As filed with the Securities and Exchange Commission on
January 26, 2010
Registration
No. 333-163228
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 3
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
QuinStreet, Inc.
(Exact name of Registrant as
specified in its charter)
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Delaware
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7389
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77-0512121
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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1051 East Hillsdale Blvd.,
Suite 800
Foster City, CA 94404
(650) 578-7700
(Address, including
zip code and telephone number, of Registrants principal
executive offices)
Douglas Valenti
Chief Executive Officer and Chairman
1051 East Hillsdale Blvd., Suite 800
Foster City, CA 94404
(650) 578-7700
(Name, address, including
zip code and telephone number, including area code, of agent for
service)
Copies to:
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Jodie Bourdet
David Peinsipp
Cooley Godward Kronish LLP
101 California Street,
5
th
Floor
San Francisco, CA 94111
(415) 693-2000
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Alan Denenberg
Davis Polk & Wardwell LLP
1600 El Camino Real
Menlo Park, CA 94025
(650) 752-2000
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the
effective date of this registration statement.
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, 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.
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
o
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Non-accelerated
filer
þ
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Smaller reporting
company
o
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(Do not check if a smaller reporting company)
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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, as amended, or until the
Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We 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 we are not soliciting offers to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION. DATED JANUARY 26, 2010.
10,000,000 Shares
Common
Stock
This is the initial
public offering of our common stock. Prior to this offering,
there has been no public market for our common stock. The
initial public offering price of our common stock is expected to
be between $17.00 and $19.00 per share.
We have applied to
list our common stock on The NASDAQ Global Market under the
symbol QNST.
The underwriters
have an option to purchase a maximum of 1,500,000 additional
shares of common stock from us to cover over-allotments, if any.
Investing in our
common stock involves risks. See Risk Factors
beginning on page 11.
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Underwriting
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Price to
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Discounts and
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Proceeds,
Before
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Public
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Commissions
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Expenses, to
us
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Per Share
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$
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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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$
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The underwriters
have agreed to reimburse us for a portion of our out-of-pocket
expenses.
Delivery of our
shares of common stock will be made on or
about ,
2010.
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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Credit
Suisse
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BofA Merrill Lynch
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J.P. Morgan
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The date of this
prospectus
is ,
2010.
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus or contained in any free writing prospectus filed
with the Securities and Exchange Commission, or SEC. Neither we
nor the underwriters have authorized anyone to provide you with
additional information or information different from that
contained in this prospectus or in any free writing prospectus
filed with the SEC. We are offering to sell, and seeking offers
to buy, our common stock only in jurisdictions where such offers
and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any
sale of our common stock.
For investors outside of the United States: Neither we nor the
underwriters have done anything that would permit this offering
or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required. Persons
outside the United States who come into possession of this
prospectus must inform themselves about, and observe any
restrictions relating to, the offering of the shares of common
stock and the distribution of this prospectus outside of the
United States.
Until ,
2010 (25 days after commencement of this offering), all
dealers that buy, sell or trade our common stock, whether or not
participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the
obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information that
you should consider in making your investment decision. Before
investing in our common stock, you should carefully read this
entire prospectus, including our consolidated financial
statements and the related notes and the information set forth
under the headings Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, in each case included
elsewhere in this prospectus. Unless the context otherwise
requires, we use the terms QuinStreet,
company, we, us and
our in this prospectus to refer to QuinStreet, Inc.
and, where appropriate, its subsidiaries.
QUINSTREET,
INC.
Overview
QuinStreet is a leader in vertical marketing and media on the
Internet. Vertical marketing and media are focused on matching
targeted segments of visitors with groupings of clients and
product offerings of probable interest to them. Vertical visitor
segments are defined by factors such as life stage, life events,
income, career status, and expressed intent to buy or research a
particular product. This approach is in contrast to marketing
and media that are focused on general consumer interests and
mass market audiences. We have built a strong set of
capabilities to engage Internet visitors with targeted media and
to connect our marketing clients with their potential customers
online. We focus on serving clients in large,
information-intensive industry categories, or verticals, where
relevant, targeted media and offerings help visitors make
informed choices, find the products that match their needs, and
thus become qualified customer prospects for our clients. Our
current primary client verticals are the education and financial
services industries. We also have a presence in the home
services,
business-to-business,
or B2B, and healthcare industries.
We generate revenue by delivering measurable online marketing
results to our clients. These results are typically in the form
of qualified leads or clicks, the outcomes of customer prospects
submitting requests for information on, or to be contacted
regarding, client products, or their clicking on or through to
specific client offers. These qualified leads or clicks are
generated from our marketing activities on our websites or on
third-party websites with whom we have relationships. Clients
primarily pay us for leads that they can convert into customers,
typically in a call center or through other offline customer
acquisition processes, or for clicks from our websites that they
can convert into applications or customers on their websites. We
are predominantly paid on a negotiated or market-driven
per lead or per click basis. Media costs
to generate qualified leads or clicks are borne by us as a cost
of providing our services.
