If the two brokers
fail to agree upon and appoint a third broker, then the third broker shall be appointed by
J.A.M.S./ENDISPUTE. The third broker shall, within twenty (20) days after his or her appointment,
make a determination of the Prevailing Rate. The determinations of Prevailing Rate prepared by all
three (3) brokers shall be compared and the Prevailing Rate shall be the average of the two closest
determinations. Such determination shall be final and binding upon the parties. The Renewal Rate
shall be the Prevailing Rate so determined in accordance with the foregoing sentence. Landlord and
Tenant shall each bear the expense of the broker selected by it and shall share equally the expense
of the third broker, if any. Promptly following the determination of the Renewal Rate pursuant to
this Section 9(c), the parties shall execute an amendment to the Lease memorializing such Renewal
Rate.
12
10.
Right of First Offer
(a) Subject to the terms of this Section 10, Tenant shall have a right of offer (the
Right of
First Offer
) during the Term to lease Suite 200 (containing approximately 11,145 rentable square
feet) or Suite 201 (containing approximately 5,985 rentable square feet) in the Building when,
subject to the last sentence of this Section 10(a), the first of such suites becomes available for
lease (the first such space becoming available after the date hereof being herein referred to as
the
First Offer Space
). The Right of First Offer is personal to Financial Engines, Inc. and may
not be exercised by any sublessee or assignee, or by any other successor or assign, of Financial
Engines, Inc. The Right of First Offer shall be effective only if neither a Default nor an event or
condition which, with the giving of notice or the passage of time, or both, would constitute a
Default, is occurring hereunder, either at the time of exercise of the Right of First Offer or on
the First Offer Commencement Date (as hereinafter defined). Tenant understands that Suite 200 is
currently leased to a third party and that Suite 201 is currently vacant. Notwithstanding anything
herein to the contrary, (i) Landlord shall have the right after the date hereof to enter into a
lease covering Suite 201 (a
Subsequent Suite 201 Lease
) without triggering Tenants Right of
First Offer, and the Right of First Offer shall only be effective, as to Suite 201, following the
expiration (subject to clause (ii) below) or sooner termination of the Subsequent Suite 201 Lease,
and (ii) the Right of First Offer is expressly made subject to the right of Landlord to renew or
extend the term of the subsequent Suite 201 Lease and of the lease of the existing tenant of Suite
200.
(b) In the event that Landlord elects to market or offer to the public for lease the First
Offer Space, or if Landlord receives a proposal (other than a proposal from the existing tenant of
Suite 200 or from the tenant under the subsequent Suite 201 Lease) to lease the First Offer Space,
which proposal Landlord intends to accept (a
First Offer Proposal
), Landlord shall notify Tenant
in writing of the business and economic terms upon which Landlord would be willing to lease the
First Offer Space to Tenant (a
First Offer Space Availability Notice
). Tenant shall thereafter
have the right to lease the First Offer Space on the business and economic terms specified in the
First Offer Space Availability Notice, and otherwise on the terms and conditions contained in the
Lease, by written notice (a
First Offer Notice
) to Landlord given not later than five (5)
business days after Tenants receipt of the First Offer Space Availability Notice. If Tenant fails
to deliver a First Offer Notice to Landlord on a timely basis as provided in the preceding sentence
(time being of the essence), then Tenant shall be deemed to have elected not to exercise the Right
of First Offer.
(c) In the event Tenant fails to exercise its Right of First Offer in a timely manner as
provided herein, the Right of First Offer shall lapse and Landlord shall thereafter have the right
to lease the First Offer Space to any party or parties on terms deemed acceptable to Landlord in
its sole and absolute discretion. If Tenant validly exercises the Right of First Offer, then
(1) Landlord and Tenant shall promptly execute and amendment to the Lease adding the First Offer
Space to the Premises, (2) Tenants lease of the First Offer Space shall commence on a date (the
First Offer Commencement Date
) specified in the First Offer Space Availability Notice, (3) the
First Offer Space shall be leased to Tenant upon the economic terms set forth in the First Offer
Space Availability Notice and otherwise on the terms set forth in the Lease, (4) Tenants
Proportionate Share of the Building and the Project shall be increased to reflect the First Offer
Space, and (5) except to the extent that the First Offer Space Availability Notice provides a
13
tenant improvement allowance or a tenant improvement loan to Tenant, the First Offer Space
shall be delivered to Tenant in its as-is condition on the First Offer Commencement Date, Tenant
acknowledging and agreeing that Landlord shall have no obligation to improve, remodel or otherwise
alter such First Offer Space prior to or after the First Offer Commencement Date, except to the
extent expressly provided in the First Offer Space Availability Notice.
11.
General Provisions
(a)
Ratification and Entire Agreement
. Except as expressly amended by this Amendment, the
Lease shall remain unmodified and in full force and effect. As modified by this Amendment, the
Lease is hereby ratified and confirmed in all respects. In the event of any inconsistencies between
the terms of this Amendment and the Lease, the terms of this Amendment shall prevail. The Lease as
amended by this Amendment constitutes the entire understanding and agreement of Landlord and Tenant
with respect to the subject matter hereof, and all prior agreements, representations, and
understandings between Landlord and Tenant with respect to the subject matter hereof, whether oral
or written, are or should be deemed to be null and void, all of the foregoing having been merged
into this Amendment. Landlord and Tenant do each hereby acknowledge that it and/or its counsel have
reviewed and revised this Amendment, and agree that no rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall be employed in the interpretation
of this Amendment. This Amendment may be amended or modified only by an instrument in writing
signed by each of Landlord and Tenant.
(b)
Brokerage
. Landlord and Tenant each represents and warrants to the other that neither it
nor its officers or agents nor anyone acting on its behalf has dealt with any real estate broker
except Newmark Knight Frank (
Tenants Broker
) and NAIBT Commercial (
Landlords Broker
) in the
negotiating or making of this Amendment, and each party agrees to indemnify and hold harmless the
other from any claim or claims, and costs and expenses, including attorneys fees, incurred by the
indemnified party in conjunction with any such claim or claims of any other broker or brokers to a
commission in connection with the Lease as a result of the actions of the indemnifying party.
Provided that this Amendment is fully executed by the parties hereto, then Landlord shall pay a
commission to Landlords Broker pursuant to a separate written agreement between Landlord and
Landlords Broker, and Landlords Broker shall be responsible for any portion of such commission
payable to Tenants Broker.
(c)
Authority; Applicable Law; Successors Bound
. Landlord and Tenant do each hereby represent
and warrant to the other that this Amendment has been duly authorized by all necessary action on
the part of such party and that such party has full power and authority to execute, deliver and
perform its obligations under this Amendment, without consent of any other party. This Amendment
shall be governed by and construed under the laws of the State of California, without giving effect
to any principles of conflicts of law that would result in the application of the laws of any other
jurisdiction. This Amendment shall inure to the benefit of and be binding upon Landlord and Tenant
and their respective successors and permitted assigns with respect to the Lease.
14
(d)
Counterparts.
This Amendment may be executed in counterparts each of which
shall be deemed an original but all of which taken together shall constitute one and the same
instrument.
In Witness Whereof,
Landlord and Tenant have executed this Amendment as of the date
first above written.
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Landlord:
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Harbor Investment Partners
,
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a California general partnership
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By:
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Embarcadero Road Investors
llc
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a Delaware limited liability company,
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its General Partner
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By:
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UBS Realty Investors
llc
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a Massachusetts limited liability company,
its Manager
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By:
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/s/ Timothy J. Cahill
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Name:
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Timothy J. Cahill
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Title:
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Director Asset Management
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Tenant:
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Financial Engines, Inc.,
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a California corporation
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By:
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/s/ Raymond J. Sims
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Name:
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Raymond J. Sims
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Title:
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EVP & CFO
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15
Exhibit 10.8
Execution Version
SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
(together with any schedule,
annex, or exhibit attached hereto, as the same may be amended, restated, or otherwise modified
from time to time, this
Agreement
) is entered into as of April 20, 2009 (the
Second Amended
and Restated Effective Date
) among
SILICON VALLEY BANK
, a California corporation
(Bank),
FINANCIAL ENGINES, INC.,
a California corporation
(Financial Engines)
and
FINANCIAL ENGINES
REINCORPORATION SUB, INC. (Reincorporation Sub)
a Delaware corporation (each of Financial
Engines and Reincorporation Sub may be referred to as a
Borrower
and collectively,
Borrowers
), and amends, restates, replaces and supersedes in its entirety that certain
Amended and Restated Loan and Security Agreement dated as of June 26, 2008, (the
2008 Loan
Agreement
) among Bank and Borrowers. Definitions of capitalized terms used in this Agreement
are set forth in Section 13 below. The parties agree as follows:
1
ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement shall be construed following GAAP.
Calculations and determinations must be made following GAAP. Capitalized terms not otherwise
defined in this Agreement shall have the meanings set forth in Section 13. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meaning provided by
the Code to the extent such terms are defined therein.
2
LOAN AND TERMS OF PAYMENT
2.1 Promise to Pay.
Borrowers hereby jointly, severally and unconditionally promise to
pay Bank the outstanding principal amount of all Credit Extensions and accrued and unpaid
interest thereon as and when due in accordance with this Agreement.
2.1.1 Revolving Advances.
(a)
Availability
. Subject to the terms and conditions of this Agreement, Bank
shall make Advances not exceeding the Availability Amount. Amounts borrowed hereunder may be
repaid and, prior to the Revolving Line Maturity Date, reborrowed, subject to the applicable
terms and conditions precedent herein.
(b)
Termination; Repayment
. The Revolving Line terminates on the Revolving
Line Maturity Date, when the principal amount of all Advances, the unpaid interest thereon,
and all other Obligations relating to the Revolving Line shall be immediately due and payable.
2.1.2 Letters of Credit Sublimit.
As part of the Revolving Line, Bank shall issue or have issued Letters of Credit for any
Borrowers account. Such aggregate amounts utilized hereunder shall at all times reduce the
amount otherwise available for Advances under the Revolving Line. The aggregate amount
available to be used for the issuance of Letters of Credit may not exceed Two Million Five
Hundred Thousand Dollars ($2,500,000). The face amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) may not
exceed the lesser of: (A) Two Million Five Hundred Thousand Dollars ($2,500,000) at any time
or (B) the Availability Amount. Notwithstanding the foregoing, Bank may issue standby Letters
of Credit with an aggregate face amount of up to One Million Five Hundred Thousand Dollars
($1,500,000) at any time outstanding even if there is no availability under the Borrowing
Base. If, on the Revolving Line Maturity Date, there are any outstanding Letters of Credit,
then on such date Borrowers shall provide to Bank cash collateral in an amount equal to 100%
of the face amount of all such Letters of Credit plus all interest, fees, and costs due or to
become due in connection therewith (as reasonably estimated by Bank in its good faith business
judgment), to secure all of the Obligations relating to said Letters of Credit. All Letters of
Credit shall be in form and substance acceptable to Bank in its sole discretion and shall be
subject to the terms and conditions of Banks standard Application and Letter of Credit
Agreement (the
Letter of Credit Application
). Borrowers agree to execute any further
documentation in connection with the Letters of Credit as Bank may reasonably request.
(a) The obligation of Borrowers to immediately reimburse Bank for drawings made under Letters
of Credit in accordance with the terms of the Letter of Credit Application and the Letter of Credit
shall be absolute, unconditional, and irrevocable, and Borrowers shall perform strictly in
accordance with the terms of this Agreement, such Letters of Credit, and the Letter of Credit
Application.
(b) Borrowers may request that Bank issue a Letter of Credit payable in a Foreign Currency. If
a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an
Advance to Borrowers of the equivalent of the amount thereof (plus fees and charges in connection
therewith such as wire, cable, SWIFT or similar charges) in Dollars at the then-prevailing rate of
exchange in San Francisco, California, for sales of the Foreign Currency for transfer to the
country issuing such Foreign Currency.
(c) To guard against fluctuations in currency exchange rates, upon the issuance of any Letter
of Credit payable in a Foreign Currency, Bank shall create a reserve (the
Letter of Credit
Reserve
) under the Revolving Line in an amount equal to ten percent (10%) of the face amount of
such Letter of Credit. The amount of the Letter of Credit Reserve may be adjusted by Bank from time
to time to account for fluctuations in the exchange rate. The availability of funds under the
Revolving Line shall be reduced by the amount of such Letter of Credit Reserve for as long as such
Letter of Credit remains outstanding.
2.1.3 Foreign Exchange Sublimit.
As part of the Revolving Line, Borrowers may enter into
foreign exchange contracts with Bank under which a Borrower commits to purchase from or sell to
Bank a specific amount of Foreign Currency (each, a
FX Forward Contract
) on a specified date (the
Settlement Date
). FX Forward Contracts shall have a Settlement Date of at least one (1) FX
Business Day after the contract date and shall be subject to a reserve of ten percent (10%) of each
outstanding FX Forward Contract in a maximum aggregate amount equal to Two Million Five Hundred
Thousand Dollars ($2,500,000) (the
FX Reserve
). The aggregate amount of FX Forward Contracts at
any one time may not exceed ten (10) times the amount of the FX Reserve. The amount otherwise
available for Credit Extensions under the Revolving Line shall be reduced by an amount equal to ten
percent (10%) of each outstanding FX Forward Contract (the
FX Reduction Amount
). Any amounts
needed to fully reimburse Bank will be treated as Advances under the Revolving Line and will accrue
interest at the interest rate applicable to Advances.
2.1.4 Cash Management Services Sublimit.
Borrowers may use up to Two Million Five Hundred
Thousand Dollars ($2,500,000) of the Revolving Line for Banks cash management services which may
include merchant services, direct deposit of payroll, business credit card, and check cashing
services identified in Banks various cash management services agreements (collectively, the
Cash
Management Services
). Any amounts Bank pays on behalf of Borrowers for any Cash Management
Services will be treated as Advances under the Revolving Line and will accrue interest at the
interest rate applicable to Advances.
2.1.5 Term Loan.
Bank shall make one (1) term loan available to Borrowers in an amount up to
the Term Loan Amount on the Second Amended and Restated Effective Date subject to the satisfaction
of the terms and conditions of this Agreement. Borrowers shall repay the Term Loan in (i)
thirty-six (36) equal installments of principal, plus (ii) payments of accrued interest (the
Term
Loan Payment
). Beginning on the first day of the month following the month in which the Funding
Date occurs, the principal portion of each Term Loan Payment shall be payable on the first day of
each month. The interest portion of each Term Loan payment shall be paid on each Interest Payment
Date. Borrowers final Term Loan Payment, due on the Term Loan Maturity Date, shall include all
outstanding principal and accrued and unpaid interest under the Term Loan. The Term Loan may be
prepaid at any time without penalty.
2.2 Overadvances.
If, at any time, Borrowers Obligations under Section 2.1.1, 2.1.2, 2.1.3,
or 2.1.4 exceed the lesser of either (i) the Revolving Line or (ii) subject to the qualification
contained in Section 2.1.2 with respect to Letters of Credit with an aggregate face amount of up to
$1,500,000, the Borrowing Base, Borrowers must immediately pay Bank the excess.
2.3 Payment of Interest on the Credit Extensions.
(a)
Interest Rate
.
-2-
(i)
Advances
. Subject to Section 2.3(b), the principal amount outstanding under the
Revolving Line shall accrue interest at a floating per annum rate equal to .75% percentage points
above the Prime Rate, which interest shall be payable monthly in accordance with Section 2.3(g)
below.
(ii)
Term Loan
. The Term Loan shall bear interest on the outstanding principal
amount thereof from the date when made, continued or converted until paid in full at a rate
per
annum
equal to (i) for Prime Rate Term Loans, the Prime Rate plus 1.50%, and (ii) for LIBOR Term
Loans, the LIBOR Rate plus 4.00%. On and after the expiration of any Interest Period applicable to
any LIBOR Term Loan outstanding on the date of occurrence of an Event of Default or acceleration of
the Obligations, the Effective Amount of such LIBOR Term Loan shall, during the continuance of such
Event of Default or after acceleration, bear interest at a rate per annum equal to the Prime Rate
plus five percent (5.00%). In no event shall Borrowers maintain at any time LIBOR Term Loans having
more than two (2) different Interest Periods.
(b)
Default Rate
. Immediately upon the occurrence and during the continuance of an
Event of Default, Obligations shall bear interest at a rate per annum which is five percentage
points above the rate that is otherwise applicable thereto in the case of Advances or Prime Rate
Term Loans (the
Default Rate
). Payment or acceptance of the increased interest rate provided in
this Section 2.3(b) is not a permitted alternative to timely payment and shall not constitute a
waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Bank.
(c)
Prime Rate Adjustments
. Changes to the interest rate of any Credit Extension
based on changes to the Prime Rate shall be effective on the effective date of any change to the
Prime Rate and to the extent of any such change.
(d)
LIBOR Term Loans
. The interest rate applicable to each LIBOR Term Loan shall be
determined in accordance with Section 3.6(a) hereunder. Subject to Sections 3.6 and 3.7, such
rate shall apply during the entire Interest Period applicable to such LIBOR Term Loan, and interest
calculated thereon shall be payable on the Interest Payment Date applicable to such LIBOR Term
Loan.
(e)
360-Day Year
. Interest shall be computed on the basis of a 360-day year for the
actual number of days elapsed.
(f)
Debit of Accounts
. Bank may debit any of any Borrowers Deposit Accounts,
including the Designated Deposit Account, for principal and interest payments or any other amounts
any Borrower owes Bank when due. These debits shall not constitute a set-off.
(g)
Payments
. Unless otherwise provided, interest is payable monthly on the first
calendar day of each month. Payments of principal and/or interest received after 12:00 p.m.
Pacific time are considered received at the opening of business on the next Business Day. When a
payment is due on a day that is not a Business Day, the payment is due the next Business Day and
additional fees or interest, as applicable, shall continue to accrue.
2.4 Fees.
Borrowers shall pay to Bank:
(a)
Revolving Line Commitment Fee
. A fully earned, non-refundable commitment fee equal
to one-quarter of a percent (.25%) of the Revolving Line, less a pro-rated amount in respect of the
loan fee of $7000 received on the effective date of the 2008 Loan Agreement, on the Second Amended
and Restated Effective Date; and if Borrowers balances at Bank or Banks affiliates drop below
$5,000,000 at any time, Borrowers will immediately pay to Bank an additional Commitment fee of
$30,000;
(b)
Term Loan Fee.
A fully-earned, non-refundable fee equal to one-half of one
percent (.50%) of the Term Loan Amount, on the Second Amended and Restated Effective Date; and
(b)
Bank Expenses
. All Bank Expenses (including reasonable attorneys fees and
expenses, plus expenses, for documentation and negotiation of this Agreement) incurred through and
after the Second Amended and Restated Effective Date, when due.
3
CONDITIONS OF LOANS
-3-
3.1 Conditions Precedent to Initial Credit Extension.
Banks obligation to make the initial
Credit Extension is subject to the condition precedent that Borrowers shall consent to or have
delivered, in form and substance satisfactory to Bank, such documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate, including, without limitation:
(a) duly executed original signatures to the Loan Documents to which it is a party;
(b) Intentionally Omitted;
(c) Operating Documents and a good standing certificate of each of Borrowers and Guarantor
certified by the Secretary of State of the States of California and Delaware, as applicable, as of
a date no earlier than thirty (30) days prior to the Second Amended and Restated Effective Date;
(d) duly executed original signatures to the completed Borrowing Resolutions for each of
Borrowers;
(e) Payoff letter duly executed by Coast DL Funding LLC in favor of Bank terminating the Oak
Hill Note and all obligations and liens relating thereto;
(f) certified copies, dated as of a recent date, of financing statement searches, as Bank
shall request, accompanied by written evidence (including any UCC termination statements) that the
Liens indicated in any such financing statements either constitute Permitted Liens or have been or,
in connection with the initial Credit Extension, will be terminated or released;
(g) the Perfection Certificate(s) executed by each of Borrowers and
Guarantor;
(h) Intentionally Omitted;
(i) the duly executed original signatures to the Reaffirmation of Guaranty, together
with the completed Borrowing Resolutions for Guarantor;
(j) the insurance policies and/or endorsements required pursuant to Section 6.5
hereof, and
(k) payment of the fees and Bank Expenses then due as specified in Section
2.4 hereof.
3.2 Conditions Precedent to all Credit Extensions.
Banks obligation to make each Credit
Extension, including the initial Credit Extension, is subject to the following:
(a) except as otherwise provided in Section 3.4, timely receipt of an
executed Payment/Advance Form;
(b) the representations and warranties in Section 5 shall be true in all material respects on
the date of the Payment/Advance Form and on the Funding Date of each Credit Extension; provided,
however, that such materiality qualifier shall not be applicable to any representations and
warranties that already are qualified or modified by materiality in the text thereof; and provided,
further that those representations and warranties expressly referring to a specific date shall be
true, accurate and complete in all material respects as of such date, and no Event of Default shall
have occurred and be continuing or result from the Credit Extension. Each Credit Extension is each
Borrowers representation and warranty on that date that the representations and warranties in
Section 5 remain true in all material respects; provided, however, that such materiality qualifier
shall not be applicable to any representations and warranties that already are qualified or
modified by materiality in the text thereof; and provided, further that those representations and
warranties expressly referring to a specific date shall be true, accurate and complete in all
material respects as of such date; and
(c) There has not been a Material Adverse Change since the Second Amended and Restated
Effective Date.
3.3 Covenant to Deliver.
-4-
Each Borrower agrees to deliver to Bank each item required to be delivered to Bank under this
Agreement as a condition to any Credit Extension. Each Borrower expressly agrees that a Credit
Extension made prior to the receipt by Bank of any such item shall not constitute a waiver by Bank
of such Borrowers obligation to deliver such item, and any such Credit Extension in the absence
of a required item shall be made in Banks sole discretion.
3.4 Procedures for Borrowing.
Subject to the prior satisfaction of all other applicable
conditions to the making of an Advance set forth in this Agreement, to obtain an Advance (other
than Advances under Sections 2.1.2 or 2.1.4), Borrowers shall notify Bank (which notice shall be
irrevocable) by electronic mail, facsimile, or telephone by 12:00 p.m. Pacific time on the Funding
Date of the Advance. Together with any such electronic or facsimile notification, Borrowers
shall deliver to Bank by electronic mail or facsimile a completed Payment/Advance
Form executed by a Responsible Officer or his or her designee. Bank may rely on any telephone
notice given by a person whom Bank believes is a Responsible Officer or designee. Bank may make
Advances under this. Agreement based on instructions from a Responsible Officer or his or her
designee or without instructions if the Advances are necessary to meet Obligations which have
become due. In the case of the Term Loan, a Notice of Borrowing (in the form of Exhibit B-l) must
be received by Bank prior to 12:00 p.m. Pacific time, (i) at least three (3) Business Days prior to
the requested Funding Date, in the case of LIBOR Term Loans, and (ii) on the requested Funding
Date, in the case of Prime Rate Term Loans, specifying: (1) the amount of the Term Loan; (2) the
requested Funding Date; (3) whether the Term Loan is to be comprised of LIBOR Term Loans or Prime
Rate Term Loans; and (4) the duration of the Interest Period applicable to any such LIBOR Term
Loans included in such notice; provided that if the Notice of Borrowing shall fail to specify the
duration of the Interest Period for any LIBOR Term Loan, such Interest Period shall be one (1)
month.
The proceeds of all such Advances and the Term Loan will be made available to Borrowers on the
Funding Date by Bank by transfer to the Designated Deposit Account and, subsequently, by wire
transfer to such other account as Borrower may instruct in the Notice of Borrowing. No Advances or
Term Loan shall be deemed made to Borrowers, and no interest shall accrue on any such Credit
Extension, until the related funds have been deposited in the Designated Deposit Account.
3.5 Conversion and Continuation Elections.
(a) So long as (i) no Event of Default exists; (ii) Borrower shall not have sent any notice of
termination of this Agreement; and (iii) Borrower shall have complied with such customary
procedures as Bank has established from time to time for Borrowers requests for LIBOR Term Loans,
Borrower may, upon irrevocable written notice to Bank:
(1) elect to convert on any Business Day, Prime Rate Term Loans into LIBOR Term
Loans;
(2) elect to continue on any Interest Payment Date any LIBOR Term Loans maturing on
such Interest Payment Date; or
(3) elect to convert on any Interest Payment Date any LIBOR Term Loans maturing on such
Interest Payment Date into Prime Rate Term Loans.
(b) Borrower shall deliver a Notice of Conversion/Continuation in accordance with Section
10 to be received by Bank prior to 12:00 p.m. Pacific time (i) at least three (3) Business Days in
advance of the Conversion Date or Continuation Date, if any Term Loans are to be converted into or
continued as LIBOR Term Loans; and (ii) on the Conversion Date, if any Term Loans are to be
converted into Prime Rate Term Loans, in each case specifying the:
(1) proposed Conversion Date or Continuation Date;
(2) aggregate amount of the Term Loans to be converted or continued;
(3) nature of the proposed conversion or continuation; and
(4) duration of the requested Interest Period.
-5-
(c) If upon the expiration of any Interest Period applicable to any LIBOR Term Loans, Borrower
shall have timely failed to select a new Interest Period to be applicable to such LIBOR Term Loans,
Borrower shall be deemed to have elected to convert such LIBOR Term Loans into Prime Rate Term
Loans.
(d) Any LIBOR Term Loans shall, at Banks option, convert into Prime Rate Term Loans in the
event that (i) an Event of Default shall exist. Borrower agrees to pay Bank, upon demand by Bank
(or Bank may, at its option, charge the Designated Deposit Account or any other account Borrower
maintains with Bank) any amounts required to compensate Bank for any loss (including loss of
anticipated profits), cost, or expense incurred by Bank, as a result of the conversion of LIBOR
Term Loans to Prime Rate Term Loans pursuant to this Section 3.5(d).
(e) Notwithstanding anything to the contrary contained herein, Bank shall not be required to
purchase United States Dollar deposits in the London interbank market or other applicable LIBOR
market to fund any LIBOR Term Loans, but the provisions hereof shall be deemed to apply as if Bank
had purchased such deposits to fund the LIBOR Term Loans.
3.6 Special Provisions Governing LIBOR Term Loans.
Notwithstanding any other provision of this
Agreement to the contrary, the following provisions shall govern with respect to LIBOR Term Loans
as to the matters covered:
(a)
Determination of Applicable Interest Rate
. As soon as practicable on each Interest
Rate Determination Date, Bank shall determine (which determination shall, absent manifest error in
calculation, be final, conclusive and binding upon all parties) the interest rate that shall apply
to the LIBOR Term Loans for which an interest rate is then being determined for the applicable
Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in
writing) to Borrower.
(b)
Inability to Determine Applicable Interest Rate
. In the event that Bank shall
have determined (which determination shall be final and conclusive and binding upon all parties
hereto), on any Interest Rate Determination Date with respect to any LIBOR Term Loan, that by
reason of circumstances affecting the London interbank market adequate and fair means do not exist
for ascertaining the interest rate applicable to such Advance on the basis provided for in the
definition of LIBOR, Bank shall on such date give notice (by facsimile or by telephone confirmed in
writing) to Borrower of such determination, whereupon (i) no Term Loans may be made as, or
converted to, LIBOR Term Loans until such time as Bank notifies Borrower that the circumstances
giving rise to such notice no longer exist, and (ii) any Notice of Borrowing or Notice of
Conversion/Continuation given by Borrower with respect to Term Loans in respect of which such
determination was made shall be deemed to be rescinded by Borrower.
(c)
Compensation for Breakage or Non-Commencement of Interest Periods
. Borrower shall
compensate Bank, upon written request by Bank (which request shall set forth the manner and method
of computing such compensation), for all losses, expenses, unrealized gains and liabilities
(including any interest paid by Bank to lenders of funds borrowed by it to make or carry its LIBOR
Term Loans, any loss, expense or liability incurred by Bank in connection with the liquidation or
re-employment of such funds, and, in the case of complete or partial principal payments or
conversions of LIBOR Term Loans prior to the last day of the applicable Interest Period, any amount
by which (A) the additional interest which would have been payable on the amount so prepaid or
converted had it not been paid or converted until the last day of the applicable Interest Period
exceeds (B) the interest which would have been recoverable by Bank by placing the amount so
received on deposit in the certificate of deposit markets, the offshore currency markets, or United
States Treasury investment products, as the case may be, for a period starting on the date on which
it was so paid or converted and ending on the last day of such Interest Period at the interest rate
determined by Bank in its reasonable discretion), if any, that Bank may incur: (i) if for any
reason (other than a default by Bank or due to any failure of Bank to fund LIBOR Term Loans due to
impracticability or illegality under Sections 3.7(c) and 3.7(d)) a borrowing or a conversion to or
continuation of any LIBOR Term Loan does not occur on a date specified in a Notice of Borrowing or
a Notice of Conversion/Continuation, as the case may be, or (ii) if for any reason (including
voluntary or mandatory prepayment or acceleration) any complete or partial principal payment or any
conversion of any of Borrowers LIBOR Term Loans occurs on a date prior to the last day of an
Interest Period applicable to that Advance. Banks determination as to such amount shall be
conclusive absent manifest error.
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(d)
Assumptions Concerning Funding of LIBOR Term Loans
. Calculation of all amounts
payable to Bank under this Section 3.6 and under Section 3.7 shall be made as though Bank had
actually funded each of its relevant LIBOR Term Loans through the purchase of a Eurodollar deposit
bearing interest at the rate obtained pursuant to the definition of LIBOR Rate in an amount equal
to the amount of such LIBOR Term Loan and having a maturity comparable to the relevant Interest
Period; provided, however, that Bank may fund each of its LIBOR Term Loans in any manner it sees
fit and the foregoing assumptions shall be utilized only for the purposes of calculating amounts
payable under this Section 3.6 and under Section 3.7.
(e)
LIBOR Term Loans After Default
. After the occurrence and during the continuance
of an Event of Default, (i) Borrower may not elect to have a Credit Extension be made or continued
as, or converted to, a LIBOR Term Loan after the expiration of any Interest Period then in effect
for such Term Loan and (ii) subject to the provisions of Section 3.6(c), any Notice of
Conversion/Continuation given by Borrower with respect to a requested conversion/continuation that
has not yet occurred shall, at Banks option, be deemed to be rescinded by Borrower and be deemed a
request to convert or continue Term Loans referred to therein as Prime Rate Term Loans.
3.7
Additional Requirements/Provisions Regarding LIBOR Term Loans.
(a) Borrower shall pay Bank, upon demand by Bank, from time to time such amounts as Bank may
determine to be necessary to compensate it for any costs incurred by Bank that Bank determines are
attributable to its making or maintaining of any amount receivable by Bank hereunder in respect of
any LIBOR Term Loans relating thereto (such increases in costs and reductions in amounts receivable
being herein called
Additional Costs
), in each case resulting from any Regulatory Change which:
(i) changes the basis of taxation of any amounts payable to Bank under this Agreement in
respect of any LIBOR Term Loans (other than changes which affect taxes measured by or imposed on
the overall net income of Bank by the jurisdiction in which Bank has its principal office);
(ii) imposes or modifies any reserve, special deposit or similar requirements relating to any
extensions of credit or other assets of, or any deposits with, or other liabilities of Bank
(including any LIBOR Term Loans or any deposits referred to in the definition of LIBOR); or
(iii) imposes any other condition affecting this Agreement (or any of such extensions of
credit or liabilities).
Bank will notify Borrower of any event occurring after the Effective Date which will entitle
Bank to compensation pursuant to this Section 3.7(a) as promptly as practicable after it obtains
knowledge thereof and determines to request such compensation. Bank will furnish Borrower with a
statement setting forth the basis and amount of each request by Bank for compensation under this
Section 3.7(a). Determinations and allocations by Bank for purposes of this Section 3.7(a) of the
effect of any Regulatory Change on its costs of maintaining its obligations to make LIBOR Term
Loans, of making or maintaining LIBOR Term Loans, or on amounts receivable by it in respect of
LIBOR Term Loans, and of the additional amounts required to compensate Bank in respect of any
Additional Costs, shall be conclusive absent manifest error.
(b) If Bank shall determine that the adoption or implementation of any applicable law, rule,
regulation, or treaty regarding capital adequacy, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central bank, or comparable
agency charged with the interpretation or administration thereof, or compliance by Bank (or its
applicable lending office) with any request or directive regarding capital adequacy (whether or not
having the force of law) of any such authority, central bank, or comparable agency, has or would
have the effect of reducing the rate of return on capital of Bank or any person or entity
controlling Bank (a
Parent)
as a consequence of its obligations hereunder to a level below that
which Bank (or its Parent) could have achieved but for such adoption, change, or compliance (taking
into consideration policies with respect to capital adequacy) by an amount deemed by Bank to be
material, then from time to time, within five (5) Business Days after demand by Bank, Borrower
shall pay to Bank such additional amount or amounts as will compensate Bank for such reduction. A
statement of Bank claiming compensation under this Section 3.7(b) and setting forth the additional
amount or amounts to be paid to it hereunder shall be conclusive absent manifest error.
(c) If, at any time, Bank, in its sole and absolute discretion, determines that (i) the amount
of LIBOR Term Loans for periods equal to the corresponding Interest Periods are not available to
Bank in the offshore
-7-
currency interbank markets, or (ii) LIBOR does not accurately reflect the cost to Bank of lending
the LIBOR Term Loans, then Bank shall promptly give notice thereof to Borrower. Upon the giving of
such notice, Banks obligation to make the LIBOR Term Loans shall terminate; provided, however,
LIBOR Term Loans shall not terminate if Bank and Borrower agree in writing to a different interest
rate applicable to LIBOR Term Loans.
(d) If it shall become unlawful for Bank to continue to fund or maintain any LIBOR Term Loans,
or to perform its obligations hereunder, upon demand by Bank, Borrower shall prepay the LIBOR Term
Loans in full with accrued interest thereon and all other amounts payable by Borrower hereunder
(including, without limitation, any amount payable in connection with such prepayment pursuant to
Section 3.7(c)(ii)). Notwithstanding the foregoing, to the extent a determination by Bank as
described above relates to a LIBOR Term Loan then being requested by Borrower pursuant to a Notice
of Borrowing or a Notice of Conversion/Continuation, Borrower shall have the option, subject to the
provisions of Section 3.7(c)(ii), to (i) rescind such Notice of Borrowing or Notice of
Conversion/Continuation by giving notice (by facsimile or by telephone confirmed in writing) to
Bank of such rescission on the date on which Bank gives notice of its determination as described
above, or (ii) modify such Notice of Borrowing or Notice of Conversion/Continuation to obtain a
Prime Rate Term Loan or to have outstanding Term Loans converted into or continued as Prime Rate
Term Loans by giving notice (by facsimile or by telephone confirmed in writing) to Bank of such
modification on the date on which Bank gives notice of its determination as described above.
4
CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest.
Each Borrower hereby grants Bank, to secure the payment and
performance in full of all of the Obligations, a continuing security interest in, and pledges to
Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all
proceeds and products thereof. Each Borrower represents, warrants, and covenants that the security
interest granted herein is and shall at all times continue to be a first priority perfected
security interest in the Collateral (subject only to Permitted Liens that may have superior
priority to Banks Lien under this Agreement). If any Borrower shall acquire a commercial tort
claim, such Borrower shall promptly notify Bank in a writing signed by such Borrower of the general
details thereof and grant to Bank in such writing a security interest therein and in the proceeds
thereof, all upon the terms of this Agreement, with such writing to be in form and substance
reasonably satisfactory to Bank.
If this Agreement is terminated, Banks Lien in the Collateral shall continue until the
Obligations (other than inchoate indemnity obligations and obligations with respect to outstanding
Letters of Credit for which cash collateral has been provided pursuant to Section 2.1.2) are repaid
in full in cash. Upon payment in full in cash of such Obligations and at such time as Banks
obligation to make Credit Extensions has terminated, Bank shall, at Borrowers sole cost and
expense, release its Liens in the Collateral and all rights therein shall revert to Borrowers.
Any assets that are sold or disposed of in a transaction permitted by Section 7.1 shall be
released from the Lien granted hereunder and shall no longer be part of the Collateral upon the
consummation of such transaction. Any Permitted Distributions (whether in the form of cash,
instruments or otherwise) properly made pursuant to Section 7.7 shall be released from the Lien
granted hereunder and shall no longer be part of the Collateral upon the making of such Permitted
Distribution.
4.2 Authorization to File Financing Statements.
Each Borrower hereby authorizes Bank to file
financing statements, without notice to Borrowers, with all appropriate jurisdictions to perfect or
protect Banks interest or rights hereunder, including a notice that any disposition of the
Collateral, by either Borrowers or any other Person, shall be deemed to violate the rights of Bank
under the Code.
5
REPRESENTATIONS AND WARRANTIES
Each Borrower represents and warrants as follows:
5.1 Due Organization, Authorization; Power and Authority.
Each Borrower is duly existing and
in good standing as a Registered Organization in its jurisdiction of formation and is qualified
and licensed to do business and is in good standing in any jurisdiction in which the conduct of
its business or its ownership of property requires that it be qualified except where the failure
to do so could not reasonably be expected to have a material adverse effect on Borrowers
business. In connection with this Agreement, Borrower has delivered to Bank a completed
certificate signed by Borrower and Guarantor, respectively, entitled Perfection Certificate.
Borrower
-8-
represents and warrants to Bank that (a) Borrowers exact legal name is that indicated on the
Perfection Certificate and on the signature page hereof; (b) Borrower is an organization of the
type and is organized in the jurisdiction set forth in the Perfection Certificate; (c) the
Perfection Certificate accurately sets forth Borrowers organizational identification number or
accurately states that Borrower has none; (d) the Perfection Certificate accurately sets forth
Borrowers place of business, or, if more than one, its chief executive office as well as
Borrowers mailing address (if different than its chief executive office); (e) Borrower (and each
of its predecessors) has not, in the past five (5) years, changed its jurisdiction of formation,
organizational structure or type, or any organizational number assigned by its jurisdiction; and
(f) all other information set forth on the Perfection Certificate pertaining to Borrower and each
of its Subsidiaries is accurate and complete (it being understood and agreed that Borrower may from
time to time update certain information in the Perfection Certificate after the Effective Date to
the extent permitted by one or more specific provisions in this Agreement). If Borrower is not now
a Registered Organization but later becomes one, Borrower shall promptly notify Bank of such
occurrence and provide Bank with Borrowers organizational identification number.
The execution, delivery and performance by Borrower of the Loan Documents to which it is a
party have been duly authorized, and do not (i) conflict with any of Borrowers organizational
documents, (ii) contravene, conflict with, constitute a default under or violate any material
Requirement of Law, (iii) contravene, conflict or violate any applicable order, writ, judgment,
injunction, decree, determination or award of any Governmental Authority by which Borrower or any
its Subsidiaries or any of their property or assets may be bound or affected, (iv) require any
action by, filing, registration, or qualification with, or Governmental Approval from, any
Governmental Authority (except such Governmental Approvals which have already been obtained and
are in full force and effect or which can only be made or obtained in the future or (v) constitute
an event of default under any material agreement by which Borrower is bound. Borrower is not in
default under any agreement to which it is a party or by which it is bound in which the default
could reasonably be expected to have a material adverse effect on Borrowers business.
5.2 Collateral.
Borrower has good title to, has rights in, and the power to transfer each
item of the Collateral upon which it purports to grant a Lien hereunder, free and clear of any and
all Liens except Permitted Liens. Borrower has no Deposit Accounts other than the Deposit Accounts
with Bank, the Deposit Accounts, if any, described in the Perfection Certificate delivered to Bank
in connection herewith, or of which Borrower has given Bank notice and taken such actions as are
necessary to give Bank a perfected security interest therein. The Accounts are bona fide, existing
obligations of the Account Debtors.
The Collateral is not in the possession of any third party bailee (such as a warehouse)
except for inventory located at printers from time to time and as otherwise provided in the
Perfection Certificate. None of the components of the Collateral shall be maintained at locations
other than as provided in the Perfection Certificate. In the event that Borrower, after the date
hereof, intends to store or otherwise deliver any portion of the Collateral to a bailee, then
Borrower will first receive the written consent of Bank and such bailee must execute and deliver a
bailee agreement in form and substance satisfactory to Bank in its sole discretion.
Borrower is the sole owner of its intellectual property, except for non-exclusive licenses
granted to its customers in the ordinary course of business. Each patent is valid and enforceable,
and no part of the intellectual property has been judged invalid or unenforceable, in whole or in
part, and to the best of Borrowers knowledge, no claim has been made that any part of the
intellectual property violates the rights of any third party except to the extent such claim could
not reasonably be expected to have a material adverse effect on Borrowers business. Except as
noted on the Perfection Certificate or as notified to Bank pursuant to the next sentence, Borrower
is not a party to, nor is bound by, any material license or other agreement (other than
over-the-counter software that is commercially available to the public) with respect to which
Borrower is the licensee (a) that prohibits or otherwise restricts Borrower from granting a
security interest in Borrowers interest in such license or agreement or any other property, or
(b) for which a default under or termination of could interfere with the Banks right to sell any
Collateral. Borrower shall provide written notice to Bank within ten (10) days of entering or
becoming bound by any such license or agreement (other than over-the-counter software that is
commercially available to the public).
5.3 Accounts Receivable.
For any Eligible Account in any Borrowing Base Certificate, all
statements made and all unpaid balances appearing in all invoices, instruments and other documents
evidencing such Eligible Accounts are and shall be true and correct and all such invoices,
instruments and other documents, and all of Borrowers Books are genuine and in all respects what
they purport to be. Whether or not an Event of Default has occurred and is continuing, Bank may,
during an audit of Eligible Accounts, notify any Account Debtor owing
-9-
Borrower money of Banks security interest in such funds and verify the amount of such Eligible
Account. All sales and other transactions underlying or giving rise to each Eligible Account shall
comply in all material respects with all applicable laws and governmental rules and regulations.
Borrower has no knowledge of any actual or imminent Insolvency Proceeding of any Account Debtor
whose accounts are Eligible Accounts in any Borrowing Base Certificate. To the best of Borrowers
knowledge, all signatures and endorsements on all documents, instruments, and agreements relating
to all Eligible Accounts are genuine, and all such documents, instruments and agreements are
legally enforceable in accordance with their terms.
5.4 Litigation.
There are no actions or proceedings pending or, to the knowledge of the
Responsible Officers, threatened in writing by or against Borrower or any of its Subsidiaries in
which a likely adverse decision could reasonably be expected to cause a Material Adverse Change.
5.5 No Material Deviation in Financial Statements.
All consolidated financial statements
for Borrower and any of its Subsidiaries delivered to Bank fairly present in all material respects
Borrowers consolidated financial condition and Borrowers consolidated results of operations.
There has not been any material deterioration in Borrowers consolidated financial condition since
the date of the most recent financial statements submitted to Bank.
5.6 Solvency.
The fair salable value of Borrowers assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; Borrower is not left with
unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay
its debts (including trade debts) as they mature.
5.7 Regulatory Compliance.
Borrower is not an investment company or a company controlled
by an investment company under the Investment Company Act of 1940, as amended. Borrower is not
engaged as one of its important activities in extending credit for margin stock (under Regulations
X, T and U of the Federal Reserve Board of Governors). Borrower has complied in all material
respects with the Federal Fair Labor Standards Act. Neither Borrower nor any of its Subsidiaries is
a holding company or an affiliate of a holding company or a subsidiary company of a
holding company as each term is defined and used in the Public Utility Holding Company Act of
2005. Borrower has not violated any laws, ordinances or rules, the violation of which could
reasonably be expected to have a material adverse effect on its business. None of Borrowers or
any of its Subsidiaries properties or assets has been used by Borrower or any Subsidiary or, to
the best of Borrowers knowledge, by previous Persons, in disposing, producing, storing, treating,
or transporting any hazardous substance other than legally. Borrower and each of its Subsidiaries
have obtained all consents, approvals and authorizations of, made all declarations or filings with,
and given all notices to, all Government Authorities that are necessary to continue their
respective businesses as currently conducted except where the failure to do so could not reasonably
be expected to cause a Material Adverse Change.
5.8 Subsidiaries; Investments.
Borrower does not own any stock, partnership interest or other
equity securities except for Permitted Investments.
5.9 Tax Returns and Payments; Pension Contributions.
Borrower has timely filed all required
tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes,
assessments, deposits and contributions owed by Borrower, except that Borrower may defer payment of
any contested taxes, provided that Borrower (a) in good faith contests its obligation to pay the
taxes by appropriate proceedings promptly and diligently instituted and conducted, (b) notifies
Bank in writing of the commencement of, and any material development in, the proceedings, and (c)
posts bonds or takes any other steps required to prevent the governmental authority from obtaining
a Lien upon any of the Collateral that is other than a Permitted Lien. Borrower is unaware of
any claims or adjustments proposed for any of Borrowers prior tax years which could result in
additional taxes becoming due and payable by Borrower the payment of which could reasonably be
expected to cause a Material Adverse Change. Borrower has paid all amounts necessary to fund all
present pension, profit sharing and deferred compensation plans in accordance with their terms, and
Borrower has not withdrawn from participation in, and has not permitted partial or complete
termination of, or permitted the occurrence of any other event with respect to, any such plan which
could reasonably be expected to result in any liability of Borrower, including any liability to the
Pension Benefit Guaranty Corporation or its successors or any other governmental agency.
-10-
5.10 Use of Proceeds.
Borrower shall use the proceeds of the Credit Extensions solely as
working capital, to fund its general business requirements and to retire the Oak Hill Note, and not
for personal, family, household or agricultural purposes.
5.11 Designation of Indebtedness under this Agreement as Senior Indebtedness.
All principal of, interest (including all interest accruing after the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowable
as a claim in any such proceeding), and all fees, costs, expenses and other amounts accrued or due
under this Agreement shall constitute Designated Senior Indebtedness under the terms of any
applicable debt instrument.
5.12 Full Disclosure.
No written representation, warranty or other statement of Borrower in
any certificate or written statement given to Bank, as of the date such representation, warranty,
or other statement was made, taken together with all such written certificates and written
statements given to Bank, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained in the certificates or statements not
misleading (it being recognized by Bank that the projections and forecasts provided by Borrower in
good faith and based upon reasonable assumptions are not viewed as facts and that actual results
during the period or periods covered by such projections and forecasts may differ from the
projected or forecasted results).
6
AFFIRMATIVE COVENANTS
Each Borrower shall do all of the following:
6.1 Government Compliance.
(a) Maintain its and all its Subsidiaries legal existence and good standing in their
respective jurisdictions of formation and maintain qualification in each jurisdiction in which the
failure to so qualify would reasonably be expected to have a material adverse effect on Borrowers
business or operations. Borrower shall comply, and have each Subsidiary comply, with all laws,
ordinances and regulations to which it is subject, noncompliance with which could have a material
adverse effect on Borrowers business.
(b) Obtain all of the Governmental Approvals necessary for the performance by Borrower of its
obligations under the Loan Documents to which it is a party and the grant of a security interest to
Bank in all of its property. Borrower shall promptly provide copies of any such obtained
Governmental Approvals to Bank.
6.2 Financial Statements, Reports, Certificates.
(a) Deliver to Bank: (i) as soon as available, but no later than the earlier of (A) five (5)
days after filing with the Securities Exchange Commission (SEC) or (B) if no such filing is made,
50 days after each fiscal quarter end and 95 days after each fiscal year end; financial statements;
(ii) a Compliance Certificate together with delivery of the 10K and 10Q reports; (iii) within 45
days after the end of each fiscal year, annual financial projections for the following fiscal year
(on a quarterly basis) as approved by Borrowers board of directors, together with any related
business forecasts used in the preparation of such annual financial projections; (iv) after
Borrower obtains actual knowledge thereof, a prompt report of any legal actions pending or
threatened in writing against Borrower or any Subsidiary that could result in damages or costs to
Borrower or any Subsidiary of $250,000 or more; and (v) budgets, sales projections, operating plans
or other financial information Bank reasonably requests.
Borrowers 10K, 10Q, and 8K reports required to be delivered pursuant to Section 6.2(a)(i)
shall be deemed to have been delivered on the date on which Borrower posts such report or provides
a link thereto on Borrowers or another website on the Internet;
provided
, that Borrower
shall provide paper copies to Bank of the Compliance Certificates required by Section 6.2(a)(ii).
(b) When the total amount of Advances plus the face amount of outstanding Letters of Credit is
greater than $1,500,000, and within thirty (30) days after the last day of each month, deliver to
Bank a (i) duly completed Borrowing Base Certificate signed by a Responsible Officer, with aged
listings of accounts receivable and accounts payable (by invoice date) and (ii) a deferred revenue
report.
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(c) Monthly financial statements, within 30 days after the last day of each month, and as soon
as available, and in any event within 150 days following the end of Borrowers fiscal year, annual
financial statements certified by, and with an unqualified opinion of, independent certified public
accountants acceptable to Bank.
(d) Together with delivery of financial statements pursuant to Section 6.2(a) and (c) above,
deliver to Bank a duly completed Compliance Certificate signed by a Responsible Officer setting
forth calculations showing compliance with the financial covenants set forth in this Agreement.
(e) Allow Bank to audit Borrowers Collateral at Borrowers expense. Such audits shall be
conducted no more often than once every twelve (12) months at Borrowers expense unless an Event of
Default has occurred and is continuing.
6.3 Taxes; Pensions.
Timely file, and require each of its Subsidiaries to timely file, all
required tax returns and reports and timely pay, and require each of its Subsidiaries to timely
file, all foreign, federal, state and local taxes, assessments, deposits and contributions owed by
Borrower and each of its Subsidiaries, except for deferred payment of any taxes contested pursuant
to the terms of Section 5.9 hereof, and shall deliver to Bank, on demand, appropriate certificates
attesting to such payments, and pay all amounts necessary to fund all present pension, profit
sharing and deferred compensation plans in accordance with their terms.
6.4 Insurance.
Keep its business and the Collateral insured for risks and in amounts
standard for companies in Borrowers industry and location and as Bank may reasonably request.
Insurance policies shall be in a form, with companies, and in amounts that are satisfactory to
Bank. All property policies shall have a lenders loss payable endorsement showing Bank as the an
additional lender loss payee and waive subrogation against Bank, and all liability policies shall
show, or have endorsements showing, Bank as an additional insured. All policies (or the loss
payable and additional insured endorsements) shall provide that the insurer shall endeavor to give
Bank at least twenty (20) days notice before canceling, amending, or declining to renew its
policy. At Banks request, Borrower shall deliver certified copies of policies and evidence of all
premium payments. If Borrower fails to obtain insurance as required under this Section 6.4 or to
pay any amount or furnish any required proof of payment to third persons and Bank, Bank may make
all or part of such payment or obtain such insurance policies required in this Section 6.4, and
take any action under the policies Bank reasonably deems prudent.
6.5 Operating Accounts.
(a) Maintain all of its and all of its Subsidiaries primary and its Subsidiaries primary
operating and, except as permitted in Section 6.5(b), other Deposit Accounts and securities
accounts with Bank and Banks Affiliates.
(b) Provide Bank five (5) days prior written notice before establishing any Collateral
Account at or with any bank or financial institution other than Bank or Banks Affiliates. For
each Collateral Account that Borrower at any time maintains, Borrower shall cause the applicable
bank or financial institution (other than Bank) at or with which any Collateral Account is
maintained to execute and deliver a Control Agreement or other appropriate instrument with respect
to such Collateral Account to perfect Banks Lien in such Collateral Account in accordance with the
terms hereunder. The provisions of the previous sentence shall not apply to Deposit Accounts
exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for
the benefit of Borrowers employees and identified to Bank by Borrower as such.
6.6 Financial Covenants.
(a) Borrower shall maintain at all times, to be tested as of the last day of each month
unless otherwise noted, on a consolidated basis with respect to Borrower and its Subsidiaries:
(i)
Adjusted Quick Ratio
. A ratio of (1) Quick Assets to (2) the sum of (x) Current
Liabilities plus (y) all Advances and Term Loans minus (z) Deferred Revenue, of at least 1.15 to
1.0 through September 30, 2009, and at least 1.25:1.00 thereafter.
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(ii)
Maximum Unfunded Capital Expenditures
. Borrowers capital expenditures
made in cash and not financed with indebtedness shall not exceed $2,000,000 in the fiscal year
ending in 2009, and $4,000,000 in any fiscal year thereafter.
(b) Borrower shall maintain at all times, to be tested as of the last day of each quarter
unless otherwise noted, on a consolidated basis with respect to Borrower and its Subsidiaries:
(i)
Minimum EBITDA
. Borrower shall achieve EBITDA of no less
than the amounts set forth below for each specified period.
|
|
|
|
|
Period
|
|
Minimum EBITDA
|
For the fiscal quarter ending March 31, 2009
|
|
$
|
750,000
|
|
For the fiscal quarter ending June 30, 2009
|
|
$
|
750,000
|
|
(ii)
Minimum Fixed Charge Coverage
. Borrower shall achieve a Fixed Charge
Coverage Ratio of no less than the amounts set forth below for each specified period.
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Period
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Minimum Fixed Charge Coverage Ratio
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For the fiscal quarter ending September 30, 2009
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1.50:1.00
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For the fiscal quarter ending December 31, 2009
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2.00:1.00
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For the fiscal quarter ending March 31, 2010
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1.50:1.00
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For the fiscal quarter ending June 30, 2010
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2.00:1.00
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For the fiscal quarters ending September 30, 2010
and thereafter
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2.50:1.00
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6.7 Protection and Registration of Intellectual Property Rights.
Borrower shall: (a) protect, defend and maintain the validity and enforceability of
its intellectual property where the failure to do so would result in a Material Adverse Change;
(b) promptly advise Bank in writing of material infringements of its intellectual property; and (c) not
allow any intellectual property to be abandoned, forfeited or dedicated to the public without Banks written consent where
such abandonment, forfeiture or dedication would have a Material Adverse Change. If Borrower (i) obtains any patent, registered
trademark or servicemark, registered copyright, registered mask work, or any pending application for any of the foregoing, whether
as owner, licensee or otherwise, or (ii) applies for any patent or the registration of any trademark or servicemark, then Borrower
shall on its next Compliance Certificate notify Bank thereof and shall execute such intellectual property security agreements and other
documents and take such other actions as Bank shall request in its good faith business judgment to perfect and maintain a first
priority perfected security interest in favor of Bank in such property. If Borrower decides to register any copyrights or mask works
in the United States Copyright Office, Borrower shall: (x) provide Bank with at least fifteen (15) days prior written notice (which may
be in the form of a Compliance Certificate) of Borrowers intent to register such copyrights or mask works together with a copy of the
application it intends to file with the United States Copyright Office (excluding exhibits
thereto); (y) execute an intellectual property security agreement and such other documents
and take such other actions as Bank may request in its good faith business judgment to perfect
and maintain a first priority perfected security interest in favor of Bank in the copyrights or
mask works intended to be registered with the United States Copyright Office; and (z) record such
intellectual property security agreement with the United States Copyright Office contemporaneously
with filing the copyright or mask work application(s) with the United States Copyright Office. Borrower
shall promptly provide to Bank copies of all applications that it files
-13-
for patents or for the registration of trademarks, servicemarks, copyrights or mask works,
together with evidence of the recording of the intellectual property security agreement
necessary for Bank to perfect and maintain a first priority perfected security interest in
such property.
6.8 Litigation Cooperation.
From the date hereof and continuing through the
termination of this Agreement, make available to Bank, without expense to Bank, Borrower and
its officers, employees and agents and Borrowers books and records, to the extent that Bank
may deem them reasonably necessary to prosecute or defend any third-party suit or proceeding
instituted by or against Bank with respect to any Collateral or Borrower.
6.9 Further Assurances.
Execute any further instruments and take further action as
Bank reasonably requests to perfect or continue Banks Lien in the Collateral or to effect
the purposes of this Agreement. Deliver to Bank, within five (5) days after the same are
sent or received, copies of all correspondence, reports, documents and other filings with
any Governmental Authority regarding compliance with or maintenance of Governmental
Approvals or Requirements of Law or that could reasonably be expected to have a material
effect on any of the Governmental Approvals or otherwise on the operations of Borrower or
any of its Subsidiaries.
7
NEGATIVE COVENANTS
No Borrower shall not do any of the following without Banks prior written consent:
7.1 Dispositions.
Convey, sell, lease, transfer or otherwise dispose of
(collectively
Transfer),
or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, except for:
(a) Transfers in the ordinary course of business for reasonably equivalent
consideration;
(b) Transfers to a Borrower or any of its Subsidiaries from a Borrower or any of its
Subsidiaries;
(c) Transfers of property in connection with sale-leaseback transactions;
(d) Transfers of property to the extent such property is exchanged for credit
against, or proceeds are promptly applied to, the purchase price of other property used or
useful in the business of Borrower or its Subsidiaries;
(e) Transfers constituting non-exclusive licenses and similar arrangements for the
use of the property of Borrower or its Subsidiaries in the ordinary course of business and
other non-perpetual licenses that may be exclusive in some respects other than territory
(and/or that may be exclusive as to territory only in discreet geographical areas outside of
the United States), but that could not result in a legal transfer of Borrowers title in the
licensed property;
(f) Transfers otherwise permitted by the Loan Documents;
(g) sales or
discounting of delinquent accounts in the ordinary course of business;
(h) Transfers
associated with the making or disposition of a Permitted Investment; and
(i) Transfers in connection with a permitted acquisition of a portion of the assets
or rights acquired.
7.2 Changes in Business; Change in Control; Jurisdiction of Formation.
Engage in any material line of business other than those lines of business conducted by
Borrower and its Subsidiaries on the date hereof and any businesses reasonably related,
complementary or incidental thereto or reasonable extensions thereof; permit or suffer any
Change in Control. Borrower will not, without prior written notice, change its
jurisdiction of formation.
7.3 Mergers or Acquisitions.
-14-
Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any Person
other than with Borrower or any Subsidiary, or acquire, or permit any of its Subsidiaries to
acquire, all or substantially all of the capital stock or property of a Person other than
Borrower or any Subsidiary, except where no Event of Default has occurred and is continuing or
would result from such action during the term of this Agreement, and (a) Borrower is the
surviving entity, (b) such merger or consolidation is a Transfer otherwise permitted pursuant to
Section 7.1 hereof, or (c) such merger is in connection with an initial public offering and is
the means by which Borrowing re-incorporates in Delaware.
7.4 Indebtedness.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
7.5 Encumbrance.
Create, incur, allow, or suffer any Lien on any of the Collateral, or
assign or convey any right to receive income, including the sale of any Accounts, or permit any
of its Subsidiaries to do so, except for Permitted Liens, permit any Collateral not to be subject
to the first priority security interest granted herein, or enter into any agreement, document,
instrument or other arrangement (except with or in favor of Bank) with any Person which directly
or indirectly prohibits or has the effect of prohibiting Borrower or any Subsidiary from
assigning, mortgaging, pledging, granting a security interest in or upon, or encumbering any of
Borrowers or any Subsidiarys intellectual property, except as is otherwise permitted in Section
7.1 hereof and the definition of Permitted Lien herein.
7.6 Maintenance of Collateral Accounts.
Maintain any Collateral Account except pursuant
to the terms of Section 6.4.(b) hereof.
7.7 Distributions; Investments. (
a) Pay any dividends or make any distribution or payment
or redeem, retire or purchase any capital stock other than Permitted Distributions; or (b)
directly or indirectly acquire or own any Person, or make any Investment in any Person, other
than Permitted Investments, or permit any of its Subsidiaries to do so.
7.8 Transactions with Affiliates.
Directly or indirectly enter into or permit to exist
any material transaction with any Affiliate of Borrower except for (a) transactions that are in
the ordinary course of Borrowers business, upon fair and reasonable terms (when viewed in the
context of any series of transactions of which it may be a part, if applicable) that are no less
favorable to Borrower than would be obtained in an arms length transaction with a non-affiliated
Person; or (b) transactions among Borrower and its Subsidiaries and among Borrowers Subsidiaries
so long as no Event of Default exists or could result therefrom.
7.9 Subordinated Debt.
Make or permit any payment on or amendments of any Subordinated
Debt, except (a) payments pursuant to the terms of the Subordinated Debt; (b) payments made with
Borrowers capital stock or other Subordinated Debt; (c) amendments to Subordinated Debt so long
as such Subordinated Debt remains subordinated in right of payment to this Agreement and any
Liens securing such Subordinated Debt remain subordinate in priority to Banks Lien hereunder; or
(d) other purchases or payments of Subordinated Debt.
7.10 Compliance.
Become an investment company or a company controlled by an investment
company, under the Investment Company Act of 1940, as amended, or undertake as one of its
important activities extending credit to purchase or carry margin stock (as defined in Regulation
U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Credit
Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with
the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation
could reasonably be expected to have a material adverse effect on Borrowers business, or permit
any of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from
participation in, permit partial or complete termination of, or permit the occurrence of any
other event with respect to, any present pension, profit sharing and deferred compensation plan
which could reasonably be expected to result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental
agency.
8
EVENTS OF DEFAULT
Any one of the following shall constitute an event of default (an
Event of Default)
under this
Agreement:
-15-
8.1 Payment Default.
Borrowers fail to (a) make any payment of principal or interest on
any Credit Extension on its due date, or (b) pay any other Obligations within three (3)
Business Days after such Obligations are due and payable (which three (3) day grace period
shall not apply to payments due on the Revolving Line Maturity Date). During the cure period,
the failure to cure the payment default is not an Event of Default (but no Credit Extension
will be made during the cure period);
8.2 Covenant Default.
(a) Borrowers fail or neglect to perform any obligation in Sections 6.2 (a), (b), (c) or (d),
6.5, or violates any covenant in Section 7; or
(b) Borrowers fail or neglect to perform, keep, or observe any other term, provision,
condition, covenant or agreement contained in this Agreement or any Loan Documents, and as to
any default (other than those specified in this Section 8) under such other term, provision,
condition, covenant or agreement that can be cured, has failed to cure the default within ten
(10) days after the occurrence thereof; provided, however, that if the default cannot by its
nature be cured within the ten (10) day period or cannot after diligent attempts by Borrowers
be cured within such ten (10) day period, and such default is likely to be cured within a
reasonable time, then Borrowers shall have an additional period (which shall not in any case
exceed thirty (30) days) to attempt to cure such default, and within such reasonable time
period the failure to cure the default shall not be deemed an Event of Default (but no Credit
Extensions shall be made during such cure period). Grace periods provided under this section
shall not apply, among other things, to financial covenants or any other covenants set forth in
subsection (a) above;
8.3 Intentionally Omitted;
8.4 Attachment; Levy; Restraint on Business.
(a) (i) The service of process seeking to
attach, by trustee or similar process, any funds of any Borrower or of any entity under control
of any Borrower (including a Subsidiary) on deposit with Bank or any Bank Affiliate, or (ii) a
notice of lien, levy, or assessment is filed against any of any Borrowers assets by any
government agency, and the same under subclauses (i) and (ii) hereof are not, within ten (10)
Business Days after the occurrence thereof, discharged or stayed (whether through the posting
of a bond or otherwise); provided, however, no Credit Extensions shall be made during any ten
(10) Business Day cure period; and (b) (i) any material portion of such Borrowers assets is
attached, seized, levied on, or comes into possession of a trustee or receiver, or (ii) any
court order enjoins, restrains, or prevents such Borrower from conducting any part of its
business;
8.5 Insolvency. (
a) Any Borrower is unable to pay its debts (including trade debts) as
they become due or otherwise becomes insolvent; (b) any Borrower begins an Insolvency
Proceeding; or (c) an Insolvency Proceeding is begun against any Borrower and not dismissed or
stayed within thirty (30) days (but no Credit Extensions shall be made while of any of the
conditions described in clause (a) exist and/or until any Insolvency Proceeding is dismissed);
8.6 Other Agreements.
If any Borrower fails to (a) make any payment that is due and
payable with respect to any Material Indebtedness and such failure continues after the
applicable grace or notice period, if any, specified in the agreement or instrument relating
thereto, or (b) perform or observe any other condition or covenant, or any other event shall
occur or condition exist under any agreement or instrument relating to any Material
Indebtedness, and such failure continues after the applicable grace or notice period, if any,
specified in the agreement or instrument relating thereto and the effect of such failure, event
or condition is to cause the holder or holders of such Material Indebtedness to accelerate the
maturity of such Material Indebtedness or cause the mandatory repurchase of any Material
Indebtedness;
8.7 Judgments.
One or more judgments, orders, or decrees for the payment of money in
an amount, individually or in the aggregate, of at least Two Hundred and Fifty Thousand Dollars
($250,000) (not covered by independent third-party insurance as to which liability has been
accepted by such insurance carrier) shall be rendered against any Borrower and shall remain
unsatisfied, unvacated, or unstayed for a period of ten (10) days after the entry thereof
(provided that no Credit Extensions will be made prior to the satisfaction, vacation, or stay
of such judgment, order, or decree);
8.8 Misrepresentations.
Any Borrower or any Person acting for any Borrower makes any
representation, warranty, or other statement now or later in this Agreement, any Loan Document
or in any writing
-16-
delivered to Bank or to induce Bank to enter this Agreement or any Loan Document, and such
representation, warranty, or other statement is incorrect in any material respect when made;
8.9 Subordinated Debt.
Any creditor of Borrowers that has signed a subordination,
intercreditor, or similar agreement with Bank breaches any terms of such agreement;
8.10 Guaranty.
(a) Any guaranty of any Obligations terminates or ceases for any reason
to be in full force and effect; (b) any Guarantor does not perform any material obligation or
covenant under any guaranty of the Obligations; (c) any circumstance described in Sections
8.3, 8.4, 8.5, 8.7, or 8.8 occurs with respect to any Guarantor, or (d) the liquidation,
winding up, or termination of existence of any Guarantor; or (e) (i) a material impairment in
the perfection or priority of Banks Lien in the collateral provided by Guarantor or in the
value of such collateral or (ii) a material adverse change in the general affairs, management,
results of operation, condition (financial or otherwise) or the prospect of repayment of the
Obligations occurs with respect to any Guarantor; or
8.11 Governmental Approvals.
Any Governmental Approval shall have been (a) revoked,
rescinded, suspended, modified in an adverse manner or not renewed in the ordinary course for
a full term and such revocation, rescission, suspension, modification or non-renewal has, or
could reasonably be expected to have, a Material Adverse Change; or (b) subject to any
decision by a Governmental Authority that designates a hearing with respect to any
applications for renewal of any of such Governmental Approval or that could result in the
Governmental Authority taking any of the actions described in clause (a) above, and such
decision or such revocation, rescission, suspension, modification or non-renewal has, or could
reasonably be expected to have, a Material Adverse Change.
9
BANKS RIGHTS AND REMEDIES
9.1 Rights and Remedies.
While an Event of Default occurs and continues Bank
may, without notice or demand, do any or all of the following:
(a) declare all Obligations immediately due and payable (but if an Event of Default
described in Section 8.5 occurs all Obligations are immediately due and payable without any
action by Bank);
(b) stop advancing money or extending credit for Borrowers benefit under this
Agreement or under any other agreement between Borrowers and Bank;
(c) demand that Borrowers (i) deposit cash with Bank in an amount equal to the
aggregate amount of any Letters of Credit remaining undrawn, as collateral security for the
repayment of any future drawings under such Letters of Credit, and Borrowers shall forthwith
deposit and pay such amounts, and (ii) pay in advance all Letter of Credit fees scheduled to
be paid or payable over the remaining term of any Letters of Credit;
(d) terminate any FX Forward Contracts;
(e) settle or adjust disputes and claims directly with Account Debtors for amounts on
terms and in any order that Bank considers advisable, notify any Person owing Borrowers money
of Banks security interest in such funds, and verify the amount of such account;
(f) make any payments and do any acts it considers necessary or reasonable to protect
the Collateral and/or its security interest in the Collateral. Borrowers shall assemble the
Collateral if Bank requests and make it available as Bank designates. Bank may enter premises
where the Collateral is located, take and maintain possession of any part of the Collateral,
and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to
its security interest and pay all expenses incurred. Each Borrower grants Bank a license to
enter and occupy any of its premises, without charge, to exercise any of Banks rights or
remedies;
(g) apply to the Obligations any (i) balances and deposits of Borrowers it holds, or
(ii) any amount held by Bank owing to or for the credit or the account of Borrowers;
(h) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale,
advertise for sale, and sell the Collateral. Bank is hereby granted a non-exclusive,
royalty-free license or other right to use, without charge, Borrowers labels, patents,
copyrights, mask works, rights of use of any name, trade secrets, trade names,
-17-
trademarks, service marks, and advertising matter, or any similar property as it pertains to
the Collateral, in completing production of, advertising for sale, and selling any Collateral
and, in connection with Banks exercise of its rights under this Section, Borrowers rights
under all licenses and all franchise agreements inure to Banks benefit;
(i) place a hold on any account maintained with Bank and/or deliver a notice of
exclusive control, any entitlement order, or other directions or instructions pursuant to any
Control Agreement or similar agreements providing control of any Collateral;
(j) demand and receive possession of Borrowers Books; and
(k) exercise all rights and remedies available to Bank under the Loan Documents or at
law or equity, including all remedies provided under the Code (including disposal of the
Collateral pursuant to the terms thereof).
9.2 Power of Attorney.
Each Borrower hereby irrevocably appoints Bank as its lawful
attorney-in-fact, exercisable upon the occurrence and during the continuance of an Event of
Default, to: (a) endorse such Borrowers name on any checks or other forms of payment or
security; (b) sign such Borrowers name on any invoice or bill of lading for any Account or
drafts against Account Debtors; (c) settle and adjust disputes and claims about the Accounts
directly with Account Debtors, for amounts and on terms Bank determines reasonable; (d) make,
settle, and adjust all claims under such Borrowers insurance policies; (e) pay, contest or
settle any Lien, charge, encumbrance, security interest, and adverse claim in or to the
Collateral, or any judgment based thereon, or otherwise take any action to terminate or
discharge the same; and (f) transfer the Collateral into the name of Bank or a third party as
the Code permits. Each Borrower hereby appoints Bank as its lawful attorney-in-fact to sign
Borrowers name on any documents necessary to perfect or continue the perfection of Banks
security interest in the Collateral regardless of whether an Event of Default has occurred
until all Obligations have been satisfied in full and Bank is under no further obligation to
make Credit Extensions hereunder. Banks foregoing appointment as each Borrowers attorney in
fact, and all of Banks rights and powers, coupled with an interest, are irrevocable until all
Obligations other than inchoate indemnity obligations and obligations with respect to
outstanding Letters of Credit for which cash collateral has been provided pursuant to Section
2.1.2) have been fully repaid and performed and Banks obligation to provide Credit Extensions
terminates.
9.3 Protective Payments.
If any Borrower fails to obtain the insurance called for by
Section 6.3 or fails to pay any premium thereon or fails to pay any other amount which
Borrowers is obligated to pay under this Agreement or any other Loan Document, Bank may obtain
such insurance or make such payment, and all amounts so paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then highest applicable rate, and secured
by the Collateral. Bank will make reasonable efforts to provide Borrowers with notice of Bank
obtaining such insurance at the time it is obtained or within a reasonable time thereafter. No
payments by Bank are deemed an agreement to make similar payments in the future or Banks
waiver of any Event of Default.
9.4 Application of Payments and Proceeds.
Unless an Event of Default has occurred and
is continuing, Bank shall apply any funds in its possession, whether from Borrower account
balances, payments, or proceeds realized as the result of any collection of Accounts or other
disposition of the Collateral, first, to Bank Expenses, including without limitation, the
reasonable costs, expenses, liabilities, obligations and attorneys fees incurred by Bank in
the exercise of its rights under this Agreement; second, to the interest due upon any of the
Obligations; and third, to the principal of the Obligations and any applicable fees and other
charges in such order as Bank shall determine in its sole discretion. Any surplus shall be paid
to Borrower or other Persons legally entitled thereto; Borrower shall remain liable to Bank for
any deficiency. If an Event of Default has occurred and is continuing, Bank may apply any
funds in its possession, whether from Borrowers account balances, payments, proceeds realized
as the result of any collection of Accounts or other disposition of the Collateral, or
otherwise, to the Obligations in such order as Bank shall determine in its sole discretion. Any
surplus shall be paid to Borrowers or other Persons legally entitled thereto; Borrower shall
remain liable to Bank for any deficiency. If Bank, in its good faith business judgment,
directly or indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Bank shall have the option, exercisable at any time, of
either reducing the Obligations by the principal amount of the purchase price or deferring the
reduction of the Obligations until the actual receipt by Bank of cash therefor.
-18-
9.5 Banks Liability for Collateral.
So long as Bank complies with reasonable
banking practices regarding the safekeeping of the Collateral in the possession or under the
control of Bank, Bank shall not be liable or responsible for: (a) the safekeeping of the
Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the
Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person.
Borrowers bear all risk of loss, damage or destruction of the Collateral.
9.6 No Waiver; Remedies Cumulative.
Banks failure, at any time or times, to
require strict performance by Borrowers of any provision of this Agreement or any other Loan
Document shall not waive, affect, or diminish any right of Bank thereafter to demand strict
performance and compliance herewith or therewith. No waiver hereunder shall be effective
unless signed by Bank and then is only effective for the specific instance and purpose for
which it is given. Banks rights and remedies under this Agreement and the other Loan
Documents are cumulative. Bank has all rights and remedies provided under the Code, by law,
or in equity. Banks exercise of one right or remedy is not an election, and Banks waiver of
any Event of Default is not a continuing waiver. Banks delay in exercising any remedy is not
a waiver, election, or acquiescence.
9.7 Demand Waiver.
Each Borrower waives demand, notice of default or dishonor,
notice of payment and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel
paper, and guarantees held by Bank on which Borrowers are liable.
10
NOTICES
All notices, consents, requests, approvals, demands, or other communication by any party to
this Agreement or any other Loan Document must be in writing and shall be deemed to have been
validly served, given, or delivered: (a) upon the earlier of actual receipt and three (3)
Business Days after deposit in the U.S. mail, first class, registered or certified mail return
receipt requested, with proper postage prepaid; (b) upon transmission, when sent by electronic
mail or facsimile transmission; (c) one (1) Business Day after deposit with a reputable
overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered by
messenger, all of which shall be addressed to the party to be notified and sent to the address,
facsimile number, or email address indicated below. Bank or any Borrower may change its mailing
or electronic mail address or facsimile number by giving the other party written notice thereof
in accordance with the terms of this Section 10.
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If to Borrower:
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Financial Engines, Inc.
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1804 Embarcadero Rd., Suite 200
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Palo Alto, CA 94303
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Attn: Raymond J. Sims
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Fax: 650-565-7705
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Email: rsims@financialengines.com
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Financial Engines Reincorporation Sub, Inc.
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1804 Embarcadero Rd.
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Palo Alto, CA 94303
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Attn: Raymond J. Sims
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Fax: 650-565-7705
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Email: rsims@financialengines.com
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If to Bank:
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Silicon Valley Bank
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2400 Hanover Street
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Palo Alto, CA 94304
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Attn: Nick Tsiagkas
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Fax: (650) 320-0016
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Email: ntsiagkas@svb.com
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11
CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE
-19-
California law governs the Loan Documents without regard to principles of conflicts of law.
Borrowers and Bank each submit to the exclusive jurisdiction of the State and Federal courts in
Santa Clara County, California; provided, however, that nothing in this Agreement shall be deemed
to operate to preclude Bank from bringing suit or taking other legal action in any other
jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce
a judgment or other court order in favor of Bank. Each Borrower expressly submits and consents in
advance to such jurisdiction in any action or suit commenced in any such court, and each Borrower
hereby waives any objection that it may have based upon lack of personal jurisdiction, improper
venue, or forum non conveniens and hereby consents to the granting of such legal or equitable
relief as is deemed appropriate by such court. Each Borrower hereby waives personal service of the
summons, complaints, and other process issued in such action or suit and agrees that service of
such summons, complaints, and other process may be made by registered or certified mail addressed
to Borrowers at the address set forth in Section 10 of this Agreement and that service so made
shall be deemed completed upon the earlier to occur of Borrowers actual receipt thereof or three
(3) days after deposit in the U.S. mails, proper postage prepaid.