Founded in 1999, we have been a pioneer in the development and
application of measurable marketing on the Internet. Clients pay
us for the actual opt-in actions by prospects or customers that
result from our marketing activities on their behalf, versus
traditional impression-based advertising and marketing models in
which an advertiser pays for more general exposure to an
advertisement. We have been particularly focused on developing
and delivering measurable marketing results in the search engine
ecosystem, the entry point of the Internet for most
of the visitors we convert into qualified leads or clicks for
our clients. We own or partner with vertical content websites
that attract Internet visitors from organic search engine
rankings due to the quality and relevancy of their content to
search engine users. We also acquire targeted visitors for our
websites through the purchase of
pay-per-click,
or PPC, advertisements on search engines. We complement search
engine companies by building websites with content and offerings
that are relevant and responsive to their searchers, and by
increasing the value of the PPC search advertising they sell by
matching visitors with offerings and converting them into
customer prospects for our clients.
Market
Opportunity
Our clients are shifting more of their marketing budgets from
traditional media channels such as direct mail, television,
radio, and newspapers to the Internet because of increasing
usage of the Internet by their potential customers. We believe
that direct marketing is the most applicable and relevant
marketing segment to us because it is targeted and measurable.
According to the July 2009 research report, Consumer
Behavior Online: A 2009 Deep Dive, by Forrester Research,
Americans spend 33% of their time with media on the
1
Internet, but online direct marketing was forecasted to
represent only 16% of the $149 billion in total annual
U.S. direct marketing spending in 2009, as reported by the
Direct Marketing Association. The Internet is an effective
direct marketing medium due to its targeting and measurability
characteristics. If direct marketing budgets shift to the
Internet in proportion to Americans share of time spent
with media on the Internet from 16% to 33% of the
$149 billion in total spending in 2009 that
could represent an increased market opportunity of
$25 billion. In addition, as traditional media categories
such as television and radio shift from analog to digital
formats, they then become channels for the targeted and
measurable marketing techniques and capabilities we have
developed for the Internet, thus expanding our addressable
market opportunity. Further future market potential may also
come from international markets.
Our
Business Model
We deliver cost-effective marketing results to our clients,
predictably and scalably, most typically in the form of a
qualified lead or click. These leads or clicks can then convert
into a customer or sale for the client at a rate that results in
an acceptable marketing cost to them. We get paid by clients
primarily when we deliver qualified leads or clicks as defined
in our agreements with them. Because we bear the costs of media,
our programs must deliver a value to our clients and a media
yield, or our ability to generate an acceptable margin on our
media costs, that provides a sound financial outcome for us. Our
general process is:
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We own or access targeted media.
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We run advertisements or other forms of marketing messages and
programs in that media to create visitor responses or clicks
through to client offerings.
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We match these responses or clicks to client offerings or brands
that meet visitor interests or needs, converting visitors into
qualified leads or clicks.
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We optimize client matches and media yield such that we achieve
desired results for clients and a sound financial outcome for us.
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Our
Competitive Advantages
Our competitive advantages include:
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Vertical focus and expertise
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Measurable marketing experience and expertise
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Targeted media
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Proprietary technology
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Client relationships
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Client-driven online marketing approach
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Acquisition strategy and success
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Scale
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Our
Strategy
We believe that we are in the early stages of a very large and
long-term business opportunity. Our strategy for pursuing this
opportunity includes the following key components:
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Focus on generating sustainable revenues by providing measurable
value to our clients.
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Build QuinStreet and our industry sustainably by behaving
ethically in all we do and by providing quality content and
website experiences to Internet visitors.
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Remain vertically focused, choosing to grow through depth,
expertise and coverage in our current industry verticals; enter
new verticals selectively over time, organically and through
acquisitions.
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Build a world class organization, with
best-in-class
capabilities for delivering measurable marketing results to
clients and high yields or returns on media costs.
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Develop and evolve the best technologies and platform for
managing vertical marketing and media on the Internet; focus on
technologies that enhance media yield, improve client results
and achieve scale efficiencies.
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Build, buy and partner with vertical content websites that
provide the most relevant and highest quality visitor
experiences in the client and media verticals we serve.
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Be a client-driven organization; develop a broad set of media
sources and capabilities to reliably meet client needs.