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWERS AND BANK EACH WAIVE THEIR RIGHT
TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE
LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL
OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT
TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the
parties hereto agree that any and all disputes or controversies of any nature between them arising
at any time shall be decided by a reference to a private judge, mutually selected by the parties
(or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior
Court) appointed in accordance with California Code of Civil Procedure Section 638 (or pursuant to
comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the
federal courts), sitting without a jury, in Santa Clara County, California; and the parties hereby
submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to
and in accordance with the provisions of California Code of Civil
Procedure §§ 638 through 645.1,
inclusive. The private judge shall have the power, among others, to grant provisional relief,
including without limitation, entering temporary restraining orders, issuing preliminary and
permanent injunctions and appointing receivers. All such proceedings shall be closed to the public
and confidential and all records relating thereto shall be permanently sealed. If during the course
of any dispute, a party desires to seek provisional relief, but a judge has not been appointed at
that point pursuant to the judicial reference procedures, then such party may apply to the Santa
Clara County, California Superior Court for such relief. The proceeding before the private judge
shall be conducted in the same manner as it would be before a court under the rules of evidence
applicable to judicial proceedings. The parties shall be entitled to discovery which shall be
conducted in the same manner as it would be before a court under the rules of discovery applicable
to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery
rules and order applicable to judicial proceedings in the same manner as a trial court judge. The
parties agree that the selected or appointed private judge shall have the power to decide all
issues in the action or proceeding, whether of fact or of law, and shall report a statement of
decision thereon pursuant to the California Code of Civil Procedure § 644(a). Nothing in this
paragraph shall limit the right of any party at any time to exercise self-help remedies, foreclose
against collateral, or obtain provisional remedies. The private judge shall also determine all
issues relating to the applicability, interpretation, and enforceability of this paragraph.
12
GENERAL PROVISIONS
12.1 Successors and Assigns.
This Agreement binds and is for the benefit of the successors
and
permitted assigns of each party. Borrowers may not assign this Agreement or any rights or
obligations under it
without Banks prior written consent (which may be granted or withheld in Banks discretion).
Bank has the right,
without the consent of or notice to Borrowers, to sell, transfer, negotiate, or grant
participation in all or any part of,
or any interest in, Banks obligations, rights, and benefits under this Agreement and the
other Loan Documents.
12.2 Indemnification.
Borrowers agree to indemnify, defend and hold Bank and its directors,
officers,
employees, agents, attorneys, or any other Person affiliated with or representing Bank (each,
an
Indemnified
Person
) harmless against: (a) all obligations, demands, claims, and liabilities
(collectively,
Claims
) asserted by
any other party in connection with the transactions contemplated by the Loan Documents; and
(b) all losses or Bank
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Expenses incurred, or paid by such Indemnified Person from, following, or arising from
transactions between Bank and Borrowers (including reasonable attorneys fees and expenses),
except for Claims and/or losses directly caused by such Indemnified Persons gross negligence or
willful misconduct.
12.3 Time of Essence.
Time is of the essence for the performance of all Obligations in this
Agreement.
12.4 Severability of Provisions.
Each provision of this Agreement is severable from every other
provision in determining the enforceability of any provision.
12.5 Correction of Loan Documents.
Bank may correct patent errors and fill in any blanks in this
Agreement and the other Loan Documents consistent with the agreement of the parties.
12.6 Amendments in Writing; Integration.
All amendments to this Agreement must be in writing
and signed by both Bank and Borrowers. This Agreement and the Loan Documents represent the
entire agreement
about this subject matter and supersede prior negotiations or agreements. All prior
agreements, understandings,
representations, warranties, and negotiations between the parties about the subject matter of
this Agreement and the
Loan Documents merge into this Agreement and the Loan Documents.
12.7 Counterparts.
This Agreement may be executed in any number of counterparts and by
different
parties on separate counterparts, each of which, when executed and delivered, are an original,
and all taken together,
constitute one Agreement.
12.8 Survival.
All covenants, representations and warranties made in this Agreement continue
in full
force until this Agreement has terminated pursuant to its terms and all Obligations (other
than inchoate indemnity
obligations and any other obligations which, by their terms, are to survive the termination of
this Agreement) have
been satisfied. The obligation of Borrowers in Section 12.2 to indemnify Bank shall survive
until the statute of
limitations with respect to such claim or cause of action shall have run.
12.9 Confidentiality.
In handling any confidential information, Bank shall exercise the same
degree of
care that it exercises for its own proprietary information, but disclosure of information may
be made: (a) to Banks
Subsidiaries or Affiliates in connection with their business with Borrower; (b) to prospective
transferees or
purchasers of any interest in the Credit Extensions (provided, however, Bank shall use
commercially reasonable
efforts to obtain such prospective transferees or purchasers agreement to the terms of this
provision); (c) as
required by law, regulation, subpoena, or other order; (d) to Banks regulators or as
otherwise required in connection
with Banks examination or audit; (e) as Bank considers appropriate in exercising remedies
under the Loan
Documents; and (f) to third-party service providers of Bank so long as such service providers
have executed a
confidentiality agreement with Bank for the benefit of Borrower with terms no less restrictive
than those contained
herein. Confidential information does not include information that either: (i) is in the
public domain or in Banks
possession when disclosed to Bank, or becomes part of the public domain after disclosure to
Bank; or (ii) is
disclosed to Bank by a third party, if Bank does not know that the third party is prohibited
from disclosing the
information.
12.10 Co-Borrower Waivers.
(a)
Cross-Guaranty
. Each Borrower hereby agrees that such Borrower is jointly and
severally liable for, and hereby absolutely and unconditionally guarantees to Bank and its
successors and assigns, the full and prompt payment (whether at stated maturity, by acceleration
or otherwise) and performance of, all Obligations owed or hereafter owing to Bank by each other
Borrower. Each Borrower agrees that its guaranty obligation hereunder is a continuing guaranty of
payment and performance and not of collection, that its obligations under this Agreement shall not
be discharged until payment and performance, in full, of the Obligations has occurred, and that
its obligations under this Section 12.10 shall be absolute and unconditional, irrespective of, and
unaffected by,
(i) the genuineness, validity, regularity, enforceability or any future amendment of, or
change in, this
Agreement, any other Loan Document or any other agreement, document or instrument to which any
Borrower is or may become a party;
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(ii) the absence of any action to enforce this Agreement (including this Section 12.10) or any
other Loan Document or the waiver or consent by Bank with respect to any of the provisions thereof;
(iii) the existence, value or condition of, or failure to perfect its Lien against, any
security for the Obligations or any action, or the absence of any action, by Bank in respect
thereof (including the release of any such security);
(iv) the insolvency of any Borrower or any Guarantor; or
(v) any other action or circumstances that might otherwise constitute a legal or equitable
discharge or defense of a surety or guarantor.
Each Borrower shall be regarded, and shall be in the same position, as the principal debtor
with respect to the Obligations guaranteed hereunder.
(b)
Specific Waivers by Borrowers
. Each Borrower expressly waives all rights it may
have now or in
the future under any statute, or at common law, or at law or in equity, or otherwise, to
compel Bank to marshal
assets or to proceed in respect of the Obligations guaranteed hereunder against any other
Borrower or any
Guarantor, any other party or against any security for the payment and performance of the
Obligations before
proceeding against, or as a condition to proceeding against, such Borrower. Without limiting
the generality of the
foregoing, each Borrower expressly waives the benefit of California Civil Code Section 2815
permitting the
revocation of any guaranty as to future transactions and the benefit of California Civil Code
Sections 2787 through
2855, 2899 and 1432 with respect to certain suretyship defenses. It is agreed among each
Borrower and Bank that
the foregoing waivers are of the essence of the transaction contemplated by this Agreement and
the other Loan
Documents and that, but for the provisions of this Section 12.10 and such waivers, Bank would
decline to enter into
this Agreement.
(c)
Benefit of Guaranty
. Each Borrower agrees that the provisions of this Section
12.10 are for the
benefit of Bank and its successors, transferees, endorsees and assigns, and nothing herein
contained shall impair, as
between any other Borrower and Bank, the obligations of such other Borrower under the Loan
Documents.
(d)
Waiver of Subrogation. Etc
. Notwithstanding anything to the contrary in this
Agreement or in any
other Loan Document or until all obligations are paid in full, each Borrower hereby expressly
and irrevocably
waives any and all rights at law or in equity to subrogation, reimbursement, exoneration,
contribution,
indemnification or set off and any and all defenses available to a surety, guarantor or
accommodation co-obligor.
Each Borrower acknowledges and agrees that this waiver is intended to benefit Bank and shall
not limit or otherwise
affect such Borrowers liability hereunder or the enforceability of this Section 12.10, and
that Bank and its
successors and assigns are intended third party beneficiaries of the waivers and agreements
set forth in this Section 12.10.
12.11 Attorneys Fees, Costs and Expenses.
In any action or proceeding between Borrowers and
Bank arising out of or relating to the Loan Documents, the prevailing party shall be entitled to
recover its reasonable attorneys fees and other costs and expenses incurred, in addition to any
other relief to which it may be entitled.
13
DEFINITIONS
13.1 Definitions.
As used in the Loan Documents, the word shall is mandatory, the word
may is permissive, the word or is not exclusive, the words includes and including are not
limiting, the singular includes the plural, and numbers denoting amounts that are set off in
brackets are negative. As used in this Agreement, the following terms have the following meanings:
Account
is any account as defined in the Code with such additions to such term as may
hereafter be made, and includes, without limitation, all accounts receivable and other sums owing
to Borrower.
Account Debtor
is any account debtor as defined in the Code with such additions to such
term as may hereafter be made.
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Advance
or
Advances
means an advance (or advances) under the Revolving Line.
Affiliate
of any Person is a Person that owns or controls directly or indirectly the
Person, any Person that controls or is controlled by or is under common control with the Person,
and each of that Persons senior executive officers, directors, partners and, for any Person that
is a limited liability company, that Persons managers and members.
Agreement
is defined in the preamble hereof.
Availability Amount
is (a) the lesser of (i) the Revolving Line or (ii) the amount
available under the Borrowing Base minus (b) the amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit) plus an amount equal to the Letter of Credit
Reserve, minus (c) the FX Reserve, minus (d) any outstanding amounts used for Cash Management
Services, and minus (e) the outstanding principal balance of any Advances.
Bank
is defined in the preamble hereof.
Bank Expenses
are all audit fees and expenses, costs, and expenses (including reasonable
attorneys fees and expenses) for preparing, amending, negotiating, administering, defending and
enforcing the Loan Documents (including, without limitation, those incurred in connection with
appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower.
Bankruptcy-Related Defaults
is defined in Section
9.1.
Borrower
is defined in the preamble hereof
Borrowers Books
are all Borrowers books and records including ledgers, federal and state
tax returns, records regarding Borrowers assets or liabilities, the Collateral, business
operations or financial condition, and all computer programs or storage or any equipment
containing such information.
Borrowing Base
is the sum of: (a) 80% of Eligible Accounts plus (b) 50% of Eligible
Intra-Quarter Managed Accounts; provided that Bank may lower the percentages of the Borrowing Base
after performing an audit of Borrowers Collateral.
Borrowing Base Certificate
is that certain certificate in the form attached hereto as
Exhibit C
.
Borrowing Resolutions
are, with respect to any Person, those resolutions substantially in
the form attached hereto as
Exhibit D
.
Business Day
is any day that is not a Saturday, Sunday or a day on which Bank is closed.
Cash Equivalents
means (a) marketable direct obligations issued or unconditionally
guaranteed by the United States or any agency or any State thereof having maturities of not more
than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1)
year after its creation and having the highest rating from either Standard & Poors Ratings Group
or Moodys Investors Service, Inc.; (c) Banks certificates of deposit issued maturing no more than
one (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of the
assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of
this definition.
Cash Management Services
is defined in Section 2.1.4.
Change in Control
means any event, transaction, or occurrence as a result of which (a) any
person (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act
of 1934, as an amended (the
Exchange Act
)), other than a trustee or other fiduciary holding
securities under an employee benefit plan of Borrower, is or becomes a beneficial owner (within the
meaning Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of
Borrower, representing twenty-five percent (25%) or more of the combined voting power of Borrowers
then outstanding securities; or (b) during any period of twelve consecutive calendar months,
individuals who at the beginning of such period constituted the Board of Directors of Borrower
(together
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with any new directors whose election by the Board of Directors of Borrower was approved by a vote
of at least two-thirds of the directors then still in office who either were directions at the
beginning of such period or whose election or nomination for election was previously so approved)
cease for any reason other than death or disability to constitute a majority of the directors then
in office.
Code
is the Uniform Commercial Code, as the same may, from time to time, be enacted and in
effect in the State of California; provided, that, to the extent that the Code is used to define
any term herein or in any Loan Document and such term is defined differently in different Articles
or Divisions of the Code, the definition of such term contained in Article or Division 9 shall
govern; provided further, that in the event that, by reason of mandatory provisions of law, any or
all of the attachment, perfection, or priority of, or remedies with respect to, Banks Lien on any
Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the
State of California, the term
Code
shall mean the Uniform Commercial Code as enacted and in
effect in such other jurisdiction solely for purposes on the provisions thereof relating to such
attachment, perfection, priority, or remedies and for purposes of definitions relating to such
provisions.
Collateral
is any and all properties, rights and assets of Borrower described
on
Exhibit A
.
Collateral Account
is any Deposit Account, Securities
Account, or Commodity Account.
Commodity Account
is any commodity account as defined in the Code with such additions to
such term as may hereafter be made.
Compliance Certificate
is that certain certificate in the form attached hereto as
Exhibit D
.
Contingent Obligation
is, for any Person, any direct or indirect liability, contingent or
not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other
obligation of another, such as an obligation directly or indirectly guaranteed, endorsed, co-made,
discounted or sold with recourse by that Person, or for which that Person is directly or
indirectly liable; (b) any obligations for undrawn letters of credit for the account of that
Person; and (c) all obligations from any interest rate, currency or commodity swap agreement,
interest rate cap or collar agreement, or other agreement or arrangement designated to protect a
Person against fluctuation in interest rates, currency exchange rates or commodity prices; but
Contingent Obligation does not include endorsements in the ordinary course of business. The
amount of a Contingent Obligation is the stated or determined amount of the primary obligation for
which the Contingent Obligation is made unless the Contingent Obligation is limited by the terms
thereof, in which case the amount of the Contingent Obligation shall be such limitation or, if not
determinable, the maximum reasonably anticipated liability for it determined by the Person in good
faith; but the amount may not exceed the maximum of the obligations under any guarantee or other
support arrangement.
Continuation Date
means any date on which Borrowers continue a LIBOR Term Loan into another
Interest Period.
Control Agreement
is any control agreement entered into among the depository institution at
which Borrower maintains a Deposit Account or the securities intermediary or commodity
intermediary at which Borrower maintains a Securities Account or a Commodity Account, Borrower,
and Bank pursuant to which Bank obtains control (within the meaning of the Code) over such Deposit
Account, Securities Account, or Commodity Account.
Conversion Date
means any date on which Borrower converts a Prime Rate Term Loan to a LIBOR
Term Loan or a LIBOR Term Loan to a Prime Rate Term Loan.
Credit Extension
is any Advance, Letter of Credit, Term Loan, FX Forward Contract, amount
utilized for Cash Management Services, or any other extension of credit by Bank for Borrowers
benefit.
Credit Party
means Borrower, and each of Borrowers Subsidiaries.
Current Liabilities
are all obligations and liabilities of Borrower to Bank, plus, without
duplication, the aggregate amount of Borrowers Total Liabilities that mature within one (1) year.
Default Rate
is defined in Section 2.3(b).
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Deferred Revenue
is all amounts received or invoiced in advance of performance under
contracts and not yet recognized as revenue.
Deposit Account
is any deposit account as defined in the Code with such additions to such
term as may hereafter be made.
Designated Deposit Account
is Borrowers Deposit Account, account number 3300362344,
maintained with Bank.
Dollars,
dollars
and
$
each mean lawful money of the United States.
EBITDA
shall mean, on a consolidated basis, (a) Net Income, plus (b) Interest Expense, plus
(c) to the extent deducted in the calculation of Net Income, depreciation expense and amortization
expense, plus (d) income tax expense, plus (e) other non-cash expense including stock compensation
expenses.
Effective Date
is the date Bank executes this Agreement as indicated on the signature page
hereof.
Eligible Accounts
means Accounts which arise in the ordinary course of Borrowers business
that meet all Borrowers representations and warranties in Section 5.3. Bank reserves the right at
any time after the Effective Date to adjust any of the criteria set forth below and to establish
new criteria in its good faith business judgment based on an audit of Borrowers Collateral on at
least 60 days prior written notice to Borrower. Eligible Accounts shall not include:
(a) Accounts that the Account Debtor has not paid within sixty (60) days of due date
regardless of
invoice payment period terms, except for CitiStreet, who shall have up to ninety (90) days
past due date;
(b) Accounts owing from an Account Debtor, sixty percent (60%) or more of whose Accounts have
not been paid within ninety (90) days of invoice date;
(c) Accounts owing from an Account Debtor which does not have its principal place of business
in
the United States or Canada unless such Accounts are otherwise Eligible Accounts and (i)
covered in full by credit
insurance satisfactory to Bank, less any deductible, (ii) supported by letter(s) of credit
acceptable to Bank,
(iii) supported by a guaranty from the Export-Import Bank of the United States, or (iv) that
Bank otherwise approves
of in writing.;
(d) Accounts owing from an Account Debtor to whom Borrower is indebted or obligated in any
manner to the Account Debtor (as creditor, lessor, supplier or otherwise sometimes called
contra accounts,
accounts payable, customer deposits or credit accounts), but (i) such Accounts are excluded
only to the extent of
Borrowers indebtedness to such Account Debtors and (ii) such exclusion does not include
Accounts subject to
customary credits, adjustments and/or discounts given to an Account Debtor by Borrower in the
ordinary course of
its business, provided that Deferred Revenue is allowed to the extent it can be offset against
amounts invoiced;
(e) Accounts for which the Account Debtor is Borrowers Affiliate, officer, employee, or
agent;
(f) Accounts with credit balances over sixty (60) days from due date;
(g) Accounts owing from an Account Debtor, including Affiliates, whose total obligations to
Borrower exceed twenty-five (25%) of all Accounts, except for JP Morgan Chase and CitiStreet,
for which such
percentage is 35%, for the amounts that exceed that percentage, unless Bank approves in
writing;
(h) Accounts owing from an Account Debtor which is a United States government entity or any
department, agency, or instrumentality thereof unless Borrower has assigned its payment rights to
Bank and the assignment has been acknowledged under the Federal Assignment of Claims Act of 1940,
as amended;
(i) Accounts for demonstration or promotional equipment, or in which goods are consigned, or
sold
on a sale guaranteed, sale or return, sale on approval, or other terms if Account Debtors
payment may be conditional;
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(j) Accounts owing from an Account Debtor that has not been invoiced or where goods or
services have not yet been rendered to the Account Debtor (sometimes called memo billings or
pre-billings);
(k) Accounts subject to contractual arrangements between Borrower and an Account Debtor where
payments shall be scheduled or due according to completion or fulfillment requirements where the
Account Debtor has a right of offset for damages suffered as a result of Borrowers failure to
perform in accordance with the contract (sometimes called contracts accounts receivable, progress
billings, milestone billings, or fulfillment contracts);
(l) Accounts owing from an Account Debtor the amount of which may be subject to withholding
based on the Account Debtors satisfaction of Borrowers complete performance (but only to the
extent of the amount withheld; sometimes called retainage billings);
(m) Accounts subject to trust provisions, subrogation rights of a bonding company, or
a statutory trust;
(n) Accounts owing from an Account Debtor that has been invoiced for goods that have not been
shipped to the Account Debtor unless Bank, Borrower, and the Account Debtor have entered into an
agreement acceptable to Bank in its sole discretion wherein the Account Debtor acknowledges that
(i) it has title to and has ownership of the goods wherever located, (ii) a bona fide sale of the
goods has occurred, and (iii) it owes payment for such goods in accordance with invoices from
Borrower (sometimes called bill and hold accounts);
(o) Accounts that represent non-trade receivables or that are derived by means other than in
the ordinary course of Borrowers business;
(p) Accounts or the portions thereof for which Borrower has permitted payment to extend
beyond 90 days;
(q) Accounts subject to chargebacks or others payment deductions taken by an Account Debtor
(but only to the extent the chargeback is determined invalid and subsequently collected by
Borrower);
(r) Accounts in which the Account Debtor disputes liability or makes any claim (but only up
to the
disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or
becomes insolvent, or goes out of business;
(s) Accounts with selling terms of more than 30 days (45 days for Accounts where the Account
Debtor is Citistreet, Dell Computer, Xerox, Apple Computer, Bank of America, IBM, PepsiCo, JP
Morgan Chase and Hewlett-Packard); provided that Bank may approve other accounts on a case by case
basis from Account Debtors that represent $25,000 or more of Borrowers revenue per year; and
(t) Accounts for which Bank in its good faith business judgment determines collection to be
doubtful.
Eligible Intra-Quarter Managed Accounts
is the portion of Intra-Quarter Managed Accounts
representing services: (i) that have been fully performed by Borrower, (ii) for which the relevant
Account Debtor owes Borrower, and (iii) the invoice for which is scheduled to be delivered no later
than the end of the calendar quarter during which the relevant services were provided.
Equipment
is all equipment as defined in the Code with such additions to such term as may
hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles
(including motor vehicles and trailers), and any interest in any of the foregoing.
ERISA
is the Employee Retirement Income Security Act of 1974, and its
regulations.
Event of Default
is defined in Section 8.
Fixed Charge Coverage Ratio
is the ratio of Borrowers EBITDA for the fiscal quarter ending
on the date of measurement to the sum of scheduled principal and interest payments on Indebtedness
for such fiscal quarter.
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Foreign Currency
means lawful money of a country other than the United States.
Funding Date
is any date on which a Credit Extension is made to or on account of Borrower
which shall be a Business Day.
FX Business Day
is any day when (a) Banks Foreign Exchange Department is conducting its
normal business and (b) the Foreign Currency being purchased or sold by Borrower is available to
Bank from the entity from which Bank shall buy or sell such Foreign Currency.
FX Forward Contract
is defined in Section
2.1.3.
FX Reduction Amount
is defined in
Section 2.1.3.
FX Reserve
is defined in
Section 2.1.3.
GAAP
is generally accepted accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other Person as may be approved by a significant segment of the
accounting profession, which are applicable to the circumstances as of the date of determination.
General Intangibles
is all general intangibles as defined in the Code in effect on the
date hereof with such additions to such term as may hereafter be made, and includes without
limitation, all copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work, whether published or unpublished, any
patents, trademarks, service marks and, to the extent permitted under applicable law, any
applications therefor, whether registered or not, any trade secret rights, including any rights to
unpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchise
agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims,
income and other tax refunds, security and other deposits, options to purchase or sell real or
personal property, rights in all litigation presently or hereafter pending (whether in contract,
tort or otherwise), insurance policies (including without limitation key man, property damage, and
business interruption insurance), payments of insurance and rights to payment of any kind.
Governmental Approval
is any consent, authorization, approval, order, license, franchise,
permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or
other act by or in respect of, any Governmental Authority.
Governmental Authority
is any nation or government, any state or other political
subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank
or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative
functions of or pertaining to government, any securities exchange and any self-regulatory
organization.
Guarantor
is any present or future guarantor of the Obligations, including Financial
Engines Advisors, L.L.C.
Indebtedness
is (a) indebtedness for borrowed money or the deferred price of property or
services, such as reimbursement and other obligations for surety bonds and letters of credit, (b)
obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease
obligations, and (d) Contingent Obligations.
Indemnified Person
is defined in Section 12.2.
Initial Audit
is Banks inspection of Borrowers Accounts, the Collateral, and Borrowers
Books.
Insolvency Proceeding
is any proceeding by or against any Person under the United States
Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit
of creditors, compositions, extensions generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
-27-
Interest Expense
means for any fiscal period, interest expense (whether cash or non-cash)
determined in accordance with GAAP for the relevant period ending on such date, including, in any
event, interest expense with respect to any Credit Extension and other Indebtedness of Borrower
and its Subsidiaries, including, without limitation or duplication, all commissions, discounts, or
related amortization and other fees and charges with respect to letters of credit and bankers
acceptance financing and the net costs associated with interest rate swap, cap, and similar
arrangements, and the interest portion of any deferred payment obligation (including leases of all
types).
Interest Payment Date
means, with respect to any LIBOR Term Loan, the last day of each
Interest Period applicable to such LIBOR Term Loan, but not less often than every three months
and, with respect to Prime Rate Term Loans and Prime Rate Advances, the first day of each month
(or, if that day of the month does not fall on a Business Day, then on the first Business Day
following such date), and each date a Prime Rate Term Loan is converted into a LIBOR Term Loan to
the extent of the amount converted to a LIBOR Term Loan.
Interest Period
means, as to any LIBOR Term Loan, the period commencing on the date of such
LIBOR Term Loan, or on the conversion/continuation date on which the LIBOR Term Loan is converted
into or continued as a LIBOR Term Loan, and ending on the date that is 1, 2, 3 or 6 months
thereafter, in each case as Borrower may elect in the applicable Notice of Borrowing or Notice of
Conversion/Continuation;
provided, however,
that (a) no Interest Period with respect to any LIBOR
Term Loan shall end later than the Term Loan Maturity Date, (b) the last day of an Interest Period
shall be determined in accordance with the practices of the LIBOR interbank market as from time to
time in effect, (c) if any Interest Period would otherwise end on a day that is not a Business
Day, that Interest Period shall be extended to the following Business Day unless, in the case of a
LIBOR Term Loan, the result of such extension would be to carry such Interest Period into another
calendar month, in which event such Interest Period shall end on the preceding Business Day, (d)
any Interest Period pertaining to a LIBOR Term Loan that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period) shall end on the last Business Day of the calendar month
at the end of such Interest Period, and (e) interest shall accrue from and include the first
Business Day of an Interest Period but exclude the last Business Day of such Interest Period.
Interest Rate Determination Date
means each date for calculating the LIBOR for purposes of
determining the interest rate in respect of an Interest Period. The Interest Rate Determination
Date shall be the second Business Day prior to the first day of the related Interest Period for a
LIBOR Term Loan.
Intra-Quarter Managed Accounts
are Accounts arising out the managed account services
provided by Borrower to its customers that would otherwise qualify as Eligible Accounts except for
the fact that the same have not been billed to the relevant Account Debtor.
Inventory
is all inventory as defined in the Code in effect on the date hereof with such
additions to such term as may hereafter be made, and includes without limitation all merchandise,
raw materials, parts, supplies, packing and shipping materials, work in process and finished
products, including without limitation such inventory as is temporarily out of Borrowers custody
or possession or in transit and including any returned goods and any documents of title
representing any of the above.
Investment
is any beneficial ownership interest in any Person (including stock, partnership
interest or other securities), and any loan, advance or capital contribution to any Person.
IP Agreement
is that certain Intellectual Property Security Agreement executed and
delivered by Borrower to Bank dated as of even date herewith.
IPO
is an initial public offering of Borrowers stock.
Letter of Credit
means a standby letter of credit issued by Bank or another institution
based upon an application, guarantee, indemnity or similar agreement on the part of Bank as set
forth in Section 2.1.2.
Letter of Credit Application
is defined in Section 2.1.2(a).
Letter of Credit Reserve
has the meaning set forth in Section 2.1.2(c).
-28-
LIBOR
means, for any Interest Rate Determination Date with respect to an Interest Period
for any Term Loan to be made, continued as or converted into a LIBOR Term Loan, the rate of
interest per annum (as set forth by Bloomberg Information Service or any successor thereto or any
other service selected by Lender which has been nominated by the British Bankers Association as
an authorized information vendor for the purpose of displaying such rates) at which deposits in
United States Dollars are offered to Bank in the London interbank market (rounded upward, if
necessary, to the nearest 0.0001%) in which Bank customarily participates at 11:00 a.m. (local
time in such interbank market) two (2) Business Days prior to the first day of such Interest
Period for a period approximately equal to such Interest Period and in an amount approximately
equal to the amount of such Term Loan.
LIBOR Rate
means, for each Interest Period in respect of LIBOR Term Loans, an interest rate
per annum
(rounded upward, if necessary, to the nearest 0.0001%) equal to LIBOR for such Interest
Period
divided by
one (1)
minus
the Reserve Requirement for such Interest Period, but in no event
shall the LIBOR Rate be less than one and one-half percent (1.50%).
LIBOR Term Loan
means any portion of the Term Loan that bears interest based on the LIBOR
Rate.
Lien
is a claim, mortgage, deed of trust, levy, charge, pledge, security interest or other
encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise
against any property.
Loan Documents
are, collectively, this Agreement, the Perfection Certificate, the IP
Agreement, the Intercreditor Agreement, any note, or notes or guaranties executed by Borrower or
any Guarantor, and any other present or future agreement between Borrower any Guarantor and/or for
the benefit of Bank in connection with this Agreement, all as amended, restated, or otherwise
modified.
Loan Supplement
is the form included as part of
Exhibit A
.
Managed Accounts
are those Accounts from clients who receive personalized asset management
services from Borrower.
Material Adverse Change
is (a) a material impairment in the perfection or priority of Banks
Lien in the Collateral or in the value of such Collateral; (b) a material adverse change in the
business, operations, or condition (financial or otherwise) of Borrower; or (c) a material
impairment of the ability of Borrower to repay any portion of the Obligations.
Material Indebtedness
is any Indebtedness the principal amount of which is equal to or
greater than $500,000.
Oak Hill Note
is that certain promissory note issued by Financial Engines to Coast DL
Funding LLC in the original principal amount of $10,000,000.
Obligations
are Borrowers any Credit Partys obligation to pay when due any debts,
principal, interest, Bank Expenses and other amounts Borrower or any Credit Party owes Bank now or
later, whether under this Agreement, the Loan Documents, or otherwise, including, without
limitation, all obligations relating to letters of credit (including reimbursement obligations for
drawn and undrawn letters of credit), cash management services, and foreign exchange contracts, if
any, and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower or any Credit Party assigned to Bank, and the performance of Borrowers
any Credit Partys duties under the Loan Documents.
Operating Documents
are, for any Person, such Persons formation documents, as certified
with the Secretary of State of such Persons state of formation on a date that is no earlier than
30 days prior to the Effective Date, and, (a) if such Person is a corporation, its bylaws in
current form, (b) if such Person is a limited liability company, its limited liability company
agreement (or similar agreement), and (c) if such Person is a partnership, its partnership
agreement (or similar agreement), each of the foregoing with all current amendments or
modifications thereto.
Payment/Advance Form
is that certain form attached hereto as
Exhibit B
.
-29-
Perfection Certificate
is defined in
Section 5.1.
Permitted Distributions
means:
(a) purchases of capital stock from former employees, consultants and directors pursuant to
repurchase agreements or other similar agreements in an aggregate amount not to exceed $300,000 in
any fiscal year plus $1,000,000 per year to allow for purchases of restricted stock from executives
in an amount necessary to pay withholding tax, provided that at the time of such purchase no
Default or Event of Default has occurred and is continuing;
(b) distributions or dividends consisting solely of Borrowers capital stock;
(c) purchases for value of any rights distributed in connection with any stockholder rights
plan;
(d) purchases of capital stock or options to acquire such capital stock with the proceeds
received from a substantially concurrent issuance of capital stock or convertible securities;
(e) purchases of capital stock pledged as collateral for loans to employees;
(f) purchases of capital stock in connection with the exercise of stock options or stock
appreciation rights by way of cashless exercise or in connection with the satisfaction of
withholding tax obligations;
(g) purchases of fractional shares of capital stock arising out of stock dividends,
splits or combinations or business combinations;
(h) the settlement or performance of such Persons obligations under any equity derivative
transaction, option contract or similar transaction or combination of transactions; and
(i) other distributions, dividends or purchases of Borrowers capital stock in cash, provided
that the aggregate amount of such distributions, dividends, or purchases made pursuant to this
clause (i) during the period commencing on the Effective Date and ending on the date of
determination, when combined with purchases of Subordinated Debt during such period, shall not
exceed $100,000, and no Default or Event of Default exists or could result from such other
distribution, dividend, or purchase.
Permitted Indebtedness
is:
(a) Borrowers Indebtedness to Bank under this Agreement and any other Loan Document;
(b) (i) any Indebtedness that does not exceed $250,000 in principal amount existing on the
Effective Date, and (ii) any Indebtedness in excess of $250,000 in principal amount existing on the
Effective Date and shown on the Perfection Certificate;
(c) Subordinated Debt;
(d) unsecured Indebtedness to trade creditors and with respect to surety bonds and similar
obligations] incurred in the ordinary course of business;
(e) guaranties of Permitted Indebtedness and of obligations of a Borrower or a subsidiary that
do not constitute Indebtedness;
(f) Indebtedness incurred as a result of endorsing negotiable instruments received in the
ordinary course of business;
(g) Indebtedness consisting of interest rate, currency, or commodity swap agreements, interest
rate cap or collar agreements or arrangements designated to protect Borrower against fluctuations
in interest rates, currency exchange rates, or commodity prices;
-30-
(h) Indebtedness between Borrower and any of its Subsidiaries or among any of Borrowers
Subsidiaries;
(i) Indebtedness with respect to documentary letters of credit;
(j) capitalized leases and purchase money Indebtedness not to exceed $500,000 in the
aggregate in any fiscal year secured by Permitted Liens;
(k) Indebtedness of entities acquired in any permitted merger or acquisition
transaction;
(l) refinanced Permitted Indebtedness, provided that the amount of such Indebtedness is not
increased except by an amount equal to a reasonable premium or other reasonable amount paid in
connection with such refinancing and by an amount equal to any existing, but unutilized,
commitment thereunder; and
(m) other Indebtedness, if, on the date of incurring any Indebtedness pursuant to this clause
(m), the outstanding aggregate amount of all Indebtedness incurred pursuant to this clause (m)
does not exceed $100,000.
Permitted Investments
are:
(a) Investments existing on the Effective Date;
(b) (i) marketable direct obligations issued or unconditionally guaranteed by the United
States or its agencies or any State maturing within 1 year from its acquisition, (ii) commercial
paper maturing no more than 2 years after its creation and having the highest rating from either
Standard & Poors Corporation or Moodys Investors Service, Inc., and (iii) Banks certificates of
deposit maturing no more than 2 years after issue;
(c) Investments approved by the Borrowers Board of Directors or otherwise pursuant to a
Board- approved investment policy;
(d) Investments in Borrower by any of its Subsidiaries or by Borrower in any Guarantor;
(e) Investments consisting of Collateral Accounts in the name of Borrower or any Subsidiary so
long as Bank has a first priority, perfected security interest in such Collateral Accounts other
than Deposit Accounts used exclusively for payroll, payroll taxes and other employee wage and
benefit payments to or for the benefit of Borrowers employees;
(f) Investments consisting of extensions of credit to Borrowers or its Subsidiaries
customers in the nature of accounts receivable, prepaid royalties or notes receivable arising from
the sale or lease of goods, provision of services or licensing activities of Borrower;
(g) Investments received in satisfaction or partial satisfaction of obligations owed by
financially troubled obligors;
(h) Investments acquired in exchange for any other Investments in connection with or as a
result of a bankruptcy, workout, reorganization or recapitalization;
(i) Investments acquired as a result of a foreclosure with respect to any secured
Investment;
(j) Temporary advances to cover incidental expenses in the ordinary course of business not to
exceed $250,000 in one year;
(k) Investments in joint ventures, strategic alliances, licensing (on a non-exclusive basis)
and similar arrangements customary in Borrowers industry and which do not require Borrower to
assume or to otherwise become liable for the obligations of any third party not directly related
to or arising out of such arrangement or require Borrower to transfer ownership of non-cash assets
to such joint venture or other entity or transfer of cash in excess of $250,000 in any one fiscal
year;
-31-
(l) Investments consisting of interest rate, currency, or commodity swap agreements, interest
rate cap or collar agreements or arrangements designated to protect a Person against fluctuations
in interest rates, currency exchange rates, or commodity prices;
(m) Investments consisting of loans and advances to employees; and
(n) other Investments, if, on the date of incurring any Investments pursuant to
this clause (n), the outstanding aggregate amount of all Investments incurred pursuant to this
clause (n) does not exceed $100,000.
Permitted Liens
are:
(a) (i) Liens securing Permitted Indebtedness described under clause (b) of the definition of
Permitted Indebtedness or (ii) Liens arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or levies, either not
delinquent or being contested in good faith and for which Borrower maintains adequate reserves on
its Books,
provided
that no notice of any such Lien has been filed or recorded under the
Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder;
(c) Liens (including with respect to capital leases) (i) on property (including accessions,
additions, parts, replacements, fixtures, improvements and attachments thereto, and the proceeds
thereof) acquired or held by Borrower or its Subsidiaries incurred for financing such property
(including accessions, additions, parts, replacements, fixtures, improvements and attachments
thereto, and the proceeds thereof) other than Accounts, Inventory, or (ii) existing on property
(and accessions, additions, parts, replacements, fixtures, improvements and attachments thereto,
and the proceeds thereof) when acquired other than Accounts, Inventory, and Financed Equipment, if
the Lien is confined to such property (including accessions, additions, parts, replacements,
fixtures, improvements and attachments thereto, and the proceeds thereof);
(d) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by
Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited
to the property encumbered by the existing Lien and the principal amount of the indebtedness it
secures may not increase;
(e) leases or subleases of real property granted in the ordinary course of business, and
leases, subleases, non-exclusive licenses or sublicenses of property (other than real property or
intellectual property) granted in the ordinary course of
Borrowers business,
if
the leases,
subleases, licenses and sublicenses do not prohibit granting Bank a security interest;
(f) non-exclusive license of intellectual property granted to third parties in the ordinary
course of business,and licenses of intellectual property that could not result in a legal transfer
of title of the licensed property that may be exclusive in respects other than territory and that
may be exclusive as to territory only as to discreet geographical areas outside of the United
States;
(g) leases or subleases granted in the ordinary course of Borrowers business, including in
connection with Borrowers leased premises or leased property;
(h) Liens in favor of custom and revenue authorities arising as a matter of law to secure the
payment of custom duties in connection with the importation of goods;
(i) Liens on insurance proceeds securing the payment of financed insurance premiums;
(j) customary Liens granted in favor of a trustee to secure fees and other amounts owing to
such
trustee under an indenture or other similar agreement;
(k) Liens on assets acquired in mergers and acquisitions not prohibited by Section 7 of this
Agreement;
-32-
(l) Liens consisting of pledges of cash, cash equivalents or government securities to secure
swap or foreign exchange contracts or letters of credit];
(m) Liens arising from attachments or judgments, orders, or decrees in circumstances not
constituting an Event of Default under Sections 8.4 and 8.7;
(n) Liens in favor of other financial institutions arising in connection with Borrowers
deposit or securities accounts held at such institutions;
(o) Liens of carriers, warehousemen, suppliers, or other Persons that are possessory in
nature arising in the ordinary course of business so long as such Liens attach only to Inventory,
securing liabilities in the aggregate amount not to exceed $500,000 and which are not delinquent
or remain payable without penalty or which are being contested in good faith and by appropriate
proceedings which proceedings have the effect of preventing the forfeiture or sale of the property
subject thereto;
(p) Liens to secure payment of workers compensation, employment insurance, old-age pensions,
social security and other like obligations incurred in the ordinary course of business (other than
Liens imposed by ERISA); and
(q) Liens not otherwise permitted, provided that (i) the amount of all such Liens is not in
excess of $100,000 and (ii) such Liens are subordinate in priority to Banks Lien hereunder.
Person
is any individual, sole proprietorship, partnership, limited liability company,
joint venture, company, trust, unincorporated organization, association, corporation, institution,
public benefit corporation, firm, joint stock company, estate, entity or government agency.
Prime Rate
is Banks most recently announced prime rate, even if it is not Banks lowest
rate, but in no event shall the Prime Rate be less than four percent (4.00%) per annum.
Prime Rate Term Loan
is any portion of the Term Loan that bears interest based on the
Prime Rate.
Quick Assets
is, on any date, Borrowers consolidated, unrestricted cash and Cash
Equivalents, net billed accounts receivable and investments with maturities of fewer than 12
months determined according to GAAP.
Registered Organization
is any registered organization as defined in the Code with such
additions to such term as may hereafter be made.
Requirement of Law
is as to any Person, the organizational or governing documents of such
Person, and any law (statutory or common), treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon
such Person or any of its property or to which such Person or any of its property is subject.
Responsible Officer
is any of the Chief Executive Officer, President, Chief Financial
Officer and Controller of Borrower.
Revolving Line
is an Advance or Advances in an amount equal to Seven Million Dollars
($7,000,000).
Revolving Line Maturity Date
is 364 days from the Second Amended and
Restated Effective Date.
Securities Account
is any securities account as defined in the Code with such additions
to such term as may hereafter be made.
Settlement Date
is defined in Section 2.1.3.
Subordinated Debt
is (a) Indebtedness incurred by Borrower subordinated to Borrowers
Indebtedness owed to Bank and which is reflected in a written agreement in a manner and form
reasonably acceptable to Bank
-33-
and approved by Bank in writing, and (b) to the extent the terms of subordination do not change
adversely to Bank, refinancings, refundings, renewals, amendments or extensions of any of the
foregoing.
Subsidiary
means, with respect to any Person, any Person of which more than 50.0% of the
voting stock or other equity interests (in the case of Persons other than corporations) is owned or
controlled directly or indirectly by such Person or one or more of Affiliates of such Person.
Term Loan
is the loan made by Bank pursuant to the terms of Section 2.1.5
hereof.
Term Loan Amount
is an amount equal to Ten Million Dollars
($10,000,000).
Term
Loan Maturity Date
is May 1, 2012.
Term Loan Payment
is defined in Section 2.1.5.
Transfer
is defined in Section 7.1.
Total Liabilities
is on any day, obligations that should, under GAAP, be classified as
liabilities on Borrowers consolidated balance sheet, including all Indebtedness, and current
portion of Subordinated Debt permitted by Bank to be paid by Borrower, but excluding all other
Subordinated Debt.
[Signature page follows.]
-34-
IN WITNESS WHEREOF,
the parties hereto have caused this Agreement to be executed as of the
Effective Date.
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BORROWERS:
FINANCIAL ENGINES, INC.
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By
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/s/ Raymond J. Sims
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Name:
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Raymond J. Sims
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Title:
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EVP + CFO
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FINANCIAL ENGINES REINCORPORATION SUB, INC.
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By
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/s/ Raymond J. Sims
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Name:
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Raymond J. Sims
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Title:
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EVP + CFO
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BANK:
SILICON VALLEY BANK
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By
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Name:
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Title:
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Effective Date:
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IN WITNESS WHEREOF,
the parties hereto have caused this Agreement to be executed as of the
Effective Date.
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BORROWERS:
FINANCIAL ENGINES, INC.
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By
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/s/ Raymond J. Sims
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Name:
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Raymond J. Sims
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Title:
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EVP &
CFO
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FINANCIAL ENGINES REINCORPORATION SUB, INC.
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By
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/s/ Raymond J. Sims
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Name:
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Raymond J. Sims
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Title:
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EVP &
CFO
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BANK:
SILICON VALLEY BANK
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By
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/s/ Nick Tsiagkas
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Name:
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Nick Tsiagkas
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Title:
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Relationship Manager
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Effective Date: April 20, 2009
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EXHIBIT A
COLLATERAL DESCRIPTION
The Collateral consists of all of Borrowers right, title and interest in and to the following
personal property:
All goods, Accounts (including health-care receivables), Equipment, Inventory, contract rights
or rights to payment of money, leases, license agreements, franchise agreements, General
Intangibles, commercial tort claims, documents, instruments (including any promissory notes),
chattel paper (whether tangible or electronic), cash, deposit accounts, fixtures, letters of credit
rights (whether or not the letter of credit is evidenced by a writing), securities, and all other
investment property, supporting obligations, and financial assets, whether now owned or hereafter
acquired, wherever located; and
all Borrowers Books relating to the foregoing, and any and all claims, rights and interests
in any of the above and all substitutions for, additions, attachments, accessories, accessions and
improvements to and replacements, products, proceeds and insurance proceeds of any or all of the
foregoing; provided, however, that notwithstanding any of the other provisions set forth in Section
4, this Agreement shall not constitute a grant of a security interest in any property to the extent
that such grant of a security interest is prohibited by any Requirement of Law of a Governmental
Authority or constitutes a breach or default under or results in the termination of or requires any
consent not obtained under, any contract, license, agreement, instrument or other document
evidencing or giving rise to such property, except to the extent that such Requirement of Law or
the term in such contract, license, agreement, instrument or other document providing for such
prohibition, breach, default or termination or requiring such consent is ineffective under Section
9-406, 9-407, 9-408 or 9-409 of the Code (or any successor provision or provisions) of any relevant
jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity;
provided, however, that such security interest shall attach immediately at such time as such
Requirement of Law is not effective or applicable, or such prohibition, breach, default or
termination is no longer applicable or is waived, and to the extent severable, shall attach
immediately to any portion of the Collateral that does not result in such consequences.
EXHIBIT
B LOAN PAYMENT/ADVANCE REQUEST FORM
Deadline for same day processing is Noon
P.S.T.
Loan Payment:
Financial Engines. Inc./Financial Engines Reincorporation Sub, Inc.
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From Account #
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To Account
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#
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(Deposit Account #)
Principal $
$
Authorized Signature:
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(Loan Account #)
and/or Interest
Phone Number:
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Print Name/Title:
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Loan Adavance:
Complete
Outgoing Wire Request
section below if all or a portion of the funds from this loan
advance are for an outgoing wire.
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From Account #
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To Account
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#
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(Loan Account #)
Amount of Advance $
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(Deposit Account #)
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All Borrowers representations and warranties in the Second Amended and Restated Loan and Security
Agreement are true, correct and complete in all material respects on the date of the request for an
advance; provided, however, that such materiality qualifier shall not be applicable to any
representations and warranties that already are qualified or modified by materiality in the text
thereof; and provided, further that those representations and warranties expressly referring to a
specific date shall be true, accurate and complete in all material respects as of such date:
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Authorized Signature:
Print Name/Title:
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Phone Number:
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Outgoing Wire Request:
Complete only if all or a portion of funds from the loan advance above is to be wired.
Deadline for same day processing is noon, P.S.T.
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Beneficiary
Name:
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Amount of Wire: $
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Beneficiary Bank:
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Account Number:
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City and State:
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Beneficiary Bank Transit (ABA) #:
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Beneficiary Bank Code (Swift, Sort,
Chip, etc.):
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(For International Wire Only)
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Intermediary Bank:
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Transit (ABA) #:
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For Further Credit to:
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Special Instruction:
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By signing below, I (we) acknowledge and agree that my (our) funds transfer request shall be
processed in accordance with and subject to the terms and conditions set forth in the agreements(s)
covering funds transfer service(s), which agreements(s) were previously received and executed by me
(us).
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Authorized
Signature:
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2
nd
Signature (if required)
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Print Name/Title:
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Print Name/Title:
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Telephone #: _______________ Telephone #: _______________
Exhibit B-1
FORM OF NOTICE OF BORROWING
Financial Engines, Inc.
Date: _________
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To:
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Silicon Valley Bank
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3003 Tasman Drive
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Santa Clara, CA 95054
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Attention: Corporate Services Department
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Re:
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Second Amended and Restated Loan
and Security Agreement dated as of ______ ___, 2009 (as
amended, modified, supplemented or restated from time to time, the
Loan Agreement
), by and
between
Financial Engines, Inc. and Financial Engines Reincorporation Sub, Inc.
(
Borrower
), and Silicon Valley Bank (the
Bank
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Ladies and Gentlemen:
The undersigned refers to the Loan Agreement, the terms defined therein and used herein as so
defined, and hereby gives you notice irrevocably, pursuant to
Section 3.4(a)
of the Loan
Agreement, of the borrowing of an Term Loan.
1.
The Funding Date, which shall be a Business Day, of the requested
borrowing is ____________.
2.
The aggregate amount of the requested borrowing is $____________.
3.
The
requested Term Loan shall consist of $____________ of Prime Rate Term Loans and $___________
of LIBOR Term Loans. No Term Loan shall be less than $1,000,000.
4.
The duration of the Interest Period for the LIBOR Term Loans included in the requested Term
Loan shall be _________ months.
The undersigned hereby certifies that the following statements are true on the date hereof,
and will be true on the date of the proposed funding before and after giving effect thereto, and to
the application of the proceeds therefrom, as applicable:
(a)
all representations and warranties of Borrower contained in the Loan Agreement are
true,
accurate and complete in all material respects as of the date hereof; provided,
however, that such
materiality qualifier shall not be applicable to any representations and warranties
that already are qualified
or modified by materiality in the text thereof; and provided, further that those
representations and
warranties expressly referring to a specific date shall be true, accurate and complete
in all material respects
as of such date; and
(b)
no Default or Event of Default has occurred and is continuing, or would result from
such
proposed Term Loan.
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Borrower
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Financial Engines, Inc.
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By:
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Name:
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Title:
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Financial Engines Reincorporation Sub, Inc.
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By:
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Name:
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Title:
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For internal Bank use only
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LIBOR Pricing Date
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LIBOR
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LIBOR Variance
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Maturity Date
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___%
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Exhibit
B-2
FORM OF NOTICE OF CONVERSION/CONTINUATION
Financial Engines, Inc.
Date: ___________
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To:
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Silicon Valley Bank
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3003 Tasman Drive
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Santa Clara, CA 95054
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Attention:
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Re:
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Second Amended and Restated Loan and Security Agreement dated as of _________, 2009 (as
amended, modified, supplemented or restated from time to time, the
Loan Agreement
), by
and between
Financial Engines, Inc.
and
Financial Engines
Reincorporation Sub, Inc.
(
Borrowers
), and Silicon Valley Bank (the
Bank
)
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Ladies and Gentlemen:
The undersigned refers to the Loan Agreement, the terms defined therein being used herein
as therein defined, and hereby gives you notice irrevocably, pursuant to
Section 3.5
of the
Loan Agreement, of the [conversion] [continuation] of the Term Loans specified herein, that:
1.
The date of the [conversion] [continuation] is ____________, 20___.
2.
The aggregate amount of the proposed Term Loan to be [converted]
is $____________ or [continued] is $____________.
3.
The Term Loan is to be [converted into] [continued as] [LIBOR] [Prime Rate] Term Loans.
4.
The duration of the Interest Period for the LIBOR Term Loans included in the
[conversion]
[continuation] shall be ______ months.
The undersigned, on behalf of Borrower, hereby certifies that the following statements are
true on the date hereof, and will be true on the date of the proposed [conversion] [continuation],
before and after giving effect thereto and to the application of the proceeds therefrom:
(a) all representations and warranties of Borrower stated in the Loan Agreement are
true,
accurate and complete in all material respects as of the date hereof; [provided,
however, that such
materiality qualifier shall not be applicable to any representations and warranties
that already are qualified
or modified by materiality in the text thereof; and provided, further that those
representations and
warranties expressly referring to a specific date shall be true, accurate and complete
in all material respects
as of such date]; and
(b) no Default or Event of Default has occurred and is continuing, or would result from
such
proposed [conversion] [continuation].
[Signature page follows.]
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Borrower
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Financial Engines, Inc.
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By:
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Name:
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Title:
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Financial Engines Reincorporation Sub, Inc.
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By:
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Name:
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Title:
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For internal Bank use only
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LIBOR Pricing Date
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LIBOR
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LIBOR Variance
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Maturity Date
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___%
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EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: Financial Engines, Inc./Financial Engines Reincorporation Sub, Inc.
Lender: Silicon Valley Bank
Revolving Commitment Amount: $7,000,000
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ACCOUNTS RECEIVABLE
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1.
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Accounts Receivable (invoiced) Book Value as of ____________________
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$
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2.
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Additions (please explain on reverse)
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$
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3.
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TOTAL ACCOUNTS RECEIVABLE
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$
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ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
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4.
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Amounts over 60 days due
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$
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5.
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Balance of 50% over 60 day accounts
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$
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6.
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Foreign Accounts
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$
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7.
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Foreign Invoiced Accounts
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$
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8.
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Contra/Customer Deposit Accounts
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$
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9.
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Intercompany/Employee Accounts
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$
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10.
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Credit balances over 60 days
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$
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11.
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Concentration Limits
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$
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12.
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U.S. Governmental Accounts
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$
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13.
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Other (please explain on reverse)
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$
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14.
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TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS
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$
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15.
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Eligible Accounts (#3 minus #14)
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$
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16.
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ELIGIBLE AMOUNT OF ACCOUNTS (80% of #15)
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$
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17.
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50% of Eligible Intra-Quarter Managed Accounts
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$
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BALANCES
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18.
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Maximum Loan Amount
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$
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19.
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Total Funds Available [Lesser of #18 or the sum of #16 and #17]
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$
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20.
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Present balance owing on Line of Credit
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$
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21.
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Outstanding under Sublimits
|
$
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22.
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RESERVE POSITION (#19 minus #20 and #21)
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$
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[Continued on following page.]
The undersigned represents and warrants that this is true, complete and correct, and that the
information in this Borrowing Base Certificate complies with the representations and warranties in
the Amended and Restated Loan and Security Agreement between the undersigned and Silicon Valley
Bank.
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COMMENTS:
FINANCIAL ENGINES, INC.
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By:
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Authorized Signer
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Date:
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COMMENTS:
FINANCIAL ENGINES REINCORPORATION SUB, INC.
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By:
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Authorized Signer
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Date:
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BANK USE ONLY
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Received by:
AUTHORIZED SIGNER
Date:
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Verified:
AUTHORIZED SIGNER
Date:
Compliance Status: Yes No
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EXHIBIT D COMPLIANCE CERTIFICATE
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TO: SILICON VALLEY BANK
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Date: _______________
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FROM:
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The undersigned authorized officers of Financial Engines, Inc. and Financial Engines
Reincorporation Sub, Inc. (Borrowers) certify that under the terms and conditions of the Amended
and Restated Loan and Security Agreement between Borrowers and Bank (the Agreement), (1) each
Borrower is in complete compliance for the period ending
_______________ with all required covenants except as noted below, (2) there are no Events of Default, (3) all
representations and warranties in the Agreement are true and correct in all material respects as
of the last day of the period for which this Certificate is provided except as noted below;
provided, however, that such materiality qualifier shall not be applicable to any representations
and warranties that already are qualified or modified by materiality in the text thereof; and
provided, further that those representations and warranties expressly referring to a specific date
shall be true, accurate and complete in all material respects as of such date, (4) each Borrower,
and each of its Subsidiaries, has timely filed all required tax returns and reports, and each
Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and
contributions owed by Borrowers except as otherwise permitted pursuant to the terms of Section 5.9
of the Agreement, and (5) no Liens have been levied or claims made against either Borrower or any
of their Subsidiaries relating to unpaid employee payroll or benefits of which Borrowers have not
previously provided written notification to Bank. Attached are the required documents supporting
the certification. The undersigned certifies that these are prepared in accordance with GAAP
consistently applied from one period to the next except as explained in an accompanying letter or
footnotes. The undersigned acknowledges that no borrowings may be requested at any time or date of
determination that either Borrower is not in compliance with any of the terms of the Agreement,
and that compliance is determined not just at the date this certificate is delivered. Capitalized
terms used but not otherwise defined herein shall have the meanings given them in the Agreement.
Please indicate compliance status by circling Yes/No under Complies column.
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|
|
Reporting Covenant
|
|
Required
|
|
Complies
|
|
|
|
|
|
Monthly financial statements with Compliance Certificate
|
|
Monthly within 30 days
|
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Yes No
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|
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|
|
Annual financial statement (CPA Audited) + CC
|
|
FYE within 150 days
|
|
Yes No
|
|
|
|
|
|
10-Q, 10-K and 8-K
|
|
The earlier of (A) five (5)
days after filin (Illegible)
with the SEC or (B) 50 days
after each fiscal quarter
or 95 days after each
fiscal year end,
|
|
Yes No
|
|
|
|
|
|
Borrowing Base Certificate A/R & A/P Agings
|
|
Monthly within 30 days when
Advances plus Letters of
Credit are more than $1.5MM
|
|
Yes No
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|
|
|
|
|
Cash Balance Report
|
|
Quarterly within 30 days
|
|
|
Borrowers shall provide Bank with at least fifteen days prior written notice of either
Borrowers intent to register any copyrights or mask works together with a copy of the
application it intends to file. Borrowers shall promptly provide to Bank copies of all
applications that either Borrower files for patents or for the registration of trademarks,
servicemarks, copyrights or mask works.
The following Intellectual Property was registered (or a registration application submitted) after
the Effective Date (if no registrations, state None)
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Financial Covenant
|
|
Required
|
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Actual
|
|
Complies
|
Maintain on a Monthly Basis:
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|
|
Minimum Quick Ratio (Adjusted)
|
|
1.15:1.0 through 9/30/09
1.25:1.0 thereafter
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|
___:1.0
|
|
Yes No
|
Maintain Annually:
|
|
|
|
|
|
|
Maximum Unfunded Capital Expenditures
|
|
$2,000,000 for FY 2009;
$4,000,000 for each FY
thereafter
|
|
$_______
|
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Yes No
|
Maintain on a Quarterly Basis:
|
|
|
|
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|
|
Minimum EBITDA
|
|
$750,000 for each of the two
quarters ending 3/31/09 and
9/30/09
|
|
$_______
|
|
Yes No
|
|
Minimum Fixed Charge Coverage Ratio
|
|
Commencing 9/30/09.
See 6.5(b)(ii)
|
|
___:1.0
|
|
Yes No
|
The following financial covenant analysis and information set forth in Schedule 1
attached hereto are true and accurate as of the date of this Certificate.
The following are the exceptions with respect to the certification above: (If no
exceptions exist, state No exceptions to note.)
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|
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|
|
FINANCIAL ENGINES, INC.
|
|
|
By:
|
|
|
|
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Name:
|
|
|
|
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Title:
|
|
|
|
|
FINANCIAL ENGINES REINCORPORATION SUB, INC.
|
|
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By:
|
|
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|
|
Name:
|
|
|
|
|
Title:
|
|
|
|
BANK USE ONLY
|
|
|
|
|
|
Received
by:
AUTHORIZED SIGNER
Date:
|
|
|
|
Verified:
AUTHORIZED SIGNER
Date:
Compliance Status: Yes No
|
|
|
Schedule 1 to Compliance Certificate
Financial Covenants of Borrower
II.
Adjusted Quick Ratio
(Section 6.6(a)(i))
Required: 1.15:1.00 through 9/30/09 and 1.25:1.00 thereafter
Actual:
|
|
|
|
|
|
|
|
|
|
A
|
|
Aggregate value of the unrestricted cash and Cash Equivalents of Borrower and its
Subsidiaries
|
|
$_______
|
B
|
|
Aggregate value of the net billed accounts receivable of Borrower and its Subsidiaries
|
|
$_______
|
C
|
|
Aggregate value of the Investments with maturities of fewer than 12 months of
Borrower and it Subsidiaries
|
|
$_______
|
D
|
|
Quick Assets (the sum of lines A through C)
|
|
$_______
|
E.
|
|
Aggregate value of Obligations to Bank
|
|
$_______
|
F
|
|
Aggregate value of liabilities that should, under GAAP, be classified as liabilities
on Borrowers consolidated balance sheet, including all Indebtedness, not otherwise
reflected in line E above, that matures within one (1) year
|
|
$_______
|
G
|
|
Aggregate value of all amounts received or invoiced by Borrower in advance of
performance under contracts and not yet recognized as revenue
|
|
$_______
|
H
|
|
Current Liabilities (the sum of lines E and F minus line G)
|
|
$_______
|
I
|
|
Adjusted Quick Ratio (line D divided by line H)
|
|
|
II.
EBITDA
Required: See Section 6.6(b)(i)
Actual:
|
|
|
|
|
A.
|
|
Net Income [per GAAP]
|
|
$_______
|
B.
|
|
To the extent included in the determination of Net Income
|
|
|
|
|
1. The provision for income taxes
|
|
$_______
|
|
|
2. Depreciation expense
|
|
$_______
|
|
|
3. Amortization expense
|
|
$_______
|
|
|
4. Interest Expense
|
|
$_______
|
|
|
5. All other charges which are both non-cash and
non-recurring, including for stock-based compensation
|
|
$_______
|
|
|
7. The sum of lines 1 through 5
|
|
$_______
|
C.
|
|
EBITDA (line A plus line B.6)
|
|
_______
|
III.
FIXED CHARGE COVERAGE RATIO
Required: See Section 6.6(b)(ii).
Actual:
|
|
|
|
|
A.
|
|
EBITDA
|
|
$______
|
B.
|
|
Scheduled payments of principal and interest for the quarter
|
|
$______
|
C.
|
|
Fixed Charge Coverage Ratio: Line A divided by Line B
|
|
___:1.0
|
Reaffirmation of Unconditional Secured Guaranty
This Reaffirmation of Unconditional Secured Guaranty is entered into as of April 20, 2009, by
the undersigned (the Guarantor) in favor of SILICON VALLEY BANK (Lender).
Whereas, Guarantor executed and delivered to Lender an Unconditional Secured Guaranty dated
as of June 26, 2008 (the Guaranty) with respect to the obligations of Financial Engines, Inc.
and Financial Engines Reincorporation Sub, Inc. (together, Borrowers) under an Amended and
Restated Loan and Security Agreement dated as of June 26, 2008 (the Existing Loan Agreement) by
and among Borrowers and Lender; and
Whereas, Borrowers and Lender are amending the Existing Loan Agreement pursuant to that
certain Second Amended and Restated Loan and Security Agreement dated as of the date hereof
(Second Amended Loan Agreement) to, among other things, provide a term loan of up to $10,000,000
and extend the Revolving Line Maturity Date to April 19, 2010 (undefined terms herein shall have
the meanings provided in the Second Amended Loan Agreement).
Now therefore, for valuable consideration, receipt of which is acknowledged, Guarantor hereby
agrees as follows:
1. Reaffirmation of Guaranty.
Guarantor hereby ratifies and reaffirms its obligations under
its Guaranty and agrees that none of the modifications to the Loan Agreement as set forth in the
Second Amended Loan Agreement shall impair such Guarantors obligations under its Guaranty or
Banks rights under its Guaranty.
2. Continuing Effect and Absence of Defenses.
Guarantor acknowledges that its Guaranty is
still in full force and effect and that Guarantor has no defenses, other than actual payment of
the guaranteed obligations, to enforcement of the Guaranty. Guarantor waives any and all defenses
to enforcement of the Guaranty that might otherwise be available as a result of the amendment and
restatement of the Existing Loan Agreement.
|
|
|
|
|
|
Financial Engines Advisors, L.L.C.
|
|
|
By:
|
/s/ Raymond J. Sims
|
|
|
|
Title: EVP + CFO
|
|
|
|
|
|
|
Exhibit 10.10
Lease Agreement
By and Between
Harbor Investment Partners,
a California general partnership
As
Landlord
and
Financial Engines, Inc.,
a California corporation
As Tenant
Dated December 7, 1999
Table of Contents
|
|
|
|
|
|
|
Page
|
Basic Lease Information
|
|
iv
|
|
|
|
|
|
1. Demise
|
|
|
1
|
|
|
|
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|
|
2. Premises
|
|
|
1
|
|
|
|
|
|
|
3. Term
|
|
|
2
|
|
|
|
|
|
|
4. Rent
|
|
|
2
|
|
|
|
|
|
|
5. Utility Expenses
|
|
|
8
|
|
|
|
|
|
|
6. Late Charge
|
|
|
8
|
|
|
|
|
|
|
7. Security Deposit
|
|
|
9
|
|
|
|
|
|
|
8. Letter of Credit
|
|
|
9
|
|
|
|
|
|
|
9. Possession
|
|
|
11
|
|
|
|
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|
|
10. Use of Premises
|
|
|
11
|
|
|
|
|
|
|
11. Acceptance of Premises
|
|
|
13
|
|
|
|
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|
|
12. Surrender
|
|
|
13
|
|
|
|
|
|
|
13. Alterations and Additions
|
|
|
14
|
|
|
|
|
|
|
14. Maintenance and Repairs of Premises
|
|
|
16
|
|
|
|
|
|
|
15. Landlords Insurance
|
|
|
18
|
|
|
|
|
|
|
16. Tenants Insurance
|
|
|
18
|
|
|
|
|
|
|
17. Indemnification
|
|
|
19
|
|
|
|
|
|
|
18. Subrogation
|
|
|
20
|
|
|
|
|
|
|
19. Signs
|
|
|
20
|
|
|
|
|
|
|
20. Free From Liens
|
|
|
20
|
|
|
|
|
|
|
21. Entry By Landlord
|
|
|
21
|
|
|
|
|
|
|
22. Destruction and Damage
|
|
|
21
|
|
i
|
|
|
|
|
|
|
Page
|
23. Condemnation
|
|
|
23
|
|
|
|
|
|
|
24. Assignment and Subletting
|
|
|
24
|
|
|
|
|
|
|
25. Tenants Default
|
|
|
27
|
|
|
|
|
|
|
26. Landlords Remedies
|
|
|
29
|
|
|
|
|
|
|
27. Landlords Right to Perform Tenants Obligations
|
|
|
31
|
|
|
|
|
|
|
28. Attorneys Fees
|
|
|
32
|
|
|
|
|
|
|
29. Taxes
|
|
|
32
|
|
|
|
|
|
|
30. Effect of Conveyance
|
|
|
32
|
|
|
|
|
|
|
31. Tenants Estoppel Certificate
|
|
|
32
|
|
|
|
|
|
|
32. Subordination
|
|
|
33
|
|
|
|
|
|
|
33. Environmental Covenants
|
|
|
34
|
|
|
|
|
|
|
34. Notices
|
|
|
37
|
|
|
|
|
|
|
35. Waiver
|
|
|
37
|
|
|
|
|
|
|
36. Holding Over
|
|
|
37
|
|
|
|
|
|
|
37. Successors and Assigns
|
|
|
38
|
|
|
|
|
|
|
38. Time
|
|
|
38
|
|
|
|
|
|
|
39. Brokers
|
|
|
38
|
|
|
|
|
|
|
40. Limitation of Liability
|
|
|
38
|
|
|
|
|
|
|
41. Financial Statements
|
|
|
39
|
|
|
|
|
|
|
42. Rules and Regulations
|
|
|
39
|
|
|
|
|
|
|
43. Mortgagee Protection
|
|
|
39
|
|
|
|
|
|
|
44. Entire Agreement
|
|
|
40
|
|
|
|
|
|
|
45. Interest
|
|
|
40
|
|
|
|
|
|
|
46. Construction
|
|
|
40
|
|
|
|
|
|
|
47. Representations and Warranties of Tenant
|
|
|
40
|
|
|
|
|
|
|
ii
|
|
|
|
|
|
|
Page
|
48. Security
|
|
|
41
|
|
|
|
|
|
|
49. Jury Trial Waiver
|
|
|
42
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
A Diagram of the Premises
|
|
|
|
|
|
|
|
|
|
B Commencement and Expiration Date Memorandum
|
|
|
|
|
|
|
|
|
|
C Rules and Regulations
|
|
|
|
|
|
|
|
|
|
D Hazardous Materials Disclosure Certificate
|
|
|
|
|
iii
Lease Agreement
Basic Lease Information
|
|
|
Lease Date:
|
|
December 7, 1999
|
|
|
|
Landlord:
|
|
Harbor Investment Partners,
a California general partnership
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Landlords Address:
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c/o Allegis Realty Investors
llc
455 Market Street, Suite
1540
San Francisco, California 94105
Attention: Asset Manager, The
Harbor Business Park
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All notices sent to Landlord under this Lease shall be sent to the
above address, with copies to:
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Insignia Commercial Group, Inc.
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160 West Santa Clara Street, Suite 1350
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San Jose, California 95113
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Attention: Property Manager, The Harbor Business Park
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Tenant:
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Financial Engines, Inc.,
a California corporation
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Tenants Contact Person:
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Jeff Maggioncalda
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Tenants Address and
Telephone Number:
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1804 Embarcadero Road, Suite 200
Palo Alto, California 94303
(650)
565-4900
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Premises Square Footage:
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Approximately Thirty Two Thousand Seven Hundred Forty Two (32,742) rentable square feet
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Premises Address:
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1830 Embarcadero Road
Palo Alto, California
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Project:
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The Harbor Business Park, 1800-1858 Embarcadero Road and 2445-2465
Faber Place, Palo Alto, California, together with the land on which
the Project is situated and all Common Areas
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Building (if not the same as
the Project):
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1830 Embarcadero Road
Palo Alto, California
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iv
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Tenants Proportionate Share
of Project:
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12.63%
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Tenants Proportionate Share of Building:
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100%
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Length of Term:
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Eighty-Four (84) months
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Estimated Commencement Date:
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May 1, 2000
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Estimated Expiration Date:
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April 30, 2007
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Monthly Base Rent:
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Months
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Monthly Base Rent
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112
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$
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117,871.20
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1324
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$
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122,586.05
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2536
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127,489.49
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3748
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132,589.07
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4960
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137,892.63
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6172
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143,408.34
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7384
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149,144.67
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Prepaid Rent
:
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One Hundred Seventeen
Thousand Eight Hundred
Seventy-One and 20/100
Dollars ($117,871.20)
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Prepaid Additional Rent:
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Thirteen Thousand Seven
Hundred Sixty-Two and 02/100
Dollars ($13,762,02)
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Month to which Prepaid Base Rent
and Additional
Rent will be Applied:
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First (1st) month of the Term
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Security Deposit:
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One Hundred Seventeen Thousand Eight Hundred Seventy-One and 20/100 Dollars ($117,871.20)
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Letter of Credit
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Seven Hundred Thousand Dollars ($700,000)
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Permitted Use:
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General office use for software development firm
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v
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Unreserved Parking Spaces:
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One hundred thirty-one (131) nonexclusive and
undesignated parking spaces
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Brokers:
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Randy Arrillaga and Steve Bouret of BT Commercial (Landlords Broker)
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Ron Himes of BT Commercial (Tenants Broker)
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Alterations Allowance:
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Ninety Eight Thousand Two Hundred Twenty-Six Dollars
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($98,226.00)
(viz.,
$3.00 per rentable square foot)
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vi
Lease Agreement
This Lease Agreement
is made and entered into by and between Landlord and Tenant
on the Lease Date. The defined terms used in this Lease which are defined in the Basic Lease
Information attached to this Lease Agreement (
Basic Lease Information
) shall have the meaning
and definition given them in the Basic Lease Information. The Basic Lease Information, the
exhibits, the addendum or addenda described in the Basic Lease Information, and this Lease
Agreement are and shall be construed as a single instrument and are referred to herein as the
Lease
.
1.
Demise
In consideration for the rents and all other charges and payments payable by Tenant, and
for the agreements, terms and conditions to be performed by Tenant in this Lease,
Landlord
Does
Hereby Lease to Tenant, and Tenant Does Hereby Hire and Take from Landlord
, the Premises
described below (the
Premises
), upon the agreements, terms arid conditions of this Lease for
the Term hereinafter stated.
2.
Premises
The Premises demised by this Lease is located in that certain building (the
Building
)
specified in the Basic Lease Information, which Building is located in that certain real estate
development (the
Project
) specified in the Basic Lease Information. The Premises has the
address and contains the square footage specified in the Basic Lease Information. The location
and dimensions of the Premises are depicted on
Exhibit A
,
which is attached hereto and
incorporated herein by this reference; provided, however, that any statement of square footage
set forth in this Lease, or that may have been used in calculating any of the economic terms
hereof is an approximation which Landlord and Tenant agree is reasonable and, except as
expressly set forth in Paragraph 4(d)(iii) below, no economic terms based thereon shall be
subject to revision whether or not the actual square footage is more or less. Tenant shall have
the non-exclusive right (in common with the other tenants, Landlord and any other person granted
use by Landlord) to use the Common Areas (as hereinafter defined), except that, with respect to
parking, Tenant shall have only a license to use the number of non-exclusive and undesignated
parking spaces set forth in the Basic Lease Information in the Projects parking areas at no
additional charge to Tenant (the
Parking Areas
); provided, however, that Landlord shall not be
required to enforce Tenants right to use such parking spaces (but shall use commercially
reasonable efforts to resolve disputes relating to parking); and provided, further, that the
number of parking spaces allocated to Tenant hereunder shall be reduced on a proportionate basis
in the event any of the parking spaces in the Parking Areas are taken or otherwise eliminated as
a result of any Condemnation (as hereinafter defined) or casualty event affecting such Parking
Areas. No easement for light or air is incorporated in the Premises. For purposes of this Lease,
the term
Common Areas
shall mean all areas and facilities outside the Premises and within the
exterior boundary line of the Project that are provided and designated by Landlord for the
non-exclusive use of Landlord, Tenant and other tenants of the Project and their respective
employees, guests and invitees.
1
Landlord has the right, in its sole discretion, from time to time, to: (a) make changes to the
Common Areas, including, without limitation, changes in the location, size, shape and number
of
driveways, entrances, parking spaces, parking areas, ingress, egress, direction of driveways,
entrances, corridors and walkways; (b) close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains available; (c) add
additional buildings and improvements to the Common Areas or remove existing buildings or
improvements therefrom; (d) use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Project or any portion thereof; and (e) do and
perform
any other acts or make any other changes in, to or with respect to the Common Areas and the
Project as Landlord may, in its sole discretion, deem to be appropriate; provided, however,
that
Landlord shall not unreasonably interfere with Tenants use of the Premises in connection with the making of such other changes.
3.
Term
The term of this Lease (the
Term
) shall be for the period of months specified in the Basic
Lease Information, commencing on the date
(the
Commencement Date
) Landlord delivers possession of
the Premises to Tenant. In the event the actual Commencement Date is a date other than the
Estimated Commencement Date specified in the Basic Lease Information, then Landlord and Tenant
shall promptly execute a Commencement and Expiration Date Memorandum in the form attached hereto as
Exhibit B,
wherein the parties shall specify the Commencement Date and the date on which the Term
expires (the
Expiration Date
).
4.
Rent
(a)
Base
Rent.
Commencing on the Rent Commencement Date (as hereinafter defined),
Tenant shall pay to Landlord, in advance on the first day of each month, without further
notice or
demand and without offset, rebate, credit or deduction for any reason whatsoever, the monthly
installments of rent specified in the Basic Lease Information (the
Base Rent
). As used
herein,
Rent Commencement Date
means the fifteenth (15th) day after Landlord delivers possession of
the Premises to Tenant.
Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid Rent and first monthly
installment of estimated Additional Rent (as hereinafter defined) specified in the Basic Lease
Information to be applied toward Base Rent and Additional Rent for the month of the Term specified
in the Basic Lease Information.
(b)
Additional Rent.
This Lease is intended to be a triple-net Lease with respect to
Landlord; and subject to Paragraph 14(b) below, the Base Rent owing hereunder is (i) to be
paid
by Tenant absolutely net of all costs and expenses relating to Landlords ownership and
operation of the Project and the Building, and (ii) not to be reduced, offset or diminished,
directly
or indirectly, by any cost, charge or expense payable hereunder by Tenant or by others in
connection with the Premises, the Building and/or the Project or any part thereof. The
provisions
of this Paragraph 4(b) for the payment of Tenants Proportionate Share(s) of Expenses (as
hereinafter defined) are intended to pass on to Tenant its share of all such costs and
expenses. In
addition to the Base Rent, commencing on the Rent Commencement Date, Tenant shall pay to
2
Landlord, in accordance with this Paragraph 4, Tenants Proportionate Share(s) of all costs and
expenses paid or incurred by Landlord in connection with the ownership, operation, maintenance,
management and repair of the Premises, the Building and/or the Project or any part thereof
(collectively, the Expenses), including, without limitation, all the following items (the
Additional Rent
):
(i)
Taxes and Assessments.
All real estate taxes and assessments, which shall include
any form of tax, assessment, fee, license fee, business license fee, levy, penalty (if a result
of Tenants delinquency), or tax (other than net income, estate, succession, inheritance,
transfer or franchise taxes), imposed by any authority having the direct or indirect power to
tax, or by any city, county, state or federal government or any improvement or other district or
division thereof, whether such tax is (i) determined by the area of the Premises, the Building
and/or the Project of any part thereof, or the Rent and other sums payable hereunder by Tenant
or by other tenants, including, but not limited to, any gross income or excise tax levied by any
of the foregoing
authorities with respect to receipt of Rent and/or other sums due under this Lease; (ii) upon
any
legal or equitable interest of Landlord in the Premises, the Building and/or the Project or any
part thereof; (iii) upon this transaction or any document to which Tenant is a party creating or
transferring any interest in the Premises, the Building and/or the Project; (iv) levied or
assessed in lieu of, in substitution for, or in addition to, existing or additional taxes
against the Premises, the Building and/or the Project, whether or not now customary or within
the contemplation of the parties; or (v) surcharged against the parking area. Tenant and
Landlord acknowledge that Proposition 13 was adopted by the voters of the State of California in
the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by
governmental agencies for such purposes as fire protection, street, sidewalk, road, utility
construction and maintenance, refuse removal and for other governmental services which may
formerly have been provided without charge to property owners or occupants. It is the intention
of the parties that all new and increased assessments, taxes, fees, levies and charges due to
any cause whatsoever are to be included within the definition of real property taxes for
purposes of this Lease.
Taxes and assessments
shall also include legal and consultants fees,
costs and disbursements incurred in connection with proceedings to contest, determine or reduce
taxes, Landlord specifically reserving the right, but not the obligation, to contest by
appropriate legal proceedings the amount or validity of any taxes.
(ii)
Insurance.
All insurance premiums for the Building and/or the Project or any part
thereof, including premiums for all risk fire and extended coverage insurance, commercial
general liability insurance, rent loss or abatement insurance, earthquake insurance, flood or
surface water coverage, and other insurance as Landlord deems necessary in its sole discretion,
and any deductibles paid under policies of any such insurance.
(iii)
Utilities.
The cost of all Utilities (as hereinafter defined) serving the Premises,
the Building and the Project that are not separately metered to Tenant, any assessments or
charges for Utilities or similar purposes included within any tax bill for the Building or the
Project, including, without limitation, entitlement fees, allocation unit fees, and/or any
similar fees or charges and any penalties (if a result of Tenants delinquency) related thereto,
and any amounts, taxes, charges, surcharges, assessments or impositions levied, assessed or
imposed upon the
3
Premises, the Building or the Project or any part thereof, or upon Tenants use and occupancy
thereof, as a result of any rationing of Utility services or restriction on Utility use
affecting the Premises, the Building and/or the Project, as contemplated in Paragraph 5 below
(collectively,
Utility Expenses
).
(iv)
Common Area Expenses.
All costs to operate, maintain, repair, replace, supervise, insure
and administer the Common Areas, including supplies, materials, labor and equipment used in or
related to the operation and maintenance of the Common Areas, including parking areas (including,
without limitation, all costs of resurfacing and restriping parking areas), signs and directories
on the Building and/or the Project, landscaping (including maintenance contracts and fees payable
to landscaping consultants), amenities, sprinkler systems, sidewalks, walkways, driveways, curbs,
lighting systems and security services, if any, provided by Landlord for the Common Areas, and
any charges, assessments, costs or fees levied by any association or entity of
which the Project or any part thereof is a member or to which the Project or any part thereof
is subject.
(v)
Parking Charges.
Any parking charges or other costs levied, assessed or imposed by, or
at the direction of, or resulting from statutes or regulations, or interpretations thereof,
promulgated by any governmental authority or insurer in connection with the use or occupancy of
the Building or the Project.
(vi)
Maintenance and Repair Costs.
Except for costs which are the responsibility of Landlord
pursuant to Paragraph 14(b) below, all costs to maintain, repair, and replace the Premises, the
Building and/or the Project or any part thereof, including, without limitation, (i) all costs
paid under maintenance, management and service agreements such as contracts for janitorial,
security and refuse removal, (ii) all costs to maintain, repair and replace the roof coverings of
the Building or the Project or any part thereof, (iii) all costs to maintain, repair and replace
the heating, ventilating, air conditioning, plumbing, sewer, drainage, electrical, fire
protection, life safety and security systems and other mechanical and electrical systems and
equipment serving the Premises, the Building and/or the Project or any part thereof
(collectively, the
Systems
), and (iv) all costs and expenses incurred in causing the Project to
be Year 2000 Compliant (as defined below).
Year 2000 Compliant
shall mean that all Systems
containing or using computers or other information technology will function without material
error or interruption resulting from the date change from year 1999 to year 2000, to the extent
that information technology of third parties properly communicates date/time data with the
Systems.
(vii)
Life Safety Costs.
All costs to install, maintain, repair and replace all life safety
systems, including, without limitation, all fire alarm systems, serving the Premises, the
Building and/or the Project or any part thereof (including all maintenance contracts and fees
payable to life safety consultants) whether such systems are or shall be required by Landlords
insurance carriers, Laws (as hereinafter defined) or otherwise.
(viii)
Management and Administration.
All costs for management and administration of the
Premises, the Building and/or the Project or any part thereof, including, without limitation, a
property management fee, accounting, auditing, billing, postage, salaries and benefits for
4
clerical and supervisory employees, whether located on the Project or off-site, payroll taxes
and legal and accounting costs and fees for licenses and permits related to the ownership and
operation of the Project.
Notwithstanding anything in this Paragraph 4(b) to the contrary, with respect to all sums
payable by Tenant as Additional Rent under this Paragraph 4(b) for the replacement of any item or
the construction of any new item in connection with the physical operation of the Premises, the
Building or the Project
(i.e.,
HVAC, roof membrane or coverings and parking area) which is a
capital item the replacement of which would be capitalized under Landlords commercial real estate
accounting practices, Tenant shall be required to pay only the prorata share of the cost of the
item falling due within the Term (including any Renewal Term) based upon the amortization of the
same over the useful life of such item, as reasonably determined by Landlord.
(c)
Exclusions from Additional Rent.
Notwithstanding anything to the contrary contained
in Paragraph 4(b) above, the following items shall be specifically excluded from the
definition of
Expenses:
(i) Repairs or other work occasioned by fire, acts of God, or other casualties or damage
to the extent Landlord is actually reimbursed by insurance (less costs of collection) for the
costs of restoration;
(ii) Payments of principal and interest on mortgage indebtedness encumbering the Project;
(iii) Space planning and other costs incurred in renovating or otherwise improving,
painting or redecorating rentable space at the Project for other tenants;
(iv) Legal fees and other related expenses associated with the negotiation or
enforcement of leases;
(v) The costs of any goods or services provided separately to or performed separately for
any other tenant of the Project, but solely to the extent that Landlord recovers the costs
thereof from such tenant and that Tenant receives no benefits from the services provided to such
tenant;
(vi) Leasing commissions paid and advertising expenses incurred in connection with the
leasing of space at the Project;
(vii) Costs of remediating contamination caused by Hazardous Materials (as hereinafter
defined);
(viii) Penalties and damages assessed against Landlord as a result of the intentional
violation by Landlord of any leases affecting the Project (provided, however, that the cost of
correcting such violation, as opposed to penalties assessed in excess of such corrective costs
and which would not be incurred but for such intentional violation, shall be included within the
definition of Expenses hereunder);
5
(ix) Costs associated with the operation of the business of the entity which constitutes
Landlord, as opposed to the operation of the Project;
(x) All salaries for any employees above the rank of senior property manager and
reasonable allocation of the salaries of all employees at or below the rank of senior property
manager whose duties include work on other buildings or projects; and
(xi) Political or charitable donations or contributions.
Nothing contained in this Paragraph 4(c) shall be deemed to limit, modify or otherwise
affect Tenants obligations under any other provisions of this Lease, including, without
limitation, Paragraphs 7 and 33.
(d)
Payment of Additional Rent
(i) Upon commencement of this Lease, Landlord shall submit to Tenant an estimate of monthly
Additional Rent for the period between the Commencement Date and the following December 31 and
Tenant shall pay such estimated Additional Rent on a monthly basis, in advance, on the first day of
each month. Tenant shall continue to make said monthly payments until notified by Landlord of a
change therein. If at any time or times Landlord determines that the amounts payable under
Paragraph 4(b) for the current year will vary from Landlords estimate given to Tenant, Landlord,
by notice to Tenant, may revise the estimate for such year, and subsequent payments by Tenant for
such year shall be based upon such revised estimate. By April 1 of each calendar year, Landlord
shall endeavor to provide to Tenant a statement (
Expense Statement
) showing the actual Additional
Rent due to Landlord for the prior calendar year, to be prorated during the first year from the
Commencement Date. If the total of the monthly payments of Additional Rent that Tenant has made for
the prior calendar year is less than the actual Additional Rent chargeable to Tenant for such prior
calendar year, then Tenant shall pay the difference in a lump sum within ten (10) days after
receipt of such Expense Statement from Landlord. Any overpayment by Tenant of Additional Rent for
the prior calendar year shall be credited towards the Additional Rent next due.
(ii) Landlords then-current annual operating and capital budgets for the Building and the
Project or the pertinent part thereof shall be used for purposes of calculating Tenants monthly
payment of estimated Additional Rent for the current year, subject to adjustment as provided above.
Landlord shall make the final determination of Additional Rent for the year in which this Lease
terminates as soon as possible after termination of such year. Even though the Term has expired and
Tenant has vacated the Premises, Tenant shall remain liable for payment of any amount due to
Landlord in excess of the estimated Additional Rent previously paid by Tenant, and, conversely,
Landlord shall promptly return to Tenant any overpayment. Failure of Landlord to submit statements
as called for herein shall not be deemed a waiver of Tenants obligation to pay Additional Rent as
herein provided.
(iii) With respect to Expenses which Landlord allocates to the Building, Tenants
Proportionate Share
shall be the percentage set forth in the Basic Lease Information as Tenants
Proportionate Share of the Building, as adjusted by Landlord from time to time for a
6
remeasurement of or changes in the physical size of the Premises or the Building, whether such
changes in size are due to an addition to or a sale or conveyance of a portion of the Building or
otherwise. With respect to Expenses which Landlord allocates to the Project as a whole or to only
a portion of the Project, Tenants
Proportionate Share
shall be, with respect to Expenses which
Landlord allocates to the Project as a whole, the percentage set forth in the Basic Lease
Information as Tenants Proportionate Share of the Project and, with respect to Expenses which
Landlord allocates to only a portion of the Project, a percentage calculated by Landlord from
time to time in its sole discretion and furnished to Tenant in writing, in either case as
adjusted by Landlord from time to time for a remeasurement of or changes in the physical size
of the Premises or the Project, whether such changes in size are due to an addition to or a
sale or
conveyance of a portion of the Project or otherwise. Notwithstanding the foregoing,
Landlord may equitably adjust Tenants Proportionate Share(s) for all or part of any item of
expense or
cost reimbursable by Tenant that relates to a repair, replacement, or service that benefits only
the Premises or only a portion of the Building and/or the Project or that varies with the
occupancy of
the Building and/or the Project. Without limiting the generality of the foregoing, Tenant
understands and agrees that Landlord shall have the right to adjust Tenants Proportionate
Share(s) of any Utility Expenses based upon Tenants use of the Utilities or similar services as
reasonably estimated and determined by Landlord based upon factors such as size of the Premises
and intensity of use of such Utilities by Tenant such that Tenant shall pay the portion of such
charges reasonably consistent with Tenants use of such Utilities and similar services. If Tenant
disputes any such estimate or determination of Utility Expenses, then Tenant shall either pay the
estimated amount or cause the Premises to be separately metered at Tenants sole expense.
(e)
General Payment Terms.
The Base Rent, Additional Rent and all other sums payable
by Tenant to Landlord hereunder, including, without limitation, any late charges assessed
pursuant to Paragraph 6 below and any interest assessed pursuant to Paragraph 45 below, are
referred to as the
Rent.
All Rent shall be paid without deduction, offset or abatement in
lawful
money of the United States of America. Checks are to be made payable to Harbor Investment
Partners and shall be mailed to: Dept. No. 66218, El Monte, California 91735-6128, or to
such
other person or place as Landlord may, from time to time, designate to Tenant in writing.
The
Rent for any fractional part of a calendar month at the commencement or termination of the
Lease term shall be aprorated amount of the Rent for a full calendar month based upon a
thirty (30) day month.
(f)
Tenants Audit Rights.
Provided Tenant is not then in Default under the terms of this
Lease (nor is any event occurring which with the giving of notice or the passage of time, or
both,
would constitute a Default hereunder), Tenant, at its sole expense, shall have the right
within
thirty (30) days after the delivery of each Expense Statement to review and audit
Landlords
books and records regarding such Expense Statement for the sole purpose of determining the
accuracy thereof. Such review or audit shall be performed by a nationally recognized
accounting
firm that calculates its fees with respect to hours actually worked and that does not
discount its
time or rate (as opposed to a calculation based upon percentage of recoveries or other
incentive
arrangement), shall take place during normal business hours in the office of Landlord or
Landlords property manager and shall be completed within three (3) business days after the
7
commencement thereof. If Tenant does not so review or audit Landlords books and records,
Landlords Expense Statement shall be final and binding upon Tenant. In the event that Tenant
determines on the basis of its review of Landlords books and records that the amount of Expenses
paid by Tenant pursuant to this Paragraph 4 for the period covered by such Expense Statement is
less than or greater than the actual amount properly payable by Tenant under the terms of this
Lease, Tenant shall promptly pay any deficiency to Landlord or, if Landlord concurs with the
results of such audit, Landlord shall promptly refund any excess payment to Tenant, as the case may
be.
5.
Utility Expenses
(a) Tenant shall pay the cost of all water, sewer use, sewer discharge fees and permit costs
and sewer connection fees, gas, heat electricity, refuse pick-up, janitorial service,
telephone and
all materials and services or other utilities (collectively,
Utilities
) billed or metered
separately to the Premises and/or Tenant, together with all taxes, assessments, charges and
penalties added to or included within such cost. Tenant acknowledges that the Premises, the
Building and/or the Project may become subject to the rationing of Utility services or
restrictions on Utility use as required by a public utility company, governmental agency or other
similar entity having jurisdiction thereof. Tenant acknowledges and agrees that its tenancy and
occupancy hereunder shall be subject to such rationing or restrictions as may be imposed upon
Landlord, Tenant, the Premises, the Building and/or the Project, and Tenant shall in no event be
excused or relieved from any covenant or obligation to be kept or performed by Tenant by reason of
any such rationing or restrictions. Tenant agrees to comply with energy conservation programs
implemented by Landlord by reason of rationing, restrictions or Laws.
(b) Landlord shall not be liable for any loss, injury or damage to property caused by or
resulting from any variation, interruption, or failure of Utilities due to any cause
whatsoever, or
from failure to make any repairs or perform any maintenance. No temporary interruption or
failure of such services incident to the making of repairs, alterations, improvements, or due
to
accident, strike, or conditions or other events shall be deemed an eviction of Tenant or
relieve
Tenant from any of its obligations hereunder. In no event shall Landlord be liable to Tenant
for
any damage to the Premises or for any loss, damage or injury to any property therein or
thereon
occasioned by bursting, rupture, leakage or overflow of any plumbing or other pipes
(including,
without limitation, water, steam, and/or refrigerant lines), sprinklers, tanks, drains,
drinking
fountains or washstands, or other similar cause in, above, upon or about the Premises, the Building, or the Project.
6.
Late Charge
Notwithstanding any other provision of this Lease, Tenant hereby acknowledges that late
payment to Landlord of Rent, or other amounts due hereunder will cause Landlord to incur costs not
contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. If
any Rent or other sums due from Tenant are not received by Landlord or by Landlords designated
agent within five (5) days after their due date, then Tenant shall pay to Landlord a late charge
equal to five percent (5%) of such overdue amount, plus any costs and
8
attorneys fees incurred by Landlord by reason of Tenants failure to pay Rent and/or other
charges when due hereunder. Landlord and Tenant hereby agree that such late charges represent a
fair and reasonable estimate of the cost that Landlord will incur by reason of Tenants late
payment and shall not be construed as a penalty. Landlords acceptance of such late charges shall
not constitute a waiver of Tenants default with respect to such overdue amount or estop Landlord
from exercising any of the other rights and remedies granted under this Lease.
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Initials:
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CDS
Landlord
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JM
Tenant
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7.
Security Deposit
Concurrently with Tenants execution of the Lease, Tenant shall deposit with Landlord the
Security Deposit specified in the Basic Lease Information as security for the full and faithful
performance of each and every term, covenant and condition of this Lease. Landlord may use, apply
or retain the whole or any part of the Security Deposit as may be reasonably necessary (a) to
remedy Tenants default in the payment of any Rent, (b) to repair damage to the Premises caused by
Tenant, (c) to clean the Premises upon termination of this Lease, (d) to reimburse Landlord for the
payment of any amount which Landlord may reasonably spend or be required to spend by reason of
Tenants default, or (e) to compensate Landlord for any other loss or damage which Landlord may
suffer by reason of Tenants default. Should Tenant faithfully and fully comply with all of the
terms, covenants and conditions of this Lease, within thirty (30) days following the expiration of
the Term, the Security Deposit or any balance thereof shall be returned to Tenant or, at the option
of Landlord, to the last assignee of Tenants interest in this Lease. Landlord shall not be
required to keep the Security Deposit separate from its general funds and Tenant shall not be
entitled to any interest on such deposit. If Landlord so uses or applies all or any portion of said
deposit, within five (5) days after written demand therefor Tenant shall deposit cash with Landlord
in an amount sufficient to restore the Security Deposit to the full extent of the above amount, and
Tenants failure to do so shall be a default under this Lease. In the event Landlord transfers its
interest in this Lease, Landlord shall transfer the then remaining amount of the Security Deposit
to Landlords successor in interest, and thereafter Landlord shall have no further liability to
Tenant with respect to such Security Deposit.
8.
Letter of Credit
(a) Upon execution of this Lease, Tenant shall deliver to Landlord, at Tenants sole cost
and expense, the Letter of Credit described below in the amount of Seven Hundred Thousand Dollars
($700,000.00) (the
LC Face Amount
) as security for Tenants performance of all of Tenants
covenants and obligations under this Lease; provided, however, that neither the Letter of Credit
nor any Letter of Credit Proceeds (as defined below) shall be deemed an advance rent deposit or an
advance payment of any other kind, or a measure of Landlords damages upon Tenants Default. The
Letter of Credit shall be maintained in effect from the date hereof through the date that is sixty
(60) days after the Expiration Date (the
LC Termination Date
). On the LC Termination Date,
Landlord shall return to Tenant the Letter of Credit and any Letter of Credit Proceeds then held
by Landlord (other than those Letter of Credit Proceeds Landlord is
9
entitled to retain under the terms of this Paragraph 8(a)); provided, however, that in no event
shall any such return be construed as an admission by Landlord that Tenant has performed all of
its obligations hereunder. Landlord shall not be required to segregate the Letter of Credit
Proceeds from its other funds and no interest shall accrue or be payable to Tenant with respect
thereto. Landlord may (but shall not be required to) draw upon the Letter of Credit and use the
proceeds therefrom (the
Letter of Credit Proceeds
) or any portion thereof (i) to cure any
Default under this Lease and to compensate Landlord for any loss or damage Landlord incurs as a
result of such Default, (ii) to repair damage to the Premises caused by Tenant and not repaired
by Tenant in accordance with this Lease, (iii) to clean the Premises upon termination of this
Lease, (iv) to reimburse Landlord for the payment of any amount which Landlord may for any other
purpose spend or be required to spend by reason of Tenants Default, and (v) for any other
purpose for which Landlord is entitled to use the Security Deposit, it being understood that any
use of the Letter of Credit Proceeds shall not constitute a bar or defense to any of Landlords
remedies set forth in Paragraph 26 below. In such event and upon written notice from Landlord
to Tenant specifying the amount of the Letter of Credit Proceeds so utilized by Landlord and
the particular purpose for which such amount was applied, Tenant shall immediately deliver to
Landlord an amendment to the Letter of Credit or a replacement Letter of Credit in an amount
equal to the full LC Face Amount. Tenants failure to deliver such replacement Letter of Credit
to Landlord within ten (10) days of Landlords notice shall constitute a Default hereunder. In
the event Landlord transfers its interest in this Lease, Landlord shall transfer the Letter of
Credit and any Letter of Credit Proceeds then held by Landlord to Landlords successor in
interest, and thereafter Landlord shall have no further liability to Tenant with respect to such
Letter of Credit or Letter of Credit Proceeds.
(b) As used herein, Letter of Credit shall mean an unconditional, stand-by irrevocable
letter of credit (herein referred to as the
Letter of Credit
) issued by the San Francisco
office of a major national bank insured by the Federal Deposit Insurance Corporation and
otherwise satisfactory to Landlord (the
Bank
), naming Landlord as beneficiary, in the amount of
the LC Face Amount, and otherwise in form and substance satisfactory to Landlord. The Letter of
Credit shall be for a one-year term and shall provide: (i) that Landlord may make partial and
multiple draws thereunder, up to the face amount thereof, (ii) that Landlord may draw upon the
Letter of Credit up to the full amount thereof and the Bank will pay to Landlord the amount of
such draw upon receipt by the Bank of a sight draft signed by Landlord and accompanied by a
written certification from Landlord to the Bank stating either that: (A) a Default has occurred
and is continuing under this Lease and any applicable grace period has expired, or (B) Landlord
has not received notice from the Bank at least thirty (30) days prior to the then current expiry
date of the Letter of Credit that the Letter of Credit will be renewed by the Bank for at least
one (1) year beyond the relevant annual expiration date or, in the case of the last year of the
Term, sixty (60) days after the Expiration Date, together with a replacement Letter of Credit or
a modification to the existing Letter of Credit effectuating such renewal, and Tenant has not
otherwise furnished Landlord with a replacement Letter of Credit as hereinafter provided; and
(iii) that, in the event of Landlords assignment or other transfer of its interest in this
Lease, the Letter of Credit shall be freely transferable by Landlord, without recourse and
without the payment of any fee or consideration, to the assignee or transferee of such interest
and the Bank shall confirm the same to Landlord and such assignee or transferee. In the event
that the Bank
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shall fail to (y) notify Landlord that the Letter of Credit will be renewed for at least one (1)
year beyond the then applicable expiration date, and (z) deliver to Landlord a replacement Letter
of Credit or a modification to the existing Letter of Credit effectuating such renewal, and
Tenant shall not have otherwise delivered to Landlord, at least thirty (30) days prior to the
relevant annual expiration date, a replacement Letter of Credit in the amount required hereunder
and otherwise meeting the requirements set forth above, then Landlord shall be entitled to draw
on the Letter of Credit as provided above, and shall hold the proceeds of such draw as Letter of
Credit Proceeds pursuant to Paragraph 8(a) above.
9.
Possession
(a)
Tenants Right of Possession
.
Subject to Paragraph 9(b), Tenant shall be entitled to
possession of the Premises upon commencement of the Term.
(b)
Delay in Delivering Possession
.
If for any reason whatsoever, Landlord cannot deliver possession of the Premises to Tenant on or before the Estimated Commencement Date, this Lease
shall not be void or voidable, nor shall Landlord, or Landlords agents, advisors, employees,
partners, shareholders, directors, invitees or independent contractors (collectively,
Landlords
Agents
), be liable to Tenant for any loss or damage resulting therefrom. Tenant shall not be
liable for Rent until Landlord delivers possession of the Premises to Tenant. The Expiration Date
shall be extended by the same number of days that Tenants possession of the Premises was delayed
beyond the Estimated Commencement Date.
(c)
Tenants Right to Terminate Lease
.
Notwithstanding anything to the contrary contained in
Paragraph 9(b) above, if Landlord fails to deliver possession of the Premises to Tenant on or
before November 1, 2000 for reasons other than Force Majeure Events and Tenant Delays (as such
terms are hereinafter defined), then Tenant shall have the right, as its sole and absolute remedy
for such failure, to terminate this Lease by written notice to Landlord given not later than
November 5, 2000. If Tenant fails to deliver such notice to Landlord on or before such date, then
this Lease shall remain in full force and effect and Tenants rights under this Paragraph 9(c)
shall terminate. As used herein,
Force Majeure Events
means strikes, embargoes, governmental
regulations, acts of God, war, civil commotion or other strife, and other events beyond the
reasonable control of Landlord; and
Tenant Delays
means any delays caused by Tenant or Tenants
Agents (as hereinafter defined).
10.
Use of Premises
(a)
Permitted Use
.
The use of the Premises by Tenant and Tenants agents, advisors,
employees, partners, shareholders, directors, invitees and independent contractors (collectively,
Tenants Agents
) shall be solely for the Permitted Use specified in the Basic Lease Information
and for no other use. Tenant shall not permit any objectionable or unpleasant odor, smoke,
dust, gas, noise or vibration to emanate from or near the Premises. The Premises shall not be
used to create any nuisance or trespass, for any illegal purpose, for any purpose not permitted
by Laws, for any purpose that would invalidate the insurance or increase the premiums for
insurance on the Premises, the Building or the Project or for any purpose or in any manner that
would interfere with other tenants use or occupancy of the Project. If any of Tenants office
machines or
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equipment disturb any other tenant in the Building, then Tenant shall provide adequate
insulation or take such other action as may be necessary to eliminate the noise or
disturbance. Tenant agrees to pay to Landlord, as Additional Rent, any increases in premiums
on policies resulting from Tenants Permitted Use or any other use or action by Tenant or
Tenants Agents which increases Landlords premiums or requires additional coverage by
Landlord to insure the Premises. Tenant agrees not to overload the floor(s) of the Building.
(b)
Compliance with Governmental Regulations and Private Restrictions.
Tenant and
Tenants Agents shall, at Tenants expense, faithfully observe and comply with (i) all
municipal, state and federal laws, statutes, codes, rules, regulations, ordinances,
requirements, and orders (collectively,
Laws
), now in force or which may hereafter be in
force pertaining to the Premises or Tenants use of the Premises, the Building or the
Project; provided, however, that except as provided in Paragraph 10(c) below, Tenant shall not be required to make or, except as
provided in Paragraph 4 above, pay for, structural changes to the Premises or the Building
not related to Tenants specific use of the Premises unless the requirement for such
changes is imposed as a result of any Alterations made to the Premises by Tenant; (ii) all
recorded covenants, conditions and restrictions affecting the Project (
Private
Restrictions
) now in force or which may hereafter be in force; and (iii) any and all rules
and regulations set forth in
Exhibit C
and any other rules and regulations now or hereafter
promulgated by Landlord related to parking or the operation of the Premises, the Building
and/or the Project (collectively, the
Rules and Regulations
). The judgment of any court of
competent jurisdiction, or the admission of Tenant in any action or proceeding against
Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such Laws or
Private Restrictions, shall be conclusive of that fact as between Landlord and Tenant.
(c)
Compliance with Americans with Disabilities Act.
Landlord and Tenant hereby agree
and acknowledge that the Premises, the Building and/or the Project may be subject to, among
other Laws, the requirements of the Americans with Disabilities Act, a federal law codified
at 42 U.S.C. 12101
et seq.,
including, but not limited to, Title III thereof, and all
regulations and guidelines related thereto, together with any and all laws, rules,
regulations, ordinances, codes and statutes now or hereafter enacted by local or state
agencies having jurisdiction thereof, including all requirements of Title 24 of the State of
California, as the same may be in effect on the date of this Lease and may be hereafter
modified, amended or supplemented (collectively, the
ADA
). Any Alterations to be
constructed hereunder shall be in compliance with the requirements of the ADA, and all costs
incurred for purposes of compliance therewith shall be a part of and included in the costs
of the Alterations. Tenant shall be solely responsible for conducting its own independent
investigation of this matter and for ensuring that the design of all Alterations strictly
comply with all requirements of the ADA. Subject to reimbursement pursuant to Paragraph 4
above, if any barrier removal work or other work is required to the Building, the Common
Areas or the Project under the ADA, then such work shall be the responsibility of Landlord;
provided, if such work is required under the ADA as a result of Tenants use of the Premises
or any work or Alteration (as hereinafter defined) made to the Premises by or on behalf of
Tenant, then such work shall be performed by Landlord at the sole cost and expense of
Tenant. Except as otherwise expressly provided in this provision, Tenant shall be
responsible at its sole cost and expense for fully and faithfully complying with all
12
applicable requirements of the ADA, including, without limitation, not discriminating against any
disabled persons in the operation of Tenants business in or about the Premises, and offering or
otherwise providing auxiliary aids and services as, and when, required by the ADA. Within ten (10)
days after receipt, Tenant shall advise Landlord in writing, and provide Landlord with copies of
(as applicable), any notices alleging violation of the ADA relating to any portion of the Premises,
the Building or the Project; any claims made or threatened orally or in writing regarding
noncompliance with the ADA and relating to any portion of the Premises, the Building, or the
Project; or any governmental or regulatory actions or investigations instituted or threatened
regarding noncompliance with the ADA and relating to any portion of the Premises, the Building or
the Project. Tenant shall and hereby agrees to protect, defend (with counsel acceptable to
Landlord) and hold Landlord and Landlords Agents harmless and mdemnify Landlord and Landlords
Agents from and against all liabilities, damages, claims, losses, penalties, judgments, charges and
expenses (including attorneys fees, costs of court and expenses necessary in the prosecution or
defense of any litigation including the enforcement of this provision) arising from or in any way
related to, directly or indirectly, Tenants or Tenants Agents violation or alleged violation of
the ADA. Tenant agrees that the obligations of Tenant herein shall survive the expiration or
earlier termination of this Lease.
11.
Acceptance of Premises
(a) By entry hereunder, Tenant accepts the Premises as suitable for Tenants intended use and
as being in good and sanitary operating order, condition and repair, AS IS, and without
representation or warranty by Landlord as to the condition, use or occupancy which may be made
thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and
Tenant.
(b) Notwithstanding the terms of Paragraph 11(a), Landlord shall cause the roof on the
Building to be in good condition and the HVAC, electrical and plumbing systems serving the
Premises to be in good working order on the Commencement Date. Any claims by Tenant under
the preceding sentence shall be made in writing not later than the fifteenth (15th) day
after the Commencement Date. In the event Tenant fails to deliver a written claim to Landlord
on or before such fifteenth (15th) day, then Landlord shall be conclusively deemed to have
satisfied its obligations under this Paragraph 11.
12.
Surrender
Tenant agrees that on the last day of the Term, or on the sooner termination of this Lease,
Tenant shall surrender the Premises to Landlord (a) in good condition and repair (damage by acts
of God, fire, and normal wear and tear excepted), but with all interior walls painted or cleaned
so they appear painted, any carpets cleaned, all floors cleaned and waxed, all non-working light
bulbs and ballasts replaced and all roll-up doors and plumbing fixtures in good condition and
working order, and (b) otherwise in accordance with Paragraph 33(h). Normal wear and tear shall
not include any damage or deterioration to the floors of the Premises arising from the use of
forklifts in, on or about the Premises (including, without limitation, any marks or stains on any
portion of the floors), and any damage or deterioration that would have been prevented by proper
13
maintenance by Tenant, or Tenant otherwise performing all of its obligations under this Lease. On
or before the expiration or sooner termination of this Lease, (i) Tenant shall remove all of
Tenants Property (as hereinafter defined) and Tenants signage from the Premises, the Building and
the Project and repair any damage caused by such removal, and (ii) Landlord may, by notice to
Tenant given not later than ninety (90) days prior to the Expiration Date (except in the event of a
termination of this Lease prior to the scheduled Expiration Date, in which event no advance notice
shall be required), require Tenant at Tenants expense to remove any or all Alterations
(specifically excluding, however, any alterations or improvements made to the Premises by the
previous tenant prior to the Commencement Date) and to repair any damage caused by such removal.
Any of Tenants Property not so removed by Tenant as required herein shall be deemed abandoned and
may be stored, removed, and disposed of by Landlord at Tenants expense, and Tenant waives all
claims against Landlord for any damages resulting from Landlords retention and disposition of such
property; provided, however, that Tenant shall remain liable to Landlord for all costs incurred in
storing and disposing of such abandoned property of Tenant. All Alterations except those which
Landlord requires Tenant to remove shall remain in the Premises as the property of Landlord. If the
Premises are not surrendered at the end of the Term or sooner termination of this Lease, and in
accordance with the provisions of this Paragraph 12 and Paragraph 33(h) below, Tenant shall
continue to be responsible for the payment of Rent (as the same may be increased pursuant to
Paragraph 36 below) until the Premises are so surrendered in accordance with said Paragraphs, and
Tenant shall indemnify, defend and hold Landlord harmless from and against any and all loss or
liability resulting from delay by Tenant in so surrendering the Premises including, without
limitation, any loss or liability resulting from any claim against Landlord made by any succeeding
tenant or prospective tenant founded on or resulting from such delay and losses to Landlord due to
lost opportunities to lease any portion of the Premises to any such succeeding tenant or
prospective tenant, together with, in each case, actual attorneys fees and costs.
13.
Alterations and Additions
(a) Tenant shall not make, or permit to be made, any alteration, addition or improvement
(hereinafter referred to individually as an
Alteration
and collectively as the
Alterations
)
to the Premises or any part thereof without the prior written consent of Landlord, which consent
shall not be unreasonably withheld; provided, however, that Landlord shall have the right in its
sole and absolute discretion to consent or to withhold its consent to any Alteration which
affects the structural portions of the Premises, the Building or the Project or the Systems
serving the Premises, the Building and/or the Project or any portion thereof (collectively,
Structural Alterations
). Landlord shall endeavor to respond to Tenants request for consent
within thirty (30) days after Tenant submits to Landlord a written request for approval, together
with the other documents and information required by this Paragraph 13. Notwithstanding the
foregoing, Tenant shall have the right to make Alterations (specifically excluding, however,
Structural Alterations) to the Premises with prior notice to but without the consent of Landlord,
provided that such Alterations (i) are constructed and performed in full compliance with the
terms of Paragraphs 13(b) through (g) below, (ii) are not visible from the exterior of the
Premises or the Building, (iii) do not require work to be performed inside the walls or above the
ceiling of the Premises, and (iv) do not exceed one thousand five hundred dollars ($1,500) in
cost on an
14
individual basis or five thousand dollars ($5,000) in the aggregate over the Term of this Lease
(collectively,
Permitted Alterations
).
(b) Any Alteration to the Premises shall be at Tenants sole cost and expense, in compliance
with all applicable Laws and all requirements requested by Landlord, including, without
limitation, the requirements of any insurer providing coverage for the Premises or the Project or
any part thereof, and in accordance with plans and specifications approved in writing by
Landlord, and shall be constructed and installed by a contractor approved in writing by Landlord.
As a further condition to giving consent, Landlord may require Tenant to. provide Landlord, at
Tenants sole cost and expense, a payment and performance bond in form acceptable to Landlord, in
a principal amount not less than one and one-half times the estimated costs of such Alterations,
to ensure Landlord against any liability for mechanics and materialmens liens and to ensure
completion of work. Before Alterations may begin, Valid building permits or other permits or
licenses required must be furnished to Landlord, and, once the Alterations begin, Tenant will
diligently and continuously pursue their completion. Landlord may monitor construction of the
Alterations and Tenant shall reimburse Landlord for its costs (including, without limitation, the
costs of any construction manager retained by Landlord) in reviewing plans and documents and in
monitoring construction. Tenant shall maintain during the course of construction, at its sole
cost and expense, builders risk insurance for the amount of the completed value of the
Alterations on an all-risk non-reporting form covering all improvements under construction,
including building materials, and other insurance in amounts and against such risks as
Landlord shall reasonably require in connection with the Alterations. In addition to and without
limitation on the generality of the foregoing, Tenant shall ensure that its contractor(s) procure
and maintain in full force and effect during the course of construction a broad form commercial
general liability and property damage policy of insurance naming Landlord, Landlords investment
advisor and agent, Allegis Realty Investors
llc,
Tenant and Landlords lenders as
additional insureds. The minimum limit of coverage of the aforesaid policy shall be in the amount
of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in any
one accident or occurrence and in the amount of not less than Three Million Dollars
($3,000,000.00) for injury or death of more than one person in any one accident or occurrence,
and shall contain a severability of interest clause or a cross liability endorsement. Such
insurance shall further insure Landlord and Tenant against liability for property damage of at
least One Million Dollars ($1,000,000.00).
(c) All Alterations, including, but not limited to, heating, lighting, electrical, air
conditioning, fixed partitioning, drapery, wall covering and paneling, built-in cabinet work and
carpeting installations made by Tenant, together with all property that has become an integral
part of the Premises or the Building, shall at once be and become the property of Landlord, and
shall not be deemed trade fixtures or Tenants Property. If requested by Landlord, Tenant will
pay, prior to the commencement of construction, an amount determined by Landlord necessary to
cover the costs of demolishing such Alterations and/or the cost of returning the Premises and the
Building to its condition prior to such Alterations.
(d) No private telephone systems and/or other related computer or telecommunications
equipment or lines may be installed without Landlords prior written consent. If Landlord gives
15
such consent, all equipment must be installed within the Premises and, at the request of Landlord
made at any time prior to the expiration of the Term, removed upon the expiration or sooner
termination of this Lease and the Premises restored to the same condition as before such
installation.
(e) Notwithstanding anything herein to the contrary, before installing any equipment or
lights which generate an undue amount of heat in the Premises, or if Tenant plans to use any
high-power usage equipment in the Premises, Tenant shall obtain the written permission of
Landlord. Landlord may refuse to grant such permission unless Tenant agrees to pay the costs to
Landlord for installation of supplementary air conditioning capacity or electrical systems
necessitated by such equipment.
(f) Tenant agrees not to proceed to make any Alterations, notwithstanding consent from
Landlord to do so, until Tenant notifies Landlord in writing of the date Tenant desires to
commence construction or installation of such Alterations and Landlord has approved such
date in writing, in order that Landlord may post appropriate notices to avoid any liability
to contractors or material suppliers for payment for Tenants improvements. Tenant will at all
times permit such notices to be posted and to remain posted until the completion of work.
(g) Landlord acknowledges that Tenant intends to paint and carpet the Premises following the
Commencement Date (the
Initial Alterations
). Tenant shall have the right to so perform the
Initial Alterations, subject to compliance with the terms and provisions of this Paragraph 13.
Landlord shall provide an allowance for the performance of the Initial Alterations in the amount
specified in the Basic Lease Information (the
Alterations Allowance
). The Alterations Allowance
shall be the maximum contribution by Landlord toward the cost of the Initial Alterations. Should
the actual cost of performing the Initial Alterations be less than the Alterations Allowance, the
Alterations Allowance shall be reduced to an amount equal to said actual cost. Landlord shall
disburse the Alterations Allowance to Tenant following the completion of the Initial Alterations,
the inspection of the same by Landlord and the review and approval by Landlord of invoices and
lien waivers to substantiate the cost of the Initial Alterations and the completion thereof in a
lien-free manner.
14.
Maintenance and Repairs of Premises
(a)
Maintenance by Tenant
.
Throughout the Term, Tenant shall, at its sole expense, (i)
keep and maintain in good order and condition the Premises, and repair and replace every part
thereof, including glass, windows, window frames, window casements, skylights, interior and
exterior doors, door frames and door closers; interior lighting (including, without limitation,
light bulbs and ballasts), the plumbing and electrical systems located within and exclusively
serving the Premises, all communications systems serving the Premises, Tenants signage, interior
demising walls and partitions, equipment, interior painting and interior walls and floors, and
the roll-up doors, ramps and dock equipment, including, without limitation, dock bumpers, dock
plates, dock seals, dock levelers and dock lights located in or on the Premises (excepting only
those portions of the Building or the Project to be maintained by Landlord, as provided in
Paragraph 14(b) below), (ii) furnish all expendables, including light bulbs, paper goods and
16
soaps, used in the Premises, and (iii) keep and maintain in good order and condition, repair and
replace all of Tenants security systems in or about or serving the Premises and, except to the
extent that Landlord notifies Tenant in writing of its intention to arrange for such monitoring,
cause the fire alarm systems serving the Premises to be monitored by a monitoring or protective
services firm approved by Landlord in writing. Tenant shall not do nor shall Tenant allow
Tenants Agents to do anything to cause any damage, deterioration or unsightliness to the
Premises, the Building or the Project.
(b)
Maintenance by Landlord
.
Subject to the provisions of Paragraphs 14(a), 22 and 23, and
further subject to Tenants obligation under Paragraph 4 to reimburse Landlord, in the form of
Additional Rent, for Tenants Proportionate Share(s) of the cost and expense of the following
items, Landlord agrees to repair and maintain the following items: the roof coverings (provided
that Tenant installs no additional air conditioning or other equipment on the roof that damages
the roof coverings, in which event Tenant shall pay all costs resulting from the presence of
such additional equipment); the Systems serving the Premises and the Building, excluding the
plumbing and electrical systems located within and exclusively serving the Premises; and the
Parking Areas, pavement, landscaping, sprinkler systems, sidewalks, driveways, curbs, and
lighting systems in the Common Areas. Subject to the provisions of Paragraphs 14(a), 22 and 23,
Landlord, at its own cost and expense, agrees to repair and maintain the following items: the
structural portions of the roof (specifically excluding the roof coverings), the foundation, the
footings, the floor slab, and the load bearing walls and exterior walls of the Building
(excluding any glass and any routine maintenance, including, without limitation, any painting,
sealing, patching and waterproofing of such walls). Notwithstanding anything in this Paragraph
14 to the contrary, Landlord shall have the right to either repair or to require Tenant to
repair any damage to any portion of the Premises, the Building and/or the Project caused by or
created due to any act, omission, negligence or willful misconduct of Tenant or Tenants Agents
and to restore the Premises, the Building and/or the Project as applicable, to the condition
existing prior to the occurrence of such damage; provided, however, that in the event Landlord
elects to perform such repair and restoration work, Tenant shall reimburse Landlord upon demand
for all costs and expenses incurred by Landlord in connection therewith. Landlords obligation
hereunder to repair and maintain is subject to the condition precedent that Landlord shall have
received written notice of the need for such repairs and maintenance and a reasonable time to
perform such repair and maintenance. Tenant shall promptly report in writing to Landlord any
defective or other condition actually known to it which Landlord is required to repair, and
failure to so report such defects shall make Tenant responsible to Landlord for the costs and
expenses of repairing any additional damage or deterioration occurring after the date Tenant
obtains knowledge of such defective condition and any liability incurred by Landlord by reason
of Tenants failure to notify Landlord of such defective condition in a timely manner as
provided herein.
(c)
Tenants Waiver of Rights.
Tenant hereby expressly waives all rights to make repairs at
the expense of Landlord or to terminate this Lease, as provided for in California Civil Code
Sections 1941 and 1942, and 1932(1), respectively, and any similar or successor statute or law
in effect or any amendment thereof during the Term.
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15.
Landlords Insurance
Landlord shall purchase and keep in force fire, extended coverage and all risk insurance
covering the Building and the Project. Tenant shall, at its sole cost and expense, comply with any
and all reasonable requirements pertaining to the Premises, the Building and the Project of any
insurer necessary for the maintenance of reasonable fire and commercial general liability
insurance, covering the Building and the Project. Landlord, at Tenants cost, may maintain Loss of
Rents insurance, insuring that the Rent will be paid in a timely manner to Landlord for a period
of at least twelve (12) months if the Premises, the Building or the Project or any portion thereof
are destroyed or rendered unusable or inaccessible by any cause insured against under this Lease.
16.
Tenants Insurance
(a)
Commercial General Liability Insurance.
Tenant shall, at Tenants expense, secure and
keep in force a broad form commercial general liability insurance and property damage policy
covering the Premises, insuring Tenant, and naming Landlord, Landlords investment advisors and
agents from time to time, including, without limitation, Allegis Realty Investors
llc
, and
Landlords lenders as additional insureds, against any liability arising out of the ownership, use,
occupancy or maintenance of the Premises. The minimum limit of coverage of such policy shall be in
the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person
in any one accident or occurrence and in the amount of not less than Three Million Dollars
($3,000,000.00) for injury or death of more than one person in any one accident or occurrence,
shall include an extended liability endorsement providing contractual liability coverage (which
shall include coverage for Tenants indemnification obligations in this Lease), and shall contain a
severability of interest clause or a cross liability endorsement. Such insurance shall further
insure Landlord and Tenant against liability for property damage of at least Three Million Dollars
($3,000,000.00). Landlord may from time to time require reasonable increases in any such limits if
Landlord believes that additional coverage is necessary or desirable. The limit of any insurance
shall not limit the liability of Tenant hereunder. No policy maintained by Tenant under this
Paragraph 16(a) shall contain a deductible greater than two thousand five hundred dollars
($2,500.00). No policy shall be cancelable or subject to reduction of coverage without thirty (30)
days prior written notice to Landlord, and loss payable clauses shall be subject to Landlords
approval. Such policies of insurance shall be issued as primary policies and not contributing with
or in excess of coverage that Landlord may carry, by an insurance company authorized to do business
in the State of California for the issuance of such type of insurance coverage and rated A:XIII or
better in Bests Key Rating Guide.
(b)
Personal Property Insurance.
Tenant shall maintain in full force and effect on all of its
personal property, furniture, furnishings, trade or business fixtures and equipment (collectively,
Tenants Property
) on the Premises, a policy or policies of fire and extended coverage insurance
with standard coverage endorsement to the extent of the full replacement cost thereof. No such
policy shall contain a deductible greater than two thousand five hundred dollars ($2,500.00).
During the term of this Lease the proceeds from any such policy or policies of insurance shall be
used for the repair or replacement of the fixtures and equipment so insured.
18
Landlord shall have no interest in the insurance upon Tenants equipment and fixtures and will
sign all documents reasonably necessary in connection with the settlement of any claim or loss
by Tenant. Landlord will not carry insurance on Tenants possessions.
(c)
Workers Compensation Insurance; Employers Liability Insurance
.
Tenant shall, at
Tenants expense, maintain in full force and effect workers compensation insurance with not less
than the minimum limits required by law, and employers liability insurance with a minimum limit
of coverage of One Million Dollars ($1,000,000).
(d)
Evidence of Coverage
.
Tenant shall deliver to Landlord certificates of insurance and true
and complete copies of any and all endorsements required herein for all insurance required to be
maintained by Tenant hereunder at the time of execution of this Lease by Tenant. Tenant
shall, at least thirty (30) days prior to expiration of each policy, furnish Landlord with
certificates of renewal or binders thereof. Each certificate shall expressly provide that such policies shall
not be cancellable or otherwise subject to modification except after thirty (30) days prior
written notice to Landlord and the other parties named as additional insureds as required in this
Lease (except for cancellation for nonpayment of premium, in which event cancellation shall not
take effect until at least ten (10) days notice has been given to Landlord).
17.
Indemnification
(a)
Of Landlord
.
Tenant shall indemnify and hold harmless Landlord and Landlords Agents
against and from any and all claims, liabilities, judgments, costs, demands, causes of action and
expenses (including, without limitation, reasonable attorneys fees) arising from (1) the use of
the Premises, the Building or the Project by Tenant or Tenants Agents, or from any activity done,
permitted or suffered by Tenant or Tenants Agents in or about the Premises, the Building or the
Project, and (2) any act, neglect, fault, willful misconduct or omission of Tenant or Tenants
Agents, or from any breach or default in the terms of this Lease by Tenant or Tenants Agents, and
(3) any action or proceeding brought on account of any matter in items (1) or (2). If any action
or proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord,
Tenant shall defend the same at Tenants expense by counsel reasonably satisfactory to Landlord.
As a material part of the consideration to Landlord, Tenant hereby releases Landlord and
Landlords Agents from responsibility for, waives its entire claim of recovery for and assumes all
risk of (i) damage to property or injury to persons in or about the Premises, the Building or the
Project from any cause whatsoever (except that which is caused by the gross negligence or willful
misconduct of Landlord or Landlords Agents or by the failure of Landlord to observe any of the
terms and conditions of this Lease, if such failure has persisted for an unreasonable period of
time after written notice of such failure), or (ii) loss resulting from business interruption or
loss of income at the Premises. The obligations of Tenant under this Paragraph 17 shall survive
any termination of this Lease.
(b)
No Impairment of Insurance
.
The foregoing indemnity shall not relieve any insurance
carrier of its obligations under any policies required to be carried by either party pursuant to
this Lease, to the extent that such policies cover the peril or occurrence that results in the
claim that is subject to the foregoing indemnity.
19
18.
Subrogation
Landlord and Tenant hereby mutually waive any claim against the other and its Agents for
any loss or damage to any of their property located on or about the Premises, the Building or
the Project that is caused by or results from perils covered by property insurance carried by
the respective parties, to the extent of the proceeds of such insurance actually received with
respect to such loss or damage, whether or not due to the negligence of the other party or its
Agents. Because the foregoing waivers will preclude the assignment of any claim by way of
subrogation to an insurance company or any other person, each party now agrees to immediately
give to its insurer written notice of the terms of these mutual waivers and shall have their
insurance policies endorsed to prevent the invalidation of the insurance coverage because of
these waivers. Nothing in this Paragraph 18 shall relieve a party of liability to the other for
failure to carry insurance required by this Lease.
19.
Signs
Tenant shall not place or permit to be placed in, upon, or about the Premises, the Building
or the Project any exterior lights, decorations, balloons, flags, pennants, banners,
advertisements or notices, or erect or install any signs, windows or door lettering, placards,
decorations, or advertising media of any type which can be viewed from the exterior the Premises
without obtaining Landlords prior written consent or without complying with Landlords signage
criteria, as the same may be modified by Landlord from time to time, and with all applicable
Laws, and will not conduct, or permit to be conducted, any sale by auction on the Premises or
otherwise on the Project. Tenant shall remove any sign, advertisement or notice placed on the
Premises, the Building or the Project by Tenant upon the expiration of the Term or sooner
termination of this Lease, and Tenant shall repair any damage or injury to the Premises, the
Building or the Project caused thereby, all at Tenants expense. If any signs are not removed,
or necessary repairs not made, Landlord shall have the right to remove the signs and repair any
damage or injury to the Premises, the Building or the Project at Tenants sole cost and expense.
20.
Free From Liens
Tenant shall keep the Premises, the Building and the Project free from any liens arising out
of any work performed, material furnished or obligations incurred by or for Tenant. In the event
that Tenant shall not, within ten (10) days following the imposition of any such lien, cause the
lien to be released of record by payment or posting of a proper bond, Landlord shall have in
addition to all other remedies provided herein and by law the right but not the obligation to
cause same to be released by such means as it shall deem proper, including payment of the claim
giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in
connection therewith (including, without limitation, attorneys fees) shall be payable to Landlord
by Tenant upon demand. Landlord shall have the right at all times to post and keep posted on the
Premises any notices permitted or required by law or that Landlord shall deem proper for the
protection of Landlord, the Premises, the Building and the Project, from mechanics and
materialmens liens. Tenant shall give to Landlord at least five (5) business days prior written
notice of commencement of any repair or construction on the Premises.
20
21.
Entry By Landlord
Tenant shall permit Landlord and Landlords Agents to enter into and upon the Premises at
all reasonable times, upon reasonable notice (except in the case of an emergency, for which no
notice shall be required), and subject to Tenants reasonable security arrangements, for the
purpose of inspecting the same or showing the Premises to prospective purchasers, lenders or
tenants or to alter, improve, maintain and repair the Premises or the Building as required or
permitted of Landlord under the terms hereof, or for any other business purpose, without any
rebate of Rent and without any liability to Tenant for any loss of occupation or quiet enjoyment
of the Premises thereby occasioned (except for actual damages resulting from the gross
negligence or willful misconduct of Landlord), provided, however, that Landlord shall take
reasonable measures to the extent reasonably practical to minimize interruption of Tenants
business operations; and Tenant shall permit Landlord to post notices of non-responsibility and
ordinary for sale or for lease signs. No such entry shall be construed to be a forcible or
unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises.
Landlord may temporarily close entrances, doors, corridors, elevators or other facilities without
liability to Tenant by reason of such closure in the case of an emergency and when Landlord
otherwise deems such closure necessary.
22.
Destruction and Damage
(a) If the Premises are damaged by fire or other perils covered by extended coverage
insurance, Landlord shall, at Landlords option:
(i) In the event of total destruction (which shall mean destruction or damage in excess
of twenty-five percent (25%) of the full insurable value thereof) of the Premises, elect either
to commence promptly to repair and restore the Premises and prosecute the same diligently to
completion, in which event this Lease shall remain in full force and effect; or not to repair or
restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant
written notice of its intention and the estimated time to complete such work within sixty (60)
days after the date (the
Casualty Discovery Date
) Landlord obtains actual knowledge of such
destruction. If Landlord elects not to restore the Premises, this Lease shall be deemed to have
terminated as of the date of such total destruction.
(ii) In the event of a partial destruction (which shall mean destruction or damage to an
extent not exceeding twenty-five percent (25%) of the full insurable value thereof) of the
Premises for which Landlord will receive insurance proceeds sufficient to cover the cost to
repair and restore such partial destruction and, if the damage thereto is such that the Premises
may be substantially repaired or restored to its condition existing immediately prior to such
damage or destruction within one hundred eighty (180) days from the Casualty Discovery Date,
Landlord shall commence and proceed diligently with the work of repair and restoration, in which
event the Lease shall continue in full force and effect. If such repair and restoration requires
longer than one hundred eighty (180) days or if the insurance proceeds therefor (plus any
amounts Tenant may elect or is obligated to contribute) are not sufficient to cover the cost of
such repair and restoration, Landlord may elect either to so repair and restore, in which event
the Lease shall
21
continue in full force and effect, or not to repair or restore, in which event the Lease shall
terminate. In either case, Landlord shall give written notice to Tenant of its intention and the
estimated time to complete such work within sixty (60) days after the Casualty Discovery Date. If
Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of
the date of such partial destruction.
(iii) Notwithstanding anything to the contrary contained in this Paragraph, in the event of
damage to the Premises occurring during the last twelve (12) months of the Term, Landlord and
Tenant shall each have the right to terminate this Lease by written notice of such election given
to the other party within thirty (30) days after the Casualty Discovery Date, provided, however,
that Tenant shall have the right to terminate this Lease pursuant to this Paragraph 22(a)(iii) only
if Tenants use and occupancy of the Premises are materially interfered with as a result of such
damage.
(b) If the Premises are damaged by any peril not covered by extended coverage insurance, and
the cost to repair such damage exceeds any amount Tenant may agree to contribute, Landlord may
elect either to commence promptly to repair and restore the Premises and prosecute the same
diligently to completion, in which event this Lease shall remain in full force and effect; or not
to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give
Tenant written notice of its intention and the estimated time to complete such work within sixty
(60) days after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this
Lease shall be deemed to have terminated as of the date on which Tenant surrenders possession of
the Premises to Landlord, except that if the damage to the Premises materially impairs Tenants
ability to continue its business operations in the Premises, then this Lease shall be deemed to
have terminated as of the date such damage occurred.
(c) Notwithstanding anything to the contrary in this Paragraph 22, Landlord shall have the
option to terminate this Lease, exercisable by notice to Tenant within sixty (60) days after the
Casualty Discovery Date, in each of the following instances:
(i) If more than twenty-five percent (25%) of the full insurable value of the Building or
the Project is damaged or destroyed, regardless of whether or not the Premises are destroyed.
(ii) If the Building or the Project or any portion thereof is damaged or destroyed and
the repair and restoration of such damage requires longer than one hundred eighty (180) days from
the Casualty Discovery Date.
(iii) If the Building or the Project or any portion thereof is damaged or destroyed and the
insurance proceeds therefor are not sufficient to cover the costs of repair and restoration.
(iv) If the Building or the Project or any portion thereof is damaged or destroyed
during the last twelve (12) months of the Term.
(d) If the Premises is damaged or destroyed to the extent that the Premises cannot be
substantially repaired or restored by Landlord within two hundred ten (210) days after the Casualty
Discovery Date, Tenant may terminate this Lease immediately upon notice thereof to
22
Landlord, which notice shall be given, if at all, not later than fifteen (15) days after Landlord
notifies Tenant of Landlords estimate of the period of time required to repair such damage or
destruction.
(e) In the event of repair and restoration as herein provided, the monthly installments of
Rent shall be abated proportionately in the ratio which Tenants use of the Premises is impaired
during the period of such repair or restoration; provided, however, that Tenant shall not be
entitled to such abatement to the extent that such damage or destruction resulted from the acts or
inaction of Tenant or Tenants Agents. Except as expressly provided in the immediately preceding
sentence with respect to abatement of Rent, Tenant shall have no claim against Landlord for, and
hereby releases Landlord and Landlords Agents from responsibility for and waives its entire claim
of recovery for any cost, loss or expense suffered or incurred by Tenant as a result of any damage
to or destruction of the Premises, the Building or the Project or the repair or restoration
thereof, including, without limitation, any cost, loss or expense resulting from any
loss of use of the whole or any part of the Premises, the Building or the Project
and/or any inconvenience or annoyance occasioned by such damage, repair or restoration.
(f) If Landlord is obligated to or elects to repair or restore as herein provided, Landlord
shall repair or restore only the initial tenant improvements, if any, constructed by Landlord in
the Premises pursuant to the terms of this Lease, substantially to their condition existing
immediately prior to the occurrence of the damage or destruction; and Tenant shall promptly repair
and restore, at Tenants expense, Tenants Alterations which were not constructed by Landlord.
(g) Tenant hereby waives the provisions of California Civil Code Section 1932(2) and Section
1933(4) which permit termination of a lease upon destruction of the leased premises, and the
provisions of any similar law now or hereinafter in effect, and the provisions of this Paragraph 22
shall govern exclusively in case of such destruction.
23.
Condemnation
(a) If twenty-five percent (25%) or more of either the Premises, the Building or the Project
or the parking areas for the Building or the Project is taken for any public or quasi-public
purpose by any lawful governmental power or authority, by exercise of the right of appropriation,
inverse condemnation, condemnation or eminent domain, or sold to prevent such taking (each such
event being referred to as a
Condemnation
), Landlord may, at its option, terminate this Lease as
of the date title vests in the condemning party. If twenty-five percent (25%) or more of the
Premises is taken and if the Premises remaining after such Condemnation and any repairs by Landlord
would be untenantable for the conduct of Tenants business operations, Tenant shall have the right
to terminate this Lease as of the date title vests in the condemning party. If either party elects
to terminate this Lease as provided herein, such election shall be made by written notice to the
other party given within thirty (30) days after the nature and extent of such Condemnation have
been finally determined. If neither Landlord nor Tenant elects to terminate this Lease to the
extent permitted above, Landlord shall promptly proceed to restore the Premises, to the extent of
any Condemnation award received by Landlord, to substantially the same condition as existed prior
to such Condemnation, allowing for the reasonable effects of
23
such Condemnation, and a proportionate abatement shall be made to the Rent corresponding to
the time during which, and to the portion of the floor area of the Premises (adjusted for any
increase thereto resulting from any reconstruction) of which, Tenant is deprived on account of such
Condemnation and restoration, as reasonably determined by Landlord. Except as expressly provided in
the immediately preceding sentence with respect to abatement of Rent, Tenant shall have no claim
against Landlord for, and hereby releases Landlord and Landlords Agents from responsibility for
and waives its entire claim of recovery for any cost, loss or expense suffered or incurred by
Tenant as a result of any Condemnation or the repair or restoration of the Premises, the Building
or the Project or the parking areas for the Building or the Project following such Condemnation,
including, without limitation, any cost, loss or expense resulting from any loss of use of the
whole or any part of the Premises, the Building, the Project or the parking areas and/or any
inconvenience or annoyance occasioned by such Condemnation, repair or restoration. The provisions
of California Code of Civil Procedure Section 1265.130, which allows either party to petition the
Superior Court to terminate the Lease in the event of a partial taking of the Premises, the
Building or the Project or the parking areas for the Building or the Project, and any other
applicable law now or hereafter enacted, are hereby waived by Tenant.
(b) Landlord shall be entitled to any and all compensation, damages, income, rent, awards,
or any interest therein whatsoever which may be paid or made in connection with any Condemnation,
and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease
or otherwise; provided, however, that Tenant shall be entitled to institute and pursue an
independent action against the condemning authority and receive any award separately allocated by
the condemning authority to Tenant for Tenants relocation expenses or the value of Tenants
Property (specifically excluding fixtures, Alterations and other components of the Premises which
under this Lease or by law are or at the expiration of the Term will become the property of
Landlord), provided that such award does not reduce any award otherwise allocable or payable to
Landlord.
24.
Assignment and Subletting
(a) Tenant shall not voluntarily or by operation of law, (1) mortgage, pledge, hypothecate
or encumber this Lease or any interest herein, (2) assign or transfer this Lease or any interest
herein, sublease the Premises or any part thereof, or any right or privilege appurtenant thereto,
or allow any other person (the employees and invitees of Tenant excepted) to occupy or use the
Premises, or any portion thereof, without first obtaining the written consent of Landlord, which
consent shall not be unreasonably withheld, provided that (i) Tenant is not then in Default under
this Lease nor is any event then occurring which with the giving of notice or the passage of time,
or both, would constitute a Default hereunder, and (ii) the proposed transfer is not an assignment
or a sublease under a previous assignment or an existing sublease. When Tenant requests Landlords
consent to such assignment or subletting, it shall notify Landlord in writing of the name and
address of the proposed assignee or subtenant and the nature and character of the business of the
proposed assignee or subtenant and shall provide (A) a fully completed Hazardous Materials
Disclosure Certificate for such assignee or subtenant in the form of
Exhibit D
hereto, and (B)
current and prior financial statements for the proposed assignee or subtenant, which financial
statements shall be audited to the extent available and shall in any
24
event be prepared in accordance with generally accepted accounting principles. Tenant shall
also provide Landlord with a copy of the proposed sublease or assignment agreement, including all
material terms and conditions thereof. Landlord shall have the option, to be exercised within
thirty (30) days of receipt of the foregoing, to (1) terminate this Lease and release Tenant of all
further obligations under this Lease as of the commencement date stated in the proposed sublease or
assignment, (2) sublease or take an assignment, as the case may be, from Tenant of the interest, or
any portion thereof, in this Lease and/or the Premises that Tenant proposes to assign or sublease,
on the same terms and conditions as stated in the proposed sublet or assignment agreement, (3)
consent to the proposed assignment or sublease, or (4) refuse its consent to the proposed
assignment or sublease, providing that such consent shall not be unreasonably withheld so long as
Tenant is not then in Default under this Lease nor is any event then occurring which with the
giving of notice or the passage of time, or both, would constitute a Default hereunder. In the
event Landlord elects to terminate this Lease or recapture the Premises, Tenant may, if it so
elects, by written notice to Landlord within ten (10) days after receipt of Landlords termination
or recapture notice, revoke its request for Landlords consent and, in such event, this Lease shall
continue in full force and effect as if Tenant had not requested Landlords consent. In the event
Landlord elects to terminate this Lease or sublease or take an assignment from Tenant of the
interest, or portion thereof, in the Lease and/or the Premises that Tenant proposes to assign or
sublease as provided in the foregoing clauses (1) and (2), respectively, then Landlord shall have
the additional right to negotiate directly with Tenants proposed assignee or subtenant and to
enter into a direct lease or occupancy agreement with such party on such terms as shall be
acceptable to Landlord in its sole and absolute discretion, and Tenant hereby waives any claims
against Landlord related thereto, including, without limitation, any claims for any compensation or
profit related to such lease or occupancy agreement.
(b) Without otherwise limiting the criteria upon which Landlord may withhold its consent,
Landlord shall be entitled to consider all reasonable criteria including, but not limited to, the
following: (1) whether or not the proposed subtenant or assignee is engaged in a business which,
and the use of the Premises will be in an manner which, is in keeping with the then character and
nature of all other tenancies in the Project, (2) whether the use to be made of the Premises by the
proposed subtenant or assignee will conflict with any so-called exclusive use then in favor of
any other tenant of the Building or the Project, and whether such use would be prohibited by any
other portion of this Lease, including, but not limited to, any rules and regulations then in
effect, or under applicable Laws, and whether such use imposes a greater load upon the Premises and
the Building and Project services then imposed by Tenant, (3) the business reputation of the
proposed individuals who will be managing and operating the business operations of the assignee or
subtenant, and the long-term financial and competitive business prospects of the proposed assignee
or subtenant, and (4) the creditworthiness and financial stability of the proposed assignee or
subtenant in light of the responsibilities involved. In any event, Landlord may withhold its
consent to any assignment or sublease, if (i) the actual use proposed to be conducted in the
Premises or portion thereof conflicts with the provisions of Paragraph 10(a) or (b) above or with
any other lease which restricts the use to which any space in the Building or the Project may be
put, or (ii) the proposed assignment or sublease requires Alterations to the Premises or portions
thereof other than Alterations permitted by Landlord in accordance with Paragraph 13 above.
25
(c) If Landlord approves an assignment or subletting as herein provided, Tenant shall pay to
Landlord, as Additional Rent, the net difference, if any received by Tenant, between (1) the Base
Rent plus Additional Rent allocable to that part of the Premises affected by such assignment or
sublease pursuant to the provisions of this Lease, and (2) the rent and any additional rent payable
by the assignee or sublessee to Tenant, less reasonable legal fees (not to exceed the sum of five
thousand dollars ($5,000.00)) and reasonable and customary market- based leasing commissions, if
any, incurred by Tenant in connection with such assignment or sublease, which fees and commissions
shall, for purposes of the aforesaid calculation, be amortized on a straight-line basis over the
term of such assignment or sublease. The assignment or sublease agreement, as the case may be,
after approval by Landlord, shall not be amended without Landlords prior written consent, and
shall contain a provision directing the assignee or subtenant to pay the rent and other sums due
thereunder directly to Landlord upon receiving written notice from Landlord that Tenant is in
default under this Lease with respect to the payment of Rent. In the event that, notwithstanding
the giving of such notice, Tenant collects any rent or other sums from the assignee or subtenant,
then Tenant shall hold such sums in trust for the benefit of Landlord and shall immediately forward
the same to Landlord. Landlords collection of such rent and other sums shall not constitute an
acceptance by Landlord of attornment by such assignee or subtenant. A consent to one assignment,
subletting, occupation or use shall not be deemed to be a consent to any other or subsequent
assignment, subletting, occupation or use, and consent to any assignment or subletting shall in no
way relieve Tenant of any liability under this Lease. Any assignment or subletting without
Landlords consent shall be void, and shall, at the option of Landlord, constitute a Default under
this Lease.
(d) Notwithstanding any assignment or subletting, Tenant and any guarantor or surety of
Tenants obligations under this Lease shall at all times remain fully responsible and liable for
the payment of the Rent and for compliance with all of Tenants other obligations under this Lease
(regardless of whether Landlords approval has been obtained for any such assignment or subletting).
(e) Tenant shall pay Landlords reasonable fees (including, without limitation, the fees of
Landlords counsel), incurred in connection with Landlords review and processing of documents
regarding any proposed assignment or sublease.
(f) Notwithstanding anything in this Lease to the contrary, in the event Landlord consents to
an assignment or subletting by Tenant in accordance with the terms of this Paragraph 24, Tenants
assignee or subtenant shall have no right to further assign this Lease or any interest therein or
thereunder or to further sublease all or any portion of the Premises. In furtherance of the
foregoing, Tenant acknowledges and agrees on behalf of itself and any assignee of subtenant
claiming under it (and any such assignee or subtenant by accepting such assignment or sublease
shall be deemed to acknowledge and agree) that no sub-subleases or further assignments of this
Lease shall be permitted at any time.
(g) Tenant acknowledges and agrees that the restrictions, conditions and limitations imposed
by this Paragraph 24 on Tenants ability to assign or transfer this Lease or any interest herein,
to sublet the Premises or any part thereof, to transfer or assign any right or privilege
26
appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any
portion thereof, are, for the purposes of California Civil Code Section 1951.4, as amended from
time to time, and for all other purposes, reasonable at the time that the Lease was entered into,
and shall be deemed to be reasonable at the time that Tenant seeks to assign or transfer this Lease
or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right
or privilege appurtenant to the Premises, or to allow any other person to occupy or use the
Premises or any portion thereof.
25.
Tenants Default
The occurrence of any one of the following events shall constitute an event of default on
the part of Tenant (
Default
):
(a) The vacation or abandonment of the Premises by Tenant for a period of ten (10)
consecutive days or any vacation or abandonment of the Premises by Tenant which would cause
any insurance policy to be invalidated or otherwise lapse, or the failure of Tenant to
continuously operate Tenants business in the Premises, in each of the foregoing cases
irrespective of whether or not Tenant is then in monetary default under this Lease. Tenant
agrees to notice and service of notice as provided for in this Lease and waives any right to
any other or further notice or service of notice which Tenant may have under any statute or
law now or hereafter in effect;
(b) Failure to pay any installment of Rent or any other monies due and payable hereunder,
said failure continuing for a period of three (3) days after the same is due;
(c) A general assignment by Tenant or any guarantor or surety of Tenants obligations
hereunder (collectively,
Guarantor
) for the benefit of creditors;
(d) The filing of a voluntary petition in bankruptcy by Tenant or any Guarantor, the filing
by Tenant or any Guarantor of a voluntary petition for an arrangement, the filing by or against
Tenant or any Guarantor of a petition, voluntary or involuntary, for reorganization, or the filing
of an involuntary petition by the creditors of Tenant or any Guarantor, said involuntary petition
remaining undischarged for a period of sixty (60) days;
(e) Receivership, attachment, or other judicial seizure of substantially all of Tenants
assets on the Premises, such attachment or other seizure remaining undismissed or undischarged for
a period of sixty (60) days after the levy thereof;
(f) Death or disability of Tenant or any Guarantor, if Tenant or such Guarantor is a natural
person, or the failure by Tenant or any Guarantor to maintain its legal existence, if Tenant or
such Guarantor is a corporation, partnership, limited liability company, trust or other legal
entity;
(g) Failure of Tenant to execute and deliver to Landlord any estoppel certificate,
subordination agreement, or lease amendment within the time periods and in the manner required by
Paragraphs 31 or 32 or 43, and/or failure by Tenant to deliver to Landlord any financial statement
within the time period and in the manner required by Paragraph 41;
27
(h) An assignment or sublease, or attempted assignment or sublease, of this Lease or the
Premises by Tenant contrary to the provision of Paragraph 24, unless such assignment or sublease is
expressly conditioned upon Tenant having received Landlords consent thereto;
(i) Failure of Tenant to restore the Security Deposit or the Letter of Credit to the amounts
and within the time periods provided in Paragraphs 7 and 8 above;
(j) Failure in the performance of any of Tenants covenants, agreements or obligations
hereunder (except those failures specified as events of Default in subparagraphs (b), (1) or (m)
above or any other subparagraphs of this Paragraph 25, which shall be governed by such other
Paragraphs), which failure continues for ten (10) days after written notice thereof from Landlord
to Tenant, provided that, if Tenant has exercised reasonable diligence to cure such failure and
such failure cannot be cured within such ten (10) day period despite reasonable diligence, Tenant
shall not be in default under this subparagraph so long as Tenant thereafter diligently and
continuously prosecutes the cure to completion and actually completes such cure within thirty (30)
days after the giving of the aforesaid written notice;
(k) Chronic delinquency by Tenant in the payment of Rent, or any other periodic payments
required to be paid by Tenant under this Lease.
Chronic delinquency
shall mean failure by Tenant
to pay Rent, or any other payments required to be paid by Tenant under this Lease within three (3)
days after written notice thereof for any three (3) months (consecutive or nonconsecutive) during
any period of twelve (12) months. In the event of a Chronic delinquency, in addition to Landlords
other remedies for Default provided in this Lease, at Landlords option, Landlord shall have the
right to require that Rent be paid by Tenant quarterly, in advance;
(l) Chronic overuse by Tenant or Tenants Agents of the number of undesignated parking
spaces set forth in the Basic Lease Information.
Chronic overuse
shall mean use by Tenant or
Tenants Agents of a number of parking spaces greater than the number of parking spaces set forth
in the Basic Lease Information more than three (3) times during the Term after written notice by
Landlord;
(m) Any insurance required to be maintained by Tenant pursuant to this Lease shall be canceled
or terminated or shall expire or be reduced or materially changed, except as permitted in this
Lease; and
(n) Any failure by Tenant to discharge any lien or encumbrance placed on the Project or any
part thereof in violation of this Lease within ten (10) days after the date such lien or
encumbrance is filed or recorded against the Project or any part thereof.
Tenant agrees that any notice given by Landlord pursuant to Paragraph 25(j), (k) or (1)
above shall satisfy the requirements for notice under California Code of Civil Procedure
Section 1161, and Landlord shall not be required to give any additional notice in order to be
entitled to commence an unlawful detainer proceeding.
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26.
Landlords Remedies
(a)
Termination.
In the event of any Default by Tenant, then in addition to any other
remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the
immediate option to terminate this Lease and all rights of Tenant hereunder by giving written
notice of such intention to terminate. In the event that Landlord shall elect to so terminate this
Lease then Landlord may recover from Tenant:
(i) the worth at the time of award of any unpaid Rent and any other sums due and payable
which have been earned at the time of such termination; plus
.(ii) the worth at the time of award of the amount by which the unpaid Rent and any other
sums due and payable which would have been earned after termination until the time of award exceeds
the amount of such rental loss Tenant proves could have been reasonably avoided; plus
(iii) the worth at the time of award of the amount by which the unpaid Rent and any other sums
due and payable for the balance of the term of this Lease after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided; plus
(iv) any other amount necessary to compensate Landlord for all the detriment proximately
caused by Tenants failure to perform its obligations under this Lease or which in the ordinary
course would be likely to result therefrom, including, without limitation, (A) any costs or
expenses incurred by Landlord (1) in retaking possession of the Premises; (2) in maintaining,
repairing, preserving, restoring, replacing, cleaning, altering, remodeling or rehabilitating the
Premises or any affected portions of the Building or the Project, including such actions undertaken
in connection with the reletting or attempted reletting of the Premises to a new tenant or tenants;
(3) for leasing commissions, advertising costs and other expenses of reletting the Premises; or (4)
in carrying the Premises, including taxes, insurance premiums, utilities and security precautions;
(B) any unearned brokerage commissions paid in connection with this Lease; (C) reimbursement of any
previously waived or abated Base Rent or Additional Rent or any free rent or reduced rental rate
granted hereunder; and (D) any concession made or paid by Landlord to the benefit of Tenant in
consideration of this Lease including, but not limited to, any unamortized portion of the
Alterations Allowance (such Alterations Allowance to be amortized over the Term in the manner
reasonably determined by Landlord); plus
(v) such reasonable attorneys fees incurred by Landlord as a result of a Default, and costs
in the event suit is filed by Landlord to enforce such remedy; and plus
(vi) at Landlords election, such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law.
As used in subparagraphs (i) and (ii) above, the
worth at the time of award
is computed by
allowing interest at an annual rate equal to twelve percent (12%) per annum or the maximum rate
permitted by law, whichever is less. As used in subparagraph (iii) above, the
worth at the time of
award
is computed by discounting such amount at the discount rate of the Federal Reserve Bank
29
of San Francisco at the time of award, plus one percent (1%). Tenant waives redemption or relief
from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other
pertinent present or future Law, in the event Tenant is evicted or Landlord takes possession of the
Premises by reason of any Default of Tenant hereunder.
(b)
Continuation of Lease.
In the event of any Default by Tenant, then in addition to any
other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have
the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in
effect after Tenants Default and abandonment and recover Rent as it becomes due, provided Tenant
has the right to sublet or assign, subject only to reasonable
limitations). In addition, Landlord
shall not be liable in any way whatsoever for its failure or refusal to relet the Premises. For
purposes of this Paragraph 26(b), the following acts by Landlord will not constitute the
termination of Tenants right to possession of the Premises:
(i) Acts of maintenance or preservation or efforts to relet the Premises, including, but
not limited to, alterations, remodeling, redecorating, repairs, replacements and/or painting as
Landlord shall consider advisable for the purpose of reletting the Premises or any part thereof; or
(ii) The appointment of a receiver upon the initiative of Landlord to protect
Landlords interest under this Lease or in the Premises.
(c)
Re-entry.
In the event of any Default by Tenant, Landlord shall also have the right, with
or without terminating this Lease, in compliance with applicable law, to re-enter the Premises and
remove all persons and property from the Premises; such property may be removed and stored in a
public warehouse or elsewhere at the cost of and for the account of Tenant.
(d)
Reletting.
In the event of the abandonment of the Premises by Tenant or in the event that
Landlord shall elect to re-enter as provided in Paragraph 26(c) or shall take possession of the
Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord
does not elect to terminate this Lease as provided in Paragraph 26(a), Landlord may from time to
tune, without terminating this Lease, relet the Premises or any part thereof for such term or
terms and at such rental or rentals and upon such other terms and conditions as Landlord in its
sole discretion may deem advisable with the right to make alterations and repairs to the Premises
in Landlords sole discretion. In the event that Landlord shall elect to so relet, then rentals
received by Landlord from such reletting shall be applied in the following order: (1) to reasonable
attorneys fees incurred by Landlord as a result of a Default and costs in the event suit is filed
by Landlord to enforce such remedies; (2) to the payment of any indebtedness other than Rent due
hereunder from Tenant to Landlord; (3) to the payment of any costs of such reletting; (4) to the
payment of the costs of any alterations and repairs to the Premises; (5) to the payment of Rent due
and unpaid hereunder; and (6) the residue, if any, shall be held by Landlord and applied in payment
of future Rent and other sums payable by Tenant hereunder as the same may become due and payable
hereunder. Should that portion of such rentals received from such reletting during any month, which
is applied to the payment of Rent hereunder, be less than the Rent payable during the month by
Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency shall be
calculated and paid monthly. Tenant shall also pay to
30
Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting
or in making such alterations and repairs not covered by the rentals received from such
reletting.
(e)
Termination.
No re-entry or taking of possession of the Premises by Landlord pursuant to
this Paragraph 26 shall be construed as an election to terminate this Lease unless a written notice
of such intention is given to Tenant or unless the termination thereof is decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of
any Default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease
for any such Default.
(f)
Cumulative Remedies.
The remedies herein provided are not exclusive and Landlord shall
have any and all other remedies provided herein or by law or in equity.
(g)
No Surrender.
No act or conduct of Landlord, whether consisting of the acceptance of the
keys to the Premises, or otherwise, shall be deemed to be or constitute an acceptance of the
surrender of the Premises by Tenant prior to the expiration of the Term, and such acceptance by
Landlord of surrender by Tenant shall only flow from and must be evidenced by a written
acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease by
Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing
that such merger take place, but shall operate as an assignment to Landlord of any and all
existing subleases, or Landlord may, at its option, elect in writing to treat such surrender
as a merger terminating Tenants estate under this Lease, and thereupon Landlord may terminate
any or all such subleases by notifying the sublessee of its election so to do within five (5)
days after such surrender.
27.
Landlords Right to Perform Tenants Obligations
(a) Without limiting the rights and remedies of Landlord contained in Paragraph 26 above, if
Tenant shall be in Default in the performance of any of the terms, provisions, covenants or
conditions to be performed or complied with by Tenant pursuant to this Lease, then Landlord may at
Landlords option, without any obligation to do so, and without notice to Tenant perform any such
term, provision, covenant, or condition, or make any such payment and Landlord by reason of so
doing shall not be liable or responsible for any loss or damage thereby sustained by Tenant or
anyone holding under or through Tenant or any of Tenants Agents.
(b) Without limiting the rights of Landlord under Paragraph 27(a) above, Landlord shall have
the right at Landlords option, without any obligation to do so, to perform any of Tenants
covenants or obligations under this Lease without notice to Tenant in the case of an emergency, as
determined by Landlord in its sole and absolute judgment, or if Landlord otherwise determines in
its sole discretion that such performance is necessary or desirable for the proper management and
operation of the Building or the Project or for the preservation of the rights and interests or
safety of other tenants of the Building or the Project.
(c) If Landlord performs any of Tenants obligations hereunder in accordance with this
Paragraph 27, the full amount of the cost and expense incurred or the payment so made or the amount
of the loss so sustained shall immediately be owing by Tenant to Landlord, and Tenant
31
shall promptly pay to Landlord upon demand, as Additional Rent, the full amount thereof with
interest thereon from the date of payment by Landlord at the lower of (1) ten percent (10%) per
annum, or (2) the highest rate permitted by applicable law.
(a) If either party hereto fails to perform any of its obligations under this Lease or if any
dispute arises between the parties hereto concerning the meaning or interpretation of any provision
of this Lease, then the defaulting party or the party not prevailing in such dispute, as the case
may be, shall pay any and all costs and expenses incurred by the other party on account of such
default and/or in enforcing or establishing its rights hereunder, including, without limitation,
court costs and reasonable attorneys fees and disbursements. Any such attorneys fees and other
expenses incurred by either party in enforcing a judgment in its favor under this Lease shall be
recoverable separately from and in addition to any other amount included in such judgment, and such attorneys fees obligation is intended to be severable from the other
provisions of this Lease and to survive and not be merged into any such judgment.
(b) Without limiting the generality of Paragraph 28(a) above, if Landlord utilizes the
services of an attorney for the purpose of collecting any Rent due and unpaid by Tenant or in
connection with any other breach of this Lease by Tenant, Tenant agrees to pay Landlord actual
attorneys fees as determined by Landlord for such services, regardless of the fact that no legal
action may be commenced or filed by Landlord.
Tenant shall be liable for and shall pay, prior to delinquency, all taxes levied against
Tenants Property. If any Alteration installed by Tenant or any of Tenants Property is assessed
and taxed with the Project or Building, Tenant shall pay such taxes to Landlord within ten (10)
days after delivery to Tenant of a statement therefor.
The term
Landlord
as used in this Lease means, from time to time, the then current owner of
the Building or the Project containing the Premises, so that, in the event of any sale of the
Building or the Project, Landlord shall be and hereby is entirely freed and relieved of all
covenants and obligations of Landlord hereunder, and it shall be deemed and construed, without
further agreement between the parties and the purchaser at any such sale, that the purchaser of the
Building or the Project has assumed and agreed to carry out any and all covenants and obligations
of Landlord hereunder.
31.
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Tenants Estoppel Certificate
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From time to time, upon written request of Landlord, Tenant shall execute, acknowledge and
deliver to Landlord or its designee, a written certificate stating (a) the date this Lease was
executed, the Commencement Date of the Term and the date the Term expires; (b) the date Tenant
entered into occupancy of the Premises; (c) the amount of Rent and the date to which
32
such Rent has been paid; (d) that this Lease is in full force and effect and has not been
assigned, modified, supplemented or amended in any way (or, if assigned, modified, supplemented or
amended, specifying the date and terms of any agreement so affecting this Lease); (e) that this
Lease represents the entire agreement between the parties with respect to Tenants right to use
and occupy the Premises (or specifying such other agreements, if any); (f) that all obligations
under this Lease to be performed by Landlord as of the date of such certificate have been satisfied (or specifying those as to which Tenant claims that Landlord has yet to perform); (g)
that all required contributions by Landlord to Tenant on account of Tenants improvements have
been received (or stating exceptions thereto); (h) that on such date there exist no defenses or
offsets that Tenant has against the enforcement of this Lease by Landlord (or stating exceptions
thereto); (i) that no Rent or other sum payable by Tenant hereunder has been paid more than one
(1) month in advance (or stating exceptions thereto); (j) that security has been deposited with
Landlord, stating the original amount thereof and any increases thereto; and (k) any other matters
evidencing the status of this Lease that may be required either by a lender making a loan to Landlord to be secured by a deed of trust covering the Building or the Project or by a purchaser
of the Building or the Project. Any such certificate delivered pursuant to this Paragraph 31 may
be relied upon by a prospective purchaser of Landlords interest or a mortgagee of Landlords
interest or assignee of any mortgage upon Landlords interest in the Premises. If Tenant shall
fail to provide such certificate within ten (10) days of receipt by Tenant of a written request by
Landlord as herein provided, such failure shall, at Landlords election, constitute a Default
under this Lease, and Tenant shall be deemed to have given such certificate as above provided
without modification and shall be deemed to have admitted the accuracy of any information supplied
by Landlord to a prospective purchaser or mortgagee.
Landlord shall have the right to cause this Lease to be and remain subject and subordinate
to any and all mortgages, deeds of trust and ground leases, if any (
Encumbrances
) that are now
or may hereafter be executed covering the Premises, or any renewals, modifications,
consolidations, replacements or extensions thereof, for the full amount of all advances made or
to be made thereunder and without regard to the time or character of such advances, together with
interest thereon and subject to all the terms and provisions thereof; provided only, that in the
event of termination of any such ground lease or upon the foreclosure of any such mortgage or
deed of trust, so long as Tenant is not in default, the holder thereof (
Holder
) shall agree to
recognize Tenants rights under this Lease as long as Tenant shall pay the Rent and observe and
perform all the provisions of this Lease to be observed and performed by Tenant. Within ten (10)
days after Landlords written request, Tenant shall execute, acknowledge and deliver any and all
reasonable documents required by Landlord or the Holder to effectuate such subordination and
nondisturbance. If Tenant fails to do so, such failure shall constitute a Default by Tenant under
this Lease. Notwithstanding anything to the contrary set forth in this Paragraph 32, Tenant
hereby attorns and agrees to attorn to any person or entity purchasing or otherwise acquiring the
Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers
or remedies under such Encumbrance.
33
33.
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Environmental Covenants
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(a) Prior to executing this Lease, Tenant has completed, executed and delivered to Landlord a
Hazardous Materials Disclosure Certificate (
Initial Disclosure Certificate
), a fully completed
copy of which is attached hereto as
Exhibit D
and incorporated herein by this reference. Tenant
covenants, represents and warrants to Landlord that the information on the Initial Disclosure
Certificate is true and correct and accurately describes the Hazardous Materials which will be
manufactured, treated, used or stored on or about the Premises by Tenant or Tenants Agents. Tenant
shall, on each anniversary of the Commencement Date and at such other times as Tenant desires to
manufacture, treat, use or store on or about the Premises new or additional Hazardous Materials
which were not listed on the Initial Disclosure Certificate, complete, execute and deliver to
Landlord an updated Disclosure Certificate (each, an
Updated Disclosure Certificate
) describing
Tenants then current and proposed future uses of Hazardous Materials on or about the Premises,
which Updated Disclosure Certificates shall be in the same format as that which is set forth in
Exhibit D
or in such updated format as Landlord may require
from time to time. Tenant shall deliver an Updated Disclosure Certificate to Landlord not less than
thirty (30) days prior to the date Tenant intends to commence the manufacture, treatment, use or
storage of new or additional Hazardous Materials on or about the Premises, and Landlord shall have
the right to approve or disapprove such new or additional Hazardous Materials in its sole and
absolute discretion. Tenant shall make no use of Hazardous Materials on or about the Premises
except as described in the Initial Disclosure Certificate or as otherwise approved by Landlord in
writing in accordance with this Paragraph 33(a).
(b) As used in this Lease, the term
Hazardous Materials
shall mean and include any
substance that is or contains (1) any hazardous substance as now or hereafter defined in § 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as
amended (
CERCLA
) (42 U.S.C. § 9601
et seq.)
or any regulations promulgated under CERCLA; (2) any
hazardous waste as now or hereafter defined in the Resource Conservation and Recovery Act, as
amended (
RCRA
) (42 U.S.C. § 6901
et seq.)
or any regulations promulgated under RCRA; (3) any
substance now or hereafter regulated by the Toxic Substances Control Act, as amended (
TSCA
) (15
U.S.C. § 2601
et seq.)
or any regulations promulgated under TSCA; (4) petroleum, petroleum
by-products, gasoline, diesel fuel, or other petroleum hydrocarbons; (5) asbestos and
asbestos-containing material, in any form, whether friable or non-friable; (6) polychlorinated
biphenyls; (7) lead and lead-containing materials; or (8) any additional substance, material or
waste (A) the presence of which on or about the Premises (i) requires reporting, investigation or
remediation under any Environmental Laws (as hereinafter defined), (ii) causes or threatens to
cause a nuisance on the Premises or any adjacent area or property or poses or threatens to pose a
hazard to the health or safety of persons on the Premises or any adjacent area or property, or
(iii) which, if it emanated or migrated from the Premises, could constitute a trespass, or (B)
which is now or is hereafter classified or considered to be hazardous or toxic under any
Environmental Laws.
(c) As used in this Lease, the term
Environmental Laws
shall mean and include (1)
CERCLA, RCRA and TSCA; and (2) any other federal, state or local laws, ordinances, statutes,
codes, rules, regulations, orders or decrees now or hereinafter in effect relating to
34
(A) pollution, (B) the protection or regulation of human health, natural resources or the
environment, (C) the treatment, storage or disposal of Hazardous Materials, or (D) the emission,
discharge, release or threatened release of Hazardous Materials into the environment.
(d) Tenant agrees that during its use and occupancy of the Premises it will (1) not
(A) permit Hazardous Materials to be present on or about the Premises except in a manner and
quantity necessary for the ordinary performance of Tenants business or (B) release, discharge
or dispose of any Hazardous Materials on, in, at, under, or emanating from, the Premises, the
Building or the Project; (2) comply with all Environmental Laws relating to the Premises and
the use of Hazardous Materials on or about the Premises and not engage in or permit others to
engage in any activity at the Premises in violation of any Environmental Laws; and (3)
immediately notify Landlord of (A) any inquiry, test, investigation or enforcement proceeding
by any governmental agency or authority against Tenant, Landlord or the Premises, Building or
Project relating to any Hazardous Materials or under any Environmental Laws or (B) the occurrence of any event or existence of any condition that would cause a breach of any of
the covenants set forth in this Paragraph 33.
(e) If Tenants use of Hazardous Materials on or about the Premises results in a release,
discharge or disposal of Hazardous Materials on, in, at, under, or emanating from, the Premises,
the Building or the Project, Tenant agrees to investigate, clean up, remove or remediate such
Hazardous Materials in full compliance with (1) the requirements of (A) all Environmental Laws
and (B) any governmental agency or authority responsible for the enforcement of any Environmental
Laws; and (2) any additional requirements of Landlord that are reasonably necessary to protect
the value of the Premises, the Building or the Project.
(f) Upon reasonable notice to Tenant, Landlord may inspect the Premises and surrounding
areas for the purpose of determining whether there exists on or about the Premises any Hazardous
Material or other condition or activity that is in violation of the requirements of this Lease or
of any Environmental Laws. Such inspections may include, but are not limited to, entering the
Premises or adjacent property with drill rigs or other machinery for the purpose of obtaining
laboratory samples. Landlord shall not be limited in the number of such inspections during the
Term of this Lease. In the event (1) such inspections reveal the presence of any such Hazardous
Material or other condition or activity in violation of the requirements of this Lease or of any
Environmental Laws, or (2) Tenant or its Agents contribute or knowingly consent to the presence
of any Hazardous Materials in, on, under, through or about the Premises, the Building or the
Project or exacerbate the condition of or the conditions caused by any Hazardous Materials in,
on, under, through or about the Premises, the Building or the Project, Tenant shall reimburse
Landlord for the cost of such inspections within ten (10) days of receipt of a written statement
therefor. Tenant will supply to Landlord such historical and operational information regarding
the Premises and surrounding areas as may be reasonably requested to facilitate any such
inspection and will make available for meetings appropriate personnel having knowledge of such
matters. Tenant agrees to give Landlord at least sixty (60) days prior notice of its intention
to vacate the Premises so that Landlord will have an opportunity to perform such an inspection
prior to such vacation. The right granted to Landlord herein to perform inspections shall not
create a duty on Landlords part to inspect the Premises, or liability on the part of Landlord
for
35
Tenants use, storage, treatment or disposal of Hazardous Materials, it being understood
that Tenant shall be solely responsible for all liability in connection therewith.
(g) Landlord shall have the right, but not the obligation, prior or subsequent to a Default,
without in any way limiting Landlords other rights and remedies under this Lease, to enter upon
the Premises, or to take such other actions as it deems necessary or advisable, to investigate,
clean up, remove or remediate any Hazardous Materials or contamination by Hazardous Materials
present on, in, at, under, or emanating from, the Premises, the Building or the Project in
violation of Tenants obligations under this Lease or under any Environmental Laws. Notwithstanding
any other provision of this Lease, Landlord shall also have the right, at its election, in its own
name or as Tenants agent, to negotiate, defend, approve and appeal, at Tenants expense, any
action taken or order issued by any governmental agency or authority with regard to any such
Hazardous Materials or contamination by Hazardous Materials. All costs and expenses paid or
incurred by Landlord in the exercise of the rights set forth in this Paragraph 33 shall be
payable by Tenant upon demand.
(h) Tenant shall surrender the Premises to Landlord upon the expiration or earlier
termination of this Lease free of debris, waste or Hazardous Materials placed on, about or near
the Premises by Tenant or Tenants Agents and, to the extent of any such debris, waste or
Hazardous Materials, in a condition which complies with all Environmental Laws and any additional
requirements of Landlord that are reasonably necessary to protect the value of the Premises, the
Building or the Project, including, without limitation, the obtaining of any closure permits .or
other governmental permits or approvals related to Tenants use of Hazardous Materials in or
about the Premises. Tenants obligations and liabilities pursuant to the provisions of this
Paragraph 33 shall survive the expiration or earlier termination of this Lease. If it is
determined by Landlord that the condition of all or any portion of the Premises, the Building,
and/or the Project is not in compliance with the provisions of this Lease with respect to
Hazardous Materials, including, without limitation, all Environmental Laws, at the expiration or
earlier termination of this Lease, then at Landlords sole option, Landlord may require Tenant to
hold over possession of the Premises until Tenant can surrender the Premises to Landlord in the
condition in which the Premises existed as of the Commencement Date and prior to the appearance
of such Hazardous Materials except for normal wear and tear, including, without limitation, the
conduct or performance of any closures as required by any Environmental Laws. The burden of proof
hereunder shall be upon Tenant. For purposes hereof, the term
normal wear and tear
shall not
include any deterioration in the condition or diminution of the value of any portion of the
Premises, the Building, and/or the Project in any manner whatsoever related to directly, or
indirectly, Hazardous Materials. Any such holdover by Tenant will be with Landlords consent,
will not be terminable by Tenant in any event or circumstance and will otherwise be subject to
the provisions of Paragraph 36 of this Lease.
(i) Tenant agrees to indemnify and hold harmless Landlord from and against any and all
claims, losses (including, without limitation, loss in value of the Premises, the Building or the Project, liabilities and expenses (including attorneys fees)) sustained by Landlord
attributable to (1) any Hazardous Materials placed on or about the Premises, the Building or the
Project by Tenant or Tenants Agents, or (2) Tenants breach of any provision of this Paragraph
33.
36
(j) Notwithstanding anything in this Paragraph 33 to the contrary, Tenant shall not be
responsible for the clean up or remediation of, and shall not be required to indemnify Landlord
against any costs or liabilities attributable to, any Hazardous Materials placed on or about the
Premises (i) prior to the Commencement Date by third parties not related to Tenant or Tenants
Agents, or (ii) by Landlord at any time, except in either case to the extent that Tenant or
Tenants Agents have contributed to or exacerbated the presence of or conditions caused by such
Hazardous Materials or have failed to take reasonable actions to prevent such Hazardous Material
from becoming placed on or about the Premises.
(k) The provisions of this Paragraph 33 shall survive the expiration or earlier termination
of this Lease.
All notices and demands which are required or may be permitted to be given to either party by
the other hereunder shall be in writing and shall be sent by United States mail, postage prepaid,
certified, or by personal delivery or overnight courier, addressed to the addressee at Tenants
Address or Landlords Address as specified in the Basic Lease Information, or to such other place
as either party may from time to time designate in a notice to the other party given as provided
herein. Copies of all notices and demands given to Landlord shall additionally be sent to
Landlords property manager at the address specified in the Basic Lease Information or at such
other address as Landlord may specify in writing from time to time. Notice shall be deemed given
upon actual receipt (or attempted delivery if delivery is refused), if personally delivered, or one
(1) business day following deposit with a reputable overnight courier that provides a receipt, or
on the third (3rd) day following deposit in the United States mail in the manner described above.
The waiver of any breach of any term, covenant or condition of this Lease shall not be deemed
to be a waiver of such term, covenant or condition or of any subsequent breach of the same or any
other term, covenant or condition herein contained. The subsequent acceptance of Rent by Landlord
shall not be deemed to be a waiver of any preceding breach by Tenant, other than the failure of
Tenant to pay the particular rental so accepted, regardless of Landlords knowledge of such
preceding breach at the time of acceptance of such Rent. No delay or omission in the exercise of
any right or remedy of Landlord in regard to any Default by Tenant shall impair such a right or
remedy or be construed as a waiver. Any waiver by Landlord of any Default must be in writing and
shall not be a waiver of any other Default concerning the same or any other provisions of this
Lease.
Any holding over after the expiration of the Term, without the express written consent of
Landlord, shall constitute a Default and, without limiting Landlords remedies provided in this
Lease, such holding over shall be construed to be a tenancy at sufferance, at a rental rate equal
to the greater of one hundred fifty percent (150%) of the fair market rental value for the Premises
as
37
determined by Landlord or two hundred percent (200%) of the Base Rent last due in this Lease, plus
Additional Rent, and shall otherwise be on the terms and conditions herein specified, so far as
applicable; provided, however, in no event shall any renewal or expansion option or other similar
right or option contained in this Lease be deemed applicable to any such tenancy at sufferance. If
the Premises are not surrendered at the end of the Term or sooner termination of this Lease, and in
accordance with the provisions of Paragraphs 12 and 33(h), Tenant shall indemnify, defend and hold
Landlord harmless from and against any and all loss or liability resulting from delay by Tenant in
so surrendering the Premises including, without limitation, any loss or liability resulting from
any claim against Landlord made by any succeeding tenant or prospective tenant founded on or
resulting from such delay and losses to Landlord due to lost opportunities to lease any portion of
the Premises to any such succeeding tenant or prospective tenant, together with, in each case,
actual attorneys fees and costs.
37.
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Successors and Assigns
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The terms, covenants and conditions of this Lease shall, subject to the provisions as to
assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all
of the parties hereto. If Tenant shall consist of more than one entity or person, the obligations
of Tenant under this Lease shall be joint and several.
Time is of the essence of this Lease and each and every term, condition and provision
herein.
Landlord and Tenant each represents and warrants to the other that neither it nor its officers
or agents nor anyone acting on its behalf has dealt with any real estate broker except the
Broker(s) specified in the Basic Lease Information in the negotiating or making of this Lease, and
each party agrees to indemnify and hold harmless the other from any claim or claims, and costs and
expenses, including attorneys fees, incurred by the indemnified party in conjunction with any such
claim or claims of any other broker or brokers to a commission in connection with this Lease as a
result of the actions of the indemnifying party. Landlord shall be responsible for a commission
payable to Landlords Broker in connection with the execution of this Lease pursuant to a separate
written agreement between Landlord and Landlords Broker, and Landlords Broker shall be solely
responsible for any commission or fee payable to Tenants Broker in connection with this Lease or
the subject matter hereof.
40.
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Limitation of Liability
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Tenant agrees that, in the event of any default or breach by Landlord with respect to any of
the terms of the Lease to be observed and performed by Landlord (1) Tenant shall look solely to the
then-current landlords interest in the Building for the satisfaction of Tenants remedies for the
collection of a judgment (or other judicial process) requiring the payment of money by Landlord;
(2) no other property or assets of Landlord, its partners, shareholders, officers,
38
directors, employees, investment advisors, or any successor in interest of any of them
(collectively, the
Landlord Parties
) shall be subject to levy, execution or other enforcement
procedure for the satisfaction of Tenants remedies; (3) no personal liability shall at any time be
asserted or enforceable against the Landlord Parties; and (4) no judgment will be taken against the
Landlord Parties. The provisions of this section shall apply only to the Landlord and the parties
herein described, and shall not be for the benefit of any insurer nor any other third party.
Within ten (10) days after Landlords request, Tenant shall deliver to Landlord the then
current financial statements of Tenant (including interim periods following the end of the last
fiscal year for which annual statements are available), prepared or compiled by a certified public
accountant, including a balance sheet and profit and loss statement for the most recent prior year,
all prepared in accordance with generally accepted accounting principles consistently applied.
42.
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Rules and Regulations
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Tenant agrees to comply with such reasonable rules and regulations as Landlord may adopt from
time to time for the orderly and proper operation of the Building and the Project; provided that
the rules and regulations shall not be changed or revised or enforced in any discriminatory way by
Landlord, nor changed by Landlord in such a way as to unreasonably interfere with Tenants use of
the Premises. Such rules may include hut shall not be limited to the following: (a) restriction of
employee parking to a limited, designated area or areas; and (b) regulation of the removal, storage
and disposal of Tenants refuse and other rubbish at the sole cost and expense of Tenant. The then
current rules and regulations shall be binding upon Tenant upon delivery of a copy of them to
Tenant. Landlord shall not be responsible to Tenant for the failure of any other person to observe
and abide by any of said rules and regulations; provided; however, that in the event any other
tenant or occupant of the Building or the Project fails to comply with the rules and regulations,
and such non-compliance unreasonably interferes with Tenants use of the Premises, Landlord shall
use reasonable efforts to make such other tenants and/or occupants comply with the rules and
regulations. Landlords current rules and regulations are attached to this Lease as
Exhibit C.
(a)
Modifications for Lender
.
If, in connection with obtaining financing for the Project or
any portion thereof, Landlords lender shall request reasonable modifications to this Lease as a
condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent to
such modifications, provided such modifications do not materially adversely affect Tenants rights
or increase Tenants obligations under this Lease.
(b)
Rights
to Cure
.
Tenant agrees to give to any trust deed or
mortgage holder (
Holder
), by registered mail, at
the same time as it is given to Landlord, a copy of any notice of default
given to Landlord, provided that prior to such notice Tenant has been notified, in writing, (by way
of notice of assignment of rents and leases, or otherwise) of the address of such Holder. Tenant
further agrees that if Landlord shall have failed to cure such default within the time
39
provided for in this Lease, then the Holder shall have an additional twenty (20) days after
expiration of such period, or after receipt of such notice from Tenant (if such notice to the
Holder is required by this Paragraph 43(b)), whichever shall last occur within which to cure such
default or if such default cannot be cured within that time, then such additional time as may be
necessary if within such twenty (20) days, any Holder has commenced and is diligently pursuing the
remedies necessary to cure such default (including, but not limited to, commencement of foreclosure
proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated.
44.
Entire Agreement
This Lease, including the Exhibits and any Addenda attached hereto, which are hereby
incorporated herein by this reference, contains the entire agreement of the parties hereto, and no
representations, inducements, promises or agreements, oral or otherwise, between the parties, not
embodied herein or therein, shall be of any force and effect.
45.
Interest
Any installment of Rent and any other sum due from Tenant under this Lease which is not
received by Landlord within ten (10) days from when the same is due shall bear interest from the
date such payment was originally due under this Lease until paid at an annual rate equal to the
maximum rate of interest permitted by law. Payment of such interest shall not excuse or cure any
Default by Tenant. In addition, Tenant shall pay all costs and attorneys fees incurred by Landlord
in collection of such amounts.
46.
Construction
This Lease shall be construed and interpreted in accordance with the laws of the State of
California. The parties acknowledge and agree that no rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall be employed in the interpretation
of this Lease, including the Exhibits and any Addenda attached hereto. All captions in this Lease
are for reference only and shall not be used in the interpretation of this Lease. Whenever required
by the context of this Lease, the singular shall include the plural, the masculine shall include
the feminine, and vice versa. If any provision of this Lease shall be determined to be illegal or
unenforceable, such determination shall not affect any other provision of this Lease and all such
other provisions shall remain in full force and effect.
47.
Representations and Warranties of Tenant
Tenant hereby makes the following representations and warranties, each of which is material
and being relied upon by Landlord, is true in all respects as of the date of this Lease, and shall
survive the expiration or termination of the Lease.
(a) If Tenant is an entity, Tenant is duly organized, validly existing and in good standing
under the laws of the state of its organization and the persons executing this Lease on behalf
of Tenant have the full right and authority to execute this Lease on behalf of Tenant and to
bind
40
Tenant without the consent or approval of any other person or entity. Tenant has full power,
capacity, authority and legal right to execute and deliver this Lease and to perform all of its
obligations hereunder. This Lease is a legal, valid and binding obligation of Tenant, enforceable
in accordance with its terms.
(b) Tenant has not (1) made a general assignment for the benefit of creditors, (2) filed any
voluntary petition in bankruptcy or suffered the filing of an involuntary petition by any
creditors, (3) suffered the appointment of a receiver to take possession of all or substantially
all of its assets, (4) suffered the attachment or other judicial seizure of all or substantially
all of its assets, (5) admitted in writing its inability to pay its debts as they come due, or (6)
made an offer of settlement, extension or composition to its creditors generally.
48.
Security
(a) Tenant acknowledges and agrees that, while Landlord may engage security personnel to
patrol the Building or the Project, Landlord is not providing any security services with respect to
the Premises, the Building or the Project and that Landlord shall not be liable to Tenant for, and
Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage
suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any
other breach of security with respect to the Premises, the Building or the Project.
(b) Tenant hereby agrees to the exercise by Landlord and Landlords Agents, within their sole
discretion, of such security measures as, but not limited to, the evacuation of the Premises, the
Building or the Project for cause, suspected cause or for drill purposes, the denial of any access
to the Premises, the Building or the Project and other similarly related actions that it deems
necessary to prevent any threat of property damage or bodily injury. The exercise of such security
measures by Landlord and Landlords Agents, and the resulting interruption of service and cessation
of Tenants business, if any, shall not be deemed an eviction or disturbance of Tenants use and
possession of the Premises, or any part thereof, or render Landlord or Landlords Agents liable to
Tenant for any resulting damages or relieve Tenant from Tenants obligations under this Lease.
41
49.
Jury Trial Waiver
Tenant hereby waives any right to trial by jury with respect to any action or proceeding (i)
brought by Landlord, Tenant or any other party, relating to (A) this Lease and/or any
understandings or prior dealings between the parties hereto, or (B) the Premises, the Building or
the Project or any part thereof, or (ii) to which Landlord is a party. Tenant hereby agrees that
this Lease constitutes a written consent to waiver of trial by jury pursuant to the provisions of
California Code of Civil Procedure Section 631, and Tenant does hereby constitute and appoint
Landlord its true and lawful attorney-in-fact, which appointment is coupled with an interest, and
Tenant does hereby authorize and empower Landlord, in the name, place and stead of Tenant, to file
this Lease with the clerk or judge of any court of competent jurisdiction as a statutory written
consent to waiver of trial by jury.
In Witness Whereof,
Landlord and Tenant have executed and delivered this
Lease as of the Lease Date specified in the Basic Lease Information.
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Landlord:
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Harbor Investment Partners,
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a California general partnership
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By:
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Aetna Life Insurance Company,
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a Connecticut corporation,
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its General Partner
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By:
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Allegis Realty Investors
llc,
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its Investment Advisor and Agent
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By:
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/s/ Cynthia Stevenin
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Cynthia Stevenin
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Vice President
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Tenant:
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Financial Engines, Inc.,
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a California corporation
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By:
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/s/
Jeff Maggioncalda
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Name:
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Jeff Maggioncalda
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Title:
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President & CEO
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By:
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Name:
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Title:
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42
Exhibit
A
Diagram of the Premises
Exhibit
B
Commencement
and Expiration Date Memorandum
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Landlord:
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Aetna Life Insurance Company
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Tenant:
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Financial Engines, Inc.
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Lease Date:
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December 7, 1999
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Premises:
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Located at 1830 Embarcadero Road, Palo Alto, California
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Tenant hereby accepts the Premises as being in the condition required under the Lease.
The Commencement Date of the Lease is hereby established as
, 199
and the Expiration Date is
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Tenant:
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Financial Engines, Inc.,
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a California corporation
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By:
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Name:
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Title:
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Approved and Agreed:
Landlord:
Harbor Investment Partners,
a California general partnership
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By:
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Aetna Life Insurance Company,
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a Connecticut corporation,
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its General Partner
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By:
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Allegis Realty Investors
llc,
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its Investment Advisor and Agent
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By:
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Cynthia Stevenin
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Vice President
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B-1
Exhibit
C
Rules and Regulations
This exhibit, entitled Rules and Regulations, is and shall constitute
Exhibit C
to the Lease
Agreement, dated as of the Lease Date, by and between landlord and Tenant for the Premises. The
terms and conditions of this
Exhibit C
are hereby incorporated into and are made a part of the
Lease. Capitalized terms used, but not otherwise defined, in this
Exhibit C
have the meanings
ascribed to such terms in the Lease.
1. Tenant shall not use any method of heating or air conditioning other than that supplied by
Landlord without the consent of Landlord.
2. All window coverings installed by Tenant and visible from the outside of the building
require the prior written approval of Landlord.
3. Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or
substance or any flammable or combustible materials on or around the Premises, except to the extent
that Tenant is permitted to use the same under the terms of Paragraph 33 of the Lease.
4. Tenant shall not alter any lock or install any new locks or bolts on any door at the
Premises without the prior consent of Landlord.
5. Tenant shall not make any duplicate keys without the prior consent of Landlord.
6. Tenant shall park motor vehicles in parking areas designated by Landlord except for loading
and unloading. During those periods of loading and unloading, Tenant shall not unreasonably
interfere with traffic flow around the Building or the Project and loading and unloading areas of
other tenants. Tenant shall not park motor vehicles in designated parking areas after the
conclusion of normal daily business activity.
7. Tenant shall not disturb, solicit or canvas any tenant or other occupant of the Building or
Project and shall cooperate to prevent same.
8. No person shall go on the roof without Landlords permission.
9. Business machines and mechanical equipment belonging to Tenant which cause noise or
vibration that may be transmitted to the structure of the Building, to such a degree as to be
objectionable to Landlord or other tenants, shall be placed and maintained by Tenant, at Tenants
expense, on vibration eliminators or in noise-dampening housing or other devices sufficient to eliminate noise or vibration.
10. All goods, including material used to store goods, delivered to the Premises of Tenant
shall be immediately moved into the Premises and shall not be left in parking or receiving areas
overnight.
C-1
11. Tractor trailers which must be unhooked or parked with dolly wheels beyond the concrete
loading areas must use steel plates or wood blocks under the dolly wheels to prevent damage to the
asphalt paving surfaces. No parking or storing of such trailers will be permitted in the auto
parking areas of the Project or on streets adjacent thereto.
12. Forklifts which operate on asphalt paving areas shall not have solid rubber tires and
shall only use tires that do not damage the asphalt.
13. Tenant is responsible for the storage and removal of all trash and refuse. All such trash
and refuse shall be contained in suitable receptacles stored behind screened enclosures at
locations approved by Landlord.
14. Tenant
shall not store or permit the storage or placement of goods or merchandise in or
around the common areas surrounding the Premises. No displays or
sales of merchandise shall be allowed in the parking lots or other common areas.
15. Tenant shall not permit any animals, including, but not limited to, any household pets, to
be brought or kept in or about the Premises, the Building, the Project or any of the common areas.
C-2
Exhibit
D
Hazardous Materials Disclosure Certificate
Your cooperation in this matter is appreciated. Initially, the information provided by you in
this Hazardous Materials Disclosure Certificate is necessary for the Landlord to evaluate your
proposed uses of the premises (the
Premises
) and to determine whether to enter into a lease
agreement with you as tenant. If a lease agreement is signed by you and the Landlord (the
Lease
Agreement
), on an annual basis in accordance with the provisions of Paragraph 33 of the Lease
Agreement, you are to provide an update to the information initially provided by you in this
certificate. Any questions regarding this certificate should be directed to, and when completed,
the certificate should be delivered to:
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Landlord:
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Harbor Investment Partners
c/o Allegis Realty Investors
llc
455 Market Street,
Suite 1540
San Francisco,
California 94105
Attention:
Cynthia Stevenin
Phone: (415)
538-4800
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Name of (Prospective) Tenant:
Mailing Address:
Contact Person, Title and Telephone Number(s):
Contact Person for Hazardous Waste Materials Management and Manifests and Telephone
Number(s):
Address of (Prospective) Premises:
Length of (Prospective) initial Term:
Describe the proposed operations to take place in, on, or about the Premises,
including, without limitation, principal products processed, manufactured or assembled,
and services and activities to be provided or otherwise conducted. Existing tenants should
describe any proposed changes to on-going operations.
D-1
2.
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USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS
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2.1
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Will any Hazardous Materials (as hereinafter defined) be used, generated,
treated, stored or disposed of in, on or about the Premises? Existing tenants should
describe any Hazardous Materials which continue to be used, generated, treated,
stored or disposed of in, on or about the Premises.
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Wastes
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Yes
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No
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Chemical Products
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Yes
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No
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Other
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Yes
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No
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If Yes is marked, please explain:
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2.2
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If Yes is marked in Section 2.1, attach a list of any Hazardous Materials to be
used, generated, treated, stored or disposed of in, on or about the Premises,
including the applicable hazard class and an estimate of the quantities of such
Hazardous Materials to be present on or about the Premises at any given time;
estimated annual throughput; the proposed location(s) and method of storage
(excluding nominal amounts of ordinary household cleaners and janitorial
supplies which are not regulated by any Environmental Laws, as hereinafter
defined); and the proposed location(s) and method(s) of treatment or disposal for
each Hazardous Material, including, the estimated frequency, and the proposed
contractors or subcontractors. Existing tenants should attach a list setting forth
the information requested above and such list should include actual
data from on-going operations and the identification of any variations in such information from
the prior years certificate.
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3.
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STORAGE TANKS AND SUMPS
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3.1
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Is any above or below ground storage or treatment of gasoline, diesel,
petroleum, or other Hazardous Materials in tanks or sumps proposed in, on or about the
Premises? Existing tenants should describe any such actual or proposed activities.
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Yes
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No
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If yes, please explain:
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D-2
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4.1
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Has your company been issued an EPA Hazardous Waste Generator I.D. Number?
Existing tenants should describe any additional identification numbers issued
since the previous certificate.
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Yes
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No
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4.2
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Has your company filed a biennial or quarterly reports as a hazardous waste
generator? Existing tenants should describe any new reports filed.
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Yes
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No
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If yes, attach a copy of the most recent report filed.
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5.
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WASTEWATER TREATMENT AND DISCHARGE
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5.1
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Will your company discharge wastewater or other wastes to:
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storm drain?
sewer?
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surface water?
no wastewater or other wastes discharged.
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Existing tenants should indicate any actual discharges. If so, describe the nature
of any proposed or actual discharge(s).
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5.2
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Will any such wastewater or waste be treated before discharge?
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Yes
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No
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If yes, describe the type of treatment proposed to be conducted. Existing tenants
should describe the actual treatment conducted.
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D-3
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6.1
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Do you plan for any air filtration systems or stacks to be used in your
companys operations in, on or about the Premises that will discharge into the air;
and will such air emissions be monitored? Existing tenants should indicate whether or
not there are any such air filtration systems or stacks in use in, on or about the
Premises which discharge into the air and whether such air emissions are being
monitored.
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Yes
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No
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If yes, please describe:
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6.2
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Do you propose to operate any of the following types of equipment, or any
other equipment requiring an air emissions permit? Existing tenants should specify any
such equipment being operated in, on or about the Premises.
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Spray booth(s)
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Incinerator(s)
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Dip tank(s)
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Other (Please describe)
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Drying oven(s)
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No Equipment Requiring Air Permits
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If yes, please describe:
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6.3
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Please describe (and submit copies of with this Hazardous Materials Disclosure
Certificate) any reports you have filed in the past [thirty-six] months with any
governmental or quasi-governmental agencies or authorities related to air discharges or
clean air requirements and any such reports which have been issued during such period
by any such agencies or authorities with respect to you or your business operations.
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D-4
7.
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HAZARDOUS MATERIALS DISCLOSURES
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7.1
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Has your company prepared or will it be required to prepare a Hazardous
Materials management plan (
Management Plan
) or Hazardous Materials
Business Plan and Inventory (
Business Plan
) pursuant to Fire Department or
other governmental or regulatory agencies requirements? Existing tenants should
indicate whether or not a Management Plan is required and has been prepared.
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Yes
o
No
o
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If yes, attach a copy of the Management Plan or Business Plan. Existing tenants
should attach a copy of any required updates to the Management Plan or Business
Plan.
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7.2
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Are any of the Hazardous Materials, and in particular chemicals, proposed to be
used in your operations in, on or about the Premises listed or regulated under
Proposition 65? Existing tenants should indicate whether or not there are any new
Hazardous Materials being so used which are listed or regulated under Proposition
65.
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Yes
o
No
o
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If yes, please explain:
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8.
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ENFORCEMENT ACTIONS AND COMPLAINTS
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8.1
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With respect to Hazardous Materials or Environmental Laws, has your company
ever been subject to any agency enforcement actions, administrative orders, or
consent decrees or has your company received requests for information, notice or
demand letters, or any other inquiries regarding its operations? Existing tenants
should indicate whether or not any such actions, orders or decrees have been, or are
in the process of being, undertaken or if any such requests have been received.
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Yes
o
No
o
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If yes, describe the actions, orders or decrees and any continuing compliance
obligations imposed as a result of these actions, orders or decrees and also
describe any requests, notices or demands, and attach a copy of all such
documents. Existing tenants should describe and attach a copy of any new actions,
orders, decrees, requests, notices or demands not already delivered to Landlord
pursuant to the provisions of Paragraph 33 of the Lease Agreement.
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D-5
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8.2
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Have there ever been, or are there now pending, any lawsuits against your
company regarding any environmental or health and safety concerns?
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Yes
o
No
o
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If yes, describe any such lawsuits and attach copies of the complaint(s),
cross-complaint(s), pleadings and other documents related thereto as requested by
Landlord. Existing tenants should describe and attach a copy of any new
complaint(s), cross-complaint(s), pleadings and other related documents not already
delivered to Landlord pursuant to the provisions of Paragraph 33 of the Lease
Agreement:
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8.3
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Have there been any problems or complaints from adjacent tenants, owners or
other neighbors at your companys current facility with regard to environmental
or health and safety concerns? Existing tenants should indicate whether or not
there have been any such problems or complaints from adjacent tenants, owners
or other neighbors at, about or near the Premises and the current status of any
such problems or complaints.
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Yes
o
No
o
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If yes, please describe. Existing tenants should describe any such problems or
complaints not already disclosed to Landlord under the provisions of the signed
Lease Agreement and the current status of any such problems or complaints.
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9.1
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Attach copies of all permits and licenses issued to your company with respect
to its proposed operations in, on or about the Premises, including, without
limitation, any Hazardous Materials permits, wastewater discharge permits, air
emissions permits, and use permits or approvals. Existing tenants should attach copies
of any new permits and licenses as well as any renewals of permits or licenses
previously issued.
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As used herein,
Hazardous Materials
shall mean and include any substance that is or contains
(a) any hazardous substance as now or hereafter defined in § 101(14) of the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended (
CERCLA
) (42 U.S.C. §
9601
et seq.)
or any regulations promulgated under CERCLA; (b) any hazardous waste as now or
hereafter defined in the Resource Conservation and Recovery Act,
D-6
as amended (RCRA) (42 U.S.C. § 6901
et seq.)
or any regulations promulgated under RCRA; (c) any
substance now or hereafter regulated by the Toxic Substances Control Act, as amended (TSCA) (15
U.S.C. § 2601
et seq.)
or any regulations promulgated under TSCA; (d) petroleum, petroleum
by-products, gasoline, diesel fuel, or other petroleum hydrocarbons; (e) asbestos and
asbestos-containing material, in any form, whether friable or non-friable; (f) polychlorinated
biphenyls; (g) lead and lead-containing materials; or (h) any additional substance, material or
waste (A) the presence of which on or about the Premises (i) requires reporting, investigation or
remediation under any Environmental Laws (as hereinafter defined), (ii) causes or threatens to
cause a nuisance on the Premises or any adjacent property or poses or threatens to pose a hazard to
the health or safety of persons on the Premises or any adjacent property, or (iii) which, if it
emanated or migrated from the Premises, could constitute a trespass, or (B) which is now or is
hereafter classified or considered to be hazardous or toxic under any Environmental Laws; and
Environmental Laws
shall mean and include (a) CERCLA, RCRA and TSCA; and (b) any other federal,
state or local laws, ordinances, statutes, codes, rules, regulations, orders or decrees now or
hereinafter in effect relating to (i) pollution, (ii) the protection or regulation of human health,
natural resources or the environment, (iii) the treatment, storage or disposal of Hazardous
Materials, or (iv) the emission, discharge, release or threatened release of Hazardous Materials
into the environment.
The undersigned hereby acknowledges and agrees that this Hazardous Materials Disclosure
Certificate is being delivered to Landlord in connection with the evaluation of a Lease
Agreement and, if such Lease Agreement is executed, will be attached thereto as an exhibit. The
undersigned further acknowledges and agrees that if such Lease Agreement is executed, this
Hazardous Materials Disclosure Certificate will be updated from time to time in accordance with
Paragraph 33 of the Lease Agreement. The undersigned further acknowledges and agrees that the
Landlord and its partners, lenders and representatives may, and will, rely upon the statements,
representations, warranties, and certifications made herein and the truthfulness thereof in
entering into the Lease Agreement and the continuance thereof throughout the term, and any
renewals thereof, of the Lease Agreement. I [print name]
, acting with full authority to
bind the (proposed) Tenant and on behalf of the (proposed) Tenant, certify, represent and
warrant that the information contained in this certificate is true and correct.
(Prospective) Tenant:
Financial Engines, Inc.,
a California corporation
D-7
First Amendment to Lease
This First Amendment to Lease
(this
Amendment
) is entered into effective as of
September 1, 2006 (the
Effective Date
), by and between
Harbor Investment Partners,
a
California general partnership (
Landlord
), and
Financial Engines, Inc.,
a California
corporation (
Tenant
).
Recitals
A. Tenant and Landlord entered into that certain Lease Agreement dated December 7, 1999 (the
Lease
), which covers certain premises consisting of approximately thirty-two thousand seven
hundred forty-two (32,742) rentable square feet (the
Premises
) in the building located at 1830
Embarcadero Road, Palo Alto, California. Capitalized terms used but not defined herein shall have
the meanings ascribed to them in the Lease.
B. Landlord and Tenant have also previously entered into that certain Lease Agreement, dated
as of July 14, 1997, as amended by a First Amendment to Lease, dated as of November 24, 1998, a
Second Amendment to Lease, dated as of November 15, 1999, a Third Amendment to Lease, dated as of
June 5, 2000, and a Fourth Amendment to Lease, dated as of March 15, 2002 (collectively, the
1804
Lease
), which Lease covers certain premises consisting of approximately nineteen thousand seven
hundred eighty-nine (19,789) rentable square feet located at
1804 Embarcadero Road, Palo Alto, California 94303 (the
1804 Premises
).
C. The Lease and the 1804 Lease currently expire on April 30, 2007.
D. Landlord and Tenant desire to amend the Lease to modify the Base Rent and extend the Term,
subject to each of the terms, conditions, and provisions set forth herein.
Agreement
Now Therefore,
in consideration of the agreements of Landlord and Tenant herein
contained and other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1.
Lease Term
The Term of the Lease is hereby extended for a period of approximately sixty-four (64) months,
commencing on May 1, 2007 and ending on August 31, 2012.
1
2.
Base Rent
Commencing on the Effective Date, the Base Rent shall be payable by Tenant to Landlord in
accordance with the schedule set forth below:
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Monthly
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Monthly
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Period
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Sq. Ft.
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Base Rate
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Base Rent
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September 1, 2006 August 31, 2007
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32,742
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x$1.55
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= $50,750.10
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September 1, 2007 August 31, 2008
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32,742
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x$1.60
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= $52,387.20
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September 1, 2008 August 31, 2009
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32,742
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x$1.65
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= $54,024.30
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September 1, 2009 August 31, 2010
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32,742
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x$1.70
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= $55,661.40
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September 1, 2010 August 31, 2011
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32,742
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x$1.75
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= $57,298.50
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September 1, 2011 August 31, 2012
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32,742
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x$1.80
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= $58,935.60
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(b) Within five (5) business days following the execution of this Amendment by the parties
hereto, Landlord shall return to Tenant an amount equal to the difference between the Base Rent
actually paid by Tenant and the Base Rent set forth above, in each case for the months of September
and October, 2006.
3.
Additional Rent.
Tenant shall continue to pay Additional Rent to Landlord in accordance with Paragraph 4(b) of
the Lease. Nothing contained herein shall be deemed to modify Tenants obligations under Paragraph
4(b).
4.
Improvements to Premises and
1804
Premises
(a) Tenant has notified Landlord of Tenants desire to make Alterations to the Premises and
the 1804 Premises, generally described as follows (collectively, the
Specified Alterations
):
(i) Carpeting shall be cleaned or replaced in high traffic areas;
(ii) Interior walls shall be touched up with fresh paint where required;
(iii) The window in the server room in the Premises (the
Server Room
) shall be replaced
with a wall;
(iv) The walls around the Server Room shall be extended to the ceiling;
(v) The
carpeting in the Server Room shall be replaced with vinyl flooring;
(vi) The exterior windows in the telecommunications room in the Premises (the
Telco Room
)
shall be replaced with a wall;
2
(vii) All telecommunications drop points in the Telco Room that do not support Tenant shall be
removed or relocated; and
(viii) Such additional improvements as may be requested by Tenant and approved by Landlord in
accordance with the first sentence of Paragraph 13(a) of the Lease.
(b) Tenant shall have the right to make the Specified Alterations, provided that the same are
performed and constructed in full compliance with the terms and conditions of Paragraphs 13(b)
through (f) of the Lease, including, without limitation, to the extent applicable, the review and
approval by Landlord of plans and specifications (which approval shall not be unreasonably
withheld, conditioned or delayed) and the obtaining by Tenant of all required governmental permits
and approvals. Landlord shall have the right to approve the general contractor employed in the
construction and installation of the Improvements (which approval shall not be unreasonably
withheld, conditioned or delayed).
(c) Tenant shall be entitled to an improvement allowance (the
Allowance
) to pay the cost of
the Specified Alterations in the Premises and the 1830 Premises. The Allowance shall be in the
aggregate amount of up to Two Hundred Ten Thousand One Hundred Twenty-Four Dollars ($210,124.00).
For purposes of clarification, the Allowance described herein is the same Allowance that is
provided under the 1830 Lease and Tenant shall be entitled to a total sum not to exceed Two Hundred
Ten Thousand One Hundred Twenty-Four Dollars ($210,124.00). The Allowance shall be applied solely
toward the hard and soft costs incurred by Tenant in designing and constructing the Specified
Alterations, but shall not be used to pay for Tenants personal property, equipment or other items
of Tenants Property. Landlord shall disburse the Allowance to Tenant following the completion of
the Specified Alterations in a lien-free condition and in accordance with all Laws (to the extent
applicable), and the delivery to Landlord of receipts, lien waivers and other documents reasonably
requested by Landlord to substantiate the actual cost of the Specified Alterations. In the event
the costs of the Specified Alterations shall be less than the amount of the Allowance, then the
Allowance shall be reduced to the actual amount of the Specified Alterations.
5.
Maintenance and Repair of Roof
Promptly following the execution of this Amendment, Landlord shall cause Landlords roofing
consultant (the
Consultant
) to perform an inspection of the roof and to provide Landlord with its
recommendations for necessary repairs to remedy the past leaks experienced by Tenant.
Notwithstanding the foregoing, if the Consultant has performed an inspection of the roof within the
one hundred eighty (180) day period prior to the Effective Date, then Landlord may rely on the
results of that inspection and the Consultant shall not be required to perform a new inspection at
this time. Landlord shall perform the repairs recommended by the Consultant as soon as reasonably
practicable following the Effective Date.
6.
Surrender
Provided that Landlord approves all Alterations hereafter made to the Premises by Tenant
(excluding the Specified Alterations); and provided, further, that any future Alterations are
office and R&D improvements similar to the improvements then existing in similar buildings in the
3
vicinity of the Project (as determined by Landlord in good faith), then notwithstanding anything to the contrary contained in the Lease, Landlord shall not have the right to require Tenant to remove such Alterations (or any Alterations previously made by Tenant to the Premises) at the expiration of the Term, and Tenant shall surrender all such Alterations to Landlord at the expiration or sooner termination of the Lease.
7.
Letter of Credit; Return of Existing Security Deposit
(a) Landlord currently holds a Security Deposit from Tenant, consisting of cash and letters of
credit (collectively, the
Existing Letters of Credit),
pursuant to the terms of the Lease and the
1804 Lease, in the aggregate amount of One Million Forty-Three Thousand Three Hundred Ninety-Five
Dollars ($1,043,395.00) (the
Existing Security Deposit).
Concurrently with the execution of this
Amendment and the cancellation of the Existing Letters of Credit, Tenant shall deliver to Landlord,
at Tenants sole cost and expense, the Letter of Credit described below in the amount of Five
Hundred Fifty Thousand Dollars ($550,000.00) (the
LC Face Amount)
as security for Tenants
performance of all of Tenants covenants and obligations under the Lease and the 1804 Lease;
provided, however, that neither the Letter of Credit nor any Letter of Credit Proceeds (as defined
below) shall be deemed an advance rent deposit or an advance payment of any other kind, or a
measure of Landlords damages upon Tenants Default hereunder or under the 1804 Lease. The Letter
of Credit (or a replacement thereof satisfying the requirements of this Section) shall be
maintained in effect from the date hereof through the date that is thirty (30) days after the
expiration of the Lease and the 1804 Lease (the
LC Termination Date).
On the LC Termination Date,
Landlord shall return to Tenant the Letter of Credit and any Letter of Credit Proceeds then held by
Landlord (other than those Letter of Credit Proceeds Landlord is entitled to retain under the terms
of this Section); provided, however, that in no event shall any such return be construed as an
admission by Landlord that Tenant has performed all of its obligations hereunder or under the 1804
Lease. Landlord shall not be required to segregate the Letter of Credit Proceeds from its other
funds and no interest shall accrue or be payable to Tenant with respect thereto. Landlord may (but
shall not be required to) draw upon the Letter of Credit in such amount as is necessary, and shall
use the proceeds therefrom (the
Letter of Credit Proceeds)
or any portion thereof, to cure any
default under the Lease and/or under the
1804 Lease and to compensate Landlord for any loss or damage Landlord incurs as a result of such
default, it being understood that any use of the Letter of Credit Proceeds shall not constitute a
bar or defense to any of Landlords remedies set forth under the Lease or under the 1804 Lease. In
such event and upon written notice from Landlord to Tenant specifying the amount of the Letter of
Credit Proceeds so utilized by Landlord and the particular purpose for which such amount was
applied, Tenant shall immediately deliver to Landlord an amendment to the Letter of Credit or a
replacement Letter of Credit in an amount equal to the full LC Face Amount. Tenants failure to
deliver such replacement Letter of Credit to Landlord within ten (10) days of Landlords notice
shall constitute a Default hereunder and under the 1804 Lease. In the event Landlord transfers its
interest in the Lease and the 1804 Lease, Landlord shall transfer the Letter of Credit and any
Letter of Credit Proceeds then held by Landlord to Landlords successor in interest, and thereafter
Landlord shall have no further liability to Tenant with respect to such Letter of Credit or Letter
of Credit Proceeds.
(b) As used herein, Letter of Credit shall mean an unconditional, stand-by irrevocable letter
of credit (herein referred to as the
Letter of Credit)
issued by Silicon Valley Bank or the
4
San Francisco Bay Area office of a major national bank insured by the Federal Deposit Insurance
Corporation and otherwise reasonably satisfactory to Landlord (the
Bank),
naming Landlord as
beneficiary, in the amount of the LC Face Amount, and otherwise in form and substance satisfactory
to Landlord. The Letter of Credit shall be for a one-year term and shall provide: (i) that Landlord
may make partial and multiple draws thereunder, up to the face amount thereof, (ii) that Landlord
may draw upon the Letter of Credit up to the full amount thereof and the Bank will pay to Landlord
the amount of such draw upon receipt by the Bank of a sight draft signed by Landlord and
accompanied by a written certification from Landlord to the Bank stating either that: (A) a Default
has occurred and is continuing under the Lease and/or under the 1804 Lease and any applicable grace
period has expired, or (B) Landlord has not received notice from the Bank at least thirty (30) days
prior to the then current expiry date of the Letter of Credit that the Letter of Credit will be
renewed by the Bank for at least one (1) year beyond the relevant annual expiration date or, in the
case of the last year of the Term, thirty (30) days after the Expiration Date, together with a
replacement Letter of Credit or a modification to the existing Letter of Credit effectuating such
renewal, and Tenant has not otherwise furnished Landlord with a replacement Letter of Credit as
hereinafter provided; and (iii) that the beneficial interest under the Letter of Credit shall be
transferable one or more times without cost (other than a transfer fee assessed by the Bank in an
amount not to exceed 1/4 of one percent (1%) of the LC Face Amount at the time of the transfer,
which fee shall be paid by Landlord) and, therefore, in the event of Landlords (or any successor
Landlords) assignment or other transfer of its interest in the Lease, the Letter of Credit shall
be transferable by Landlord (or any successor Landlord), without recourse, to the assignee or
transferee of such interest and the Bank shall confirm the same to Landlord (or such successor) and
such assignee or transferee. In the event that the Bank shall fail to (y) notify Landlord that the
Letter of Credit will be renewed for at least one (1) year beyond the then applicable expiration
date, and (z) deliver to Landlord a replacement Letter of Credit or a modification to the existing
Letter of Credit effectuating such renewal, and Tenant shall not have otherwise delivered to
Landlord, at least thirty (30) days prior to the relevant annual expiration date, a replacement
Letter of Credit in the amount required hereunder and otherwise meeting the requirements set forth
above, then Landlord shall be entitled to draw on the Letter of Credit as provided above, and shall
hold the proceeds of such draw as Letter of Credit Proceeds pursuant to Section 7(a) above.
(c) Tenant hereby waives the provisions of California Civil Code Section 1950.7 (other than
subsection (b) thereof) and/or any successor statute, it being expressly agreed that Landlord may
apply all or any portion of the Letter of Credit or the proceeds thereof in payment of any and all
sums reasonably necessary to compensate Landlord for any other loss or damage, foreseeable or
unforeseeable, caused by the act or omission of Tenant or any officer, employee, agent or invitee
of Tenant, and that following a Default by Tenant, all or any portion of the Letter of Credit or
the proceeds thereof may be retained by Landlord following a termination of the Lease and applied
to future damages, including damages for future rent, pending determination of the same
(d) Within five (5) business days following Landlords receipt of the Letter of Credit
specified under Section 7(a) above, Landlord shall return the Existing Security Deposit to Tenant
(excluding the Existing Letters of Credit, which shall be cancelled as provided in Section 6(a)
above), and Paragraphs 7 and 8 of the Lease and Paragraphs 7 and 8 of the 1804 Lease shall be of no
further force and effect.
5
8.
Assignment and Subletting
Paragraph 24 of the Lease is hereby deleted in its entirety and the following provision is
hereby substituted therefor:
(a) Tenant shall not voluntarily or by operation of law, (i) mortgage, pledge,
hypothecate or encumber this Lease or any interest herein, (ii) assign or transfer
this Lease or any interest herein, sublease the Premises or any part thereof, or
any right or privilege appurtenant thereto, or allow any other person (the
employees and invitees of Tenant excepted) to occupy or use the Premises, or any
portion thereof, without first obtaining the written consent of Landlord, which
consent shall not be unreasonably withheld, as set forth below in this Paragraph
24; provided, however, that Tenant is not then in Default under this Lease nor is
any event then occurring which with the giving of notice or the passage of time, or
both, would constitute a Default hereunder. Any other provision of the Lease
notwithstanding, Tenant shall have the right to market the Premises in a manner
consistent with other sublease marketing campaigns approved by other landlords of
similarly- situated premises similar in quality to, and in the vicinity of, the
Project, including, if applicable, the use of sublease marketing signage, subject
to the reasonable approval of Landlord.
(b) When Tenant requests Landlords consent to an assignment or subletting, it
shall notify Landlord in writing of the name and address of the proposed assignee
or subtenant and the nature and character of the business of the proposed assignee
or subtenant and shall provide current and one (1) years prior financial
statements for the proposed assignee or subtenant, which financial statements shall
be audited to the extent available and shall in any event be prepared in accordance
with generally accepted accounting principles. Tenant shall also provide Landlord
with a copy of the proposed sublease or assignment agreement, including all
material terms and conditions thereof. Landlord shall have the option, to be
exercised within fifteen (15) business days of receipt of the foregoing, to consent
to the proposed assignment or sublease, or refuse its consent to the proposed
assignment or sublease, provided that (A) such consent shall not be unreasonably
withheld so long as Tenant is not then in Default under this Lease nor is any event
then occurring which, with the giving of notice or the passage of time, or both,
would constitute a Default hereunder, and (B) as a condition to providing such
consent, Landlord may require attornment from the proposed subtenant on terms and
conditions acceptable to Landlord.
(c) Without otherwise limiting the criteria upon which Landlord may withhold
its consent, Landlord shall be entitled to consider all reasonable criteria
including, but not limited to, the following: (i) whether or not the proposed
subtenant or assignee is engaged in a business which, and the use of the Premises
will be in an manner which, is in keeping with the then character and nature of all
other tenancies in the Project; (ii) whether the use
6
to be made of the Premises by the proposed subtenant or assignee will conflict with any
so-called exclusive use then in favor of any other tenant of the Building or the
Project, and whether such use would be prohibited by any other portion of this Lease,
including, but not limited to, any rules and regulations then in effect, or under
applicable Laws, and whether such use imposes a greater load upon the Premises and the
Building and the Project services than imposed generally by other tenancies in the
Project; and (iii) the creditworthiness and financial stability of the proposed assignee
or subtenant in light of the responsibilities involved. In any event, Landlord may
withhold its consent to any assignment or sublease, if (A) the actual use proposed to be
conducted in the Premises or portion thereof conflicts with the provisions of Paragraphs
10(a) or (b) above or with any other lease which restricts the use to which any space in
the Building or the Project may be put; (B) the proposed assignment or sublease requires
alterations, improvements or additions to the Premises or portions thereof; (C) the
portion of the Premises proposed to be sublet is irregular in shape and/or does not
permit safe or otherwise appropriate means of ingress and egress, or does not comply
with governmental safety and other codes; or (D) the proposed sublessee or assignee is
either a governmental or quasi-governmental agency or instrumentality thereof.
(d) If Landlord approves an assignment or subletting as herein provided, Tenant
shall pay to Landlord, as Additional Rent, fifty percent (50%) of the excess, if any, of
(i) the rent and any additional rent payable by the assignee or sublessee to Tenant,
less reasonable and customary marketing expenditures, brokerage commissions and
attorneys fees incurred by Tenant in connection with such assignment or sublease; minus
(ii) Base Rent plus Additional Rent allocable to that part of the Premises affected by
such assignment or sublease pursuant to the provisions of this Lease, which costs shall,
for purposes of the aforesaid calculation, be amortized on a straight- line basis over
the term of such assignment or sublease. The assignment or sublease agreement, as the
case may be, after approval by Landlord, shall not be amended without Landlords prior
written consent, and shall contain a provision directing the assignee or subtenant to
pay the rent and other sums due thereunder directly to Landlord upon receiving written
notice from Landlord that Tenant is in default under this Lease with respect to the
payment of Rent. In the event that, notwithstanding the giving of such notice, Tenant
collects any rent or other sums from the assignee or subtenant, then Tenant shall hold
such sums in trust for the benefit of Landlord and shall immediately forward the same to
Landlord. Landlords collection of such rent and other sums shall not constitute an
acceptance by Landlord of attornment by such assignee or subtenant.
(e) Notwithstanding any assignment or subletting, Tenant and any guarantor or
surety of Tenants obligations under this Lease shall at all times remain fully and
primarily responsible and liable for the payment of the Rent and for compliance with all
of Tenants other obligations under this Lease
7
(regardless of whether Landlords approval has been obtained for any such assignment or
subletting).
(f) Tenant shall reimburse Landlord for its out-of-pocket, reasonable costs
(including, without limitation, the reasonable fees of Landlords counsel), actually
incurred in connection with Landlords review and processing of documents regarding any
proposed assignment or sublease.
(g) A consent to one assignment, subletting, occupation or use shall not be deemed
to be a consent to any other or subsequent assignment, subletting, occupation or use,
and consent to any assignment or subletting shall in no way relieve Tenant of any
liability under this Lease. Any assignment or subletting without Landlords consent
shall be void, and shall, at the option of Landlord, constitute a Default under this
Lease.
(h) Tenant acknowledges and agrees that the restrictions, conditions and
limitations imposed by this Paragraph 24 on Tenants ability to assign or transfer this
Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or
assign any right or privilege appurtenant to the Premises, or to allow any other person
to occupy or use the Premises or any portion thereof, are, for the purposes of
California Civil Code Section 1951.4, as amended from time to time, and for all other
purposes, reasonable at the time that this Lease was entered into, and shall be deemed
to be reasonable at the time that Tenant seeks to assign or transfer this Lease or any
interest herein, to sublet the Premises or any part thereof, to transfer or assign any
right or privilege appurtenant to the Premises, or to allow any other person to occupy
or use the Premises or any portion thereof.
(i) If this Lease is assigned, whether or not in violation of the provisions of
this Lease, Landlord may collect Rent from the assignee. If the Premises or any part
thereof is sublet or used or occupied by anyone other than Tenant, whether or not in
violation of this Lease, Landlord may, after a Default by Tenant, collect Rent from the
subtenant or occupant. In either event, Landlord may apply the net amount collected to
Rent, but no such assignment, subletting, occupancy or collection shall be deemed a
waiver of any of the provisions of this Paragraph 24, or the acceptance of the assignee,
subtenant or occupant as tenant, or a release of Tenant from the further performance by
Tenant of Tenants obligations under this Lease. The consent by Landlord to an
assignment, mortgaging, pledging, encumbering, transfer, use, occupancy or subletting
pursuant to any provision of this Lease shall not, except as otherwise provided herein,
in any way be considered to relieve Tenant from obtaining the express consent of
Landlord to any other or further assignment, mortgaging, pledging, encumbering,
transfer, use, occupancy or subletting. References in this Lease to use or occupancy by
anyone other than Tenant shall not be construed as limited to subtenants and those
claiming under or through subtenants but as including also licensees or others claiming
under or through Tenant, immediately or remotely. The
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listing of any name other than that of Tenant on any door of the Premises or on
any directory or in any elevator in the Building, or otherwise, shall not,
except as otherwise provided herein, operate to vest in the person so named any
right or interest in this Lease or in the Premises, or be deemed to constitute,
or serve as a substitute for, or any waiver of, any prior consent of Landlord
required under this Paragraph 24.
(j) Each subletting and/or assignment pursuant to this Paragraph shall
be subject to all of the covenants, agreements, terms, provisions and
conditions contained in this Lease. If Landlord shall consent to, or reasonably
withhold its consent to, any proposed assignment or sublease, Tenant shall
indemnify, defend and hold harmless Landlord against and from any and all loss,
liability, damages, costs and expenses (including reasonable counsel fees)
resulting from any claims that may be made against Landlord by the proposed
assignee or sublessee or by any brokers or other persons claiming a commission
or similar fee in connection with the proposed assignment or sublease.
9.
Option to Renew
(a) All previous rights or options to renew contained in the Lease are null, void and of no
force or effect from and after the date hereof.
(b) Tenant shall have one (1) option (the
Renewal Option)
to extend the Term for a period of
five (5) years beyond the Expiration Date (the
Renewal Term
). The Renewal Option is personal to
Financial Engines, Inc. and may not be exercised by any other sublessee or assignee, or by any
other successor or assign of Financial Engines, Inc. The Renewal Option shall be effective only if
Tenant is not in Default under the Lease, nor has any event occurred which with the giving of
notice or the passage of time, or both, would constitute a default hereunder, either at the time of
exercise of the Renewal Option or at the commencement of the Renewal Term. The Renewal Option must
be exercised, if at all, by written notice (
Election Notice
) from Tenant to Landlord given not
more than twelve (12) months nor less than nine (9) months prior to the expiration of the Term. Any
such notice given by Tenant to Landlord shall be irrevocable. If Tenant fails to exercise the
Renewal Option in a timely manner as provided for above, the Renewal Option shall be void. The
Renewal Term shall be upon the same terms and conditions as the initial Term, except that (i) no
further Renewal Option shall be available to Tenant at the expiration of the Renewal Term, and (ii)
the Base Rent during the Renewal Term (the
Renewal Rate
) shall be equal to one hundred percent
(100%) of the prevailing market rate for space in similarly situated buildings in the vicinity of
the Project comparable to the Building in location, condition, quality and type at the commencement
of the Renewal Term (the
Prevailing Rate
). The term prevailing market rate shall mean the base
rental for such comparable space, taking into account any additional rental and all other payments
and escalations payable hereunder and by tenants under leases of such comparable space. The
Prevailing Rate shall be determined in accordance with Section 9(c) below.
(c) Within thirty (30) days after Landlords receipt of the Election Notice or as soon
thereafter as is reasonably practicable, Landlord shall notify Tenant in writing (the
Renewal Rate
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Notice)
of Landlords determination of the Renewal Rate for the Renewal Term. Tenant shall have
thirty (30) days (the
Response Period)
after receipt of the Renewal Rate Notice to advise
Landlord whether or not Tenant agrees with Landlords Renewal Rate. If Tenant does not respond to
Landlord in writing within the Response Period, then Tenant shall be deemed to have accepted the
Renewal Rate specified by Landlord in the Renewal Rate Notice. If Tenant agrees or is deemed to
have agreed with Landlords determination of the Renewal Rate, then such determination shall be
final and binding on the parties. If Tenant notifies Landlord in writing during the Response Period
that Tenant disagrees with Landlords determination of the Renewal Rate, then within twenty (20)
days after Landlords receipt of Tenants written notice, Landlord and Tenant shall each retain a
licensed commercial real estate broker with at least five (5) years experience negotiating lease
transactions for similar properties in the City of Palo Alto. If only one broker is appointed by
the parties during such twenty (20) day period, then such broker shall, within twenty (20) days
after his or her appointment, determine the Prevailing Rate, and the Renewal Rate shall be the
Prevailing Rate so determined by such broker. If Landlord and Tenant each appoint a broker during
such twenty (20) day period as contemplated hereunder, then the brokers shall meet at least two (2)
times during the thirty (30) day period commencing on the date on which the last of the brokers has
been appointed (the
Broker Negotiation Period)
to attempt to mutually agree upon the Prevailing
Rate. If the brokers agree upon the Prevailing Rate on or before the expiration of the Broker
Negotiation Period, then the Prevailing Rate so determined by the brokers shall be the Renewal
Rate for all purposes of the Lease. If the brokers cannot agree upon the Prevailing Rate at the
expiration of the Broker Negotiation Period, but if the determinations of such brokers differ by
less than five percent (5%) of the higher of the two, the Prevailing Rate shall be the average of
the two determinations. In the event such determinations differ by more than five percent (5%) of
the higher of the two, then such appraisers shall within twenty (20) days designate a third broker,
who shall have the same qualifications required for the initial two brokers. If the two brokers
fail to agree upon and appoint a third broker, then the third broker shall be appointed by
J.A.M.S./ENDISPUTE. The third broker shall, within twenty (20) days after his or her appointment,
make a determination of the Prevailing Rate. The determinations of Prevailing Rate prepared by all
three (3) brokers shall be compared and the Prevailing Rate shall be the average of the two closest
determinations. Such determination shall be final and binding upon the parties. The Renewal Rate
shall be the Prevailing Rate so determined in accordance with the foregoing sentence. Landlord and
Tenant shall each bear the expense of the broker selected by it and shall share equally the expense
of the third broker, if any. Promptly following the determination of the Renewal Rate pursuant to
this Section 9(c), the parties shall execute an amendment to the Lease memorializing such Renewal
Rate.
10.
General Provisions
(a)
Ratification and Entire Agreement.
Except as expressly amended by this Amendment, the
Lease shall remain unmodified and in full force and effect. As modified by this Amendment, the
Lease is hereby ratified and confirmed in all respects. In the event of any inconsistencies between
the terms of this Amendment and the Lease, the terms of this Amendment shall prevail. The Lease as
amended by this Amendment constitutes the entire understanding and agreement of Landlord and Tenant
with respect to the subject matter hereof, and all prior agreements, representations, and
understandings between Landlord and Tenant with respect to the subject matter hereof, whether oral
or written, are or should be deemed to be null
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and void, all of the foregoing having been merged into this Amendment. Landlord and Tenant do each
hereby acknowledge that it and/or its counsel have reviewed and revised this Amendment, and agree
that no rule of construction to the effect that any ambiguities are to be resolved against the
drafting party shall be employed in the interpretation of this Amendment. This Amendment may be
amended or modified only by an instrument in writing signed by each of Landlord and Tenant.
(b)
Brokerage.
Landlord and Tenant each represents and warrants to the other that neither it
nor its officers or agents nor anyone acting on its behalf has dealt with any real estate broker
except Newmark Knight Frank
(Tenants Broker)
and NAI BT Commercial
(Landlords Broker)
in the
negotiating or making of this Amendment, and each party agrees to indemnify and hold harmless the
other from any claim or claims, and costs and expenses, including attorneys fees, incurred by the
indemnified party in conjunction with any such claim or claims of any other broker or brokers to a
commission in connection with the Lease as a result of the actions of the indemnifying party.
Provided that this Amendment is fully executed by the parties hereto, then Landlord shall pay a
commission to Landlords Broker pursuant to a separate written agreement between Landlord and
Landlords Broker, and Landlords Broker shall be responsible for any portion of such commission
payable to Tenants Broker.
(c)
Authority; Applicable Law; Successors Bound.
Landlord and Tenant do each hereby represent
and warrant to the other that this Amendment has been duly authorized by all necessary action on
the part of such party and that such party has full power and authority to execute, deliver and
perform its obligations under this Amendment, without consent of any other party. This Amendment
shall be governed by and construed under the laws of the State of California, without giving effect
to any principles of conflicts of law that would result in the application of the laws of any other
jurisdiction. This Amendment shall inure to the benefit of and be binding upon Landlord and Tenant
and their respective successors and permitted assigns with respect to the Lease.
(d)
Counterparts
.
This Amendment may be executed in counterparts each of which shall be deemed
an original but all of which taken together shall constitute one and the same instrument.
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In Witness Whereof,
Landlord and Tenant have executed this Amendment as of the date
first above written.
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Landlord:
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Harbor Investment Partners
,
a California general partnership
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By:
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Embarcadero Road Investors LLC,
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a Delaware limited liability company,
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its General Partner
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By:
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UBS Realty Investors LLC,
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a Massachusetts limited liability company,
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its Manager
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By:
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/s/
Timothy J. Cahill
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Name:
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Timothy J. Cahill
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Title:
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Director -
Asset Management
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Tenant:
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Financial Engines, Inc.,
a California corporation
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By:
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/s/ Raymond Sims
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Name:
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RAYMOND J. SIMS
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Title:
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EVP & CFO
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