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Recent
Developments (Unaudited)
Our consolidated financial statements for the quarter ended
December 31, 2009, our second fiscal quarter, are not yet
available. Our expectations with respect to our unaudited
results for the period discussed below are based upon management
estimates and are the responsibility of management. Our
independent registered public accounting firm has not audited,
reviewed or performed any procedures with respect to these
preliminary financial data and, accordingly, does not express an
opinion or any other form of assurance with respect thereto.
This summary is not meant to be a comprehensive statement of our
unaudited financial results for this period and our actual
results may differ from these estimates.
We are providing the following preliminary results as of and for
the quarter ended December 31, 2009:
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Net revenue of approximately $76 million;
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Net income of approximately $2 million;
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Cash and cash equivalents of approximately
$34 million; and
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Total debt of approximately $107 million.
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Other Financial Data.
For the quarter ended
December 31, 2009, estimated Adjusted EBITDA was
approximately $15 million. We define Adjusted EBITDA as net
income less interest and other income plus interest and other
expense, provision for taxes, depreciation expense, amortization
expense, stock-based compensation expense and foreign-exchange
(loss) gain.
Net
Revenue
We expect our net revenue for the quarter ended
December 31, 2009 to be approximately $76 million,
which is an increase of approximately $17 million as
compared to net revenue of $59.2 million for the quarter
ended December 31, 2008 and a decrease of approximately
$3 million as compared to net revenue of $78.6 million
for the previous sequential quarter ended September 30,
2009. The primary reasons for the increase versus the comparable
quarter in fiscal 2009 are an increase in net revenue from our
financial services client vertical and, to a lesser degree, an
increase in net revenue from our education client vertical. The
primary reasons for the decrease versus the previous sequential
quarter were a decrease in net revenue from our education client
vertical revenue due to typical seasonality, as described in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Trends Affecting
our Business Seasonality, partially offset by
an increase in net revenue from our financial services client
vertical due to organic growth.
Adjusted
EBITDA
Our use of Adjusted EBITDA.
We include
Adjusted EBITDA in this prospectus for a number of reasons as
described in Summary Consolidated Financial
Data Adjusted EBITDA. Our use of Adjusted
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our
results as reported under GAAP; limitations of our use of
Adjusted EBITDA as an analytical tool are described in
Summary Consolidated Financial Data Adjusted
EBITDA.
3
Reconciliation of Adjusted EBITDA to Net
Income.
For the quarter ended December 31,
2009, our estimated net income was approximately
$2 million. In order to arrive at our estimated Adjusted
EBITDA of approximately $15 million for this period, we
added to our estimated net income our estimated interest and
other income (expense), net of approximately $1 million,
estimated provision for taxes of approximately $2 million,
estimated depreciation and amortization of approximately
$5 million, and estimated
stock-based
compensation expense of approximately $5 million.
Risks
Associated with Our Business
Our business is subject to numerous risks and uncertainties,
including those highlighted in the section entitled Risk
Factors immediately following this prospectus summary,
that primarily represent challenges we face in connection with
the successful implementation of our strategy and the growth of
our business. We operate in an immature industry and have a
rapidly-evolving business model, which make it difficult to
predict our future operating results. In addition, we expect a
number of factors to cause our operating results to fluctuate on
a quarterly and annual basis, which may make it difficult to
predict our future performance.
Corporate
Information
We incorporated in California in April 1999. We reincorporated
in Delaware in December 2009. Our principal executive offices
are located at 1051 East Hillsdale Blvd., Suite 800, Foster
City, California 94404, and our telephone number is
(650) 578-7700.
Our website address is www.quinstreet.com. We do not incorporate
the information on or accessible through our website into this
prospectus, and you should not consider any information on, or
that can be accessed through, our website as part of this
prospectus, and investors should not rely on any such
information in deciding whether to purchase our common stock.
QuinStreet
®
,
the QuinStreet logo design and other trademarks or service marks
of QuinStreet appearing in this prospectus are the property of
QuinStreet. This prospectus also contains trademarks and trade
names of other businesses that are the property of their
respective holders.
4
THE
OFFERING
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Common stock offered by QuinStreet
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10,000,000 shares
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Common stock to be outstanding after this offering
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44,912,597 shares
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Over-allotment option
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1,500,000 shares
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Use of proceeds
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We expect the net proceeds to us from this offering, after
deduction of the estimated underwriting discounts and
commissions and estimated offering expenses, to be approximately
$165.1 million at an assumed initial public offering price
of $18.00 per share. We intend to use the net proceeds from
this offering for working capital, capital expenditures and
other general corporate purposes. We may also use a portion of
the net proceeds to repay debt or to acquire other businesses,
products or technologies. See Use of Proceeds.
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Dividend policy
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We do not intend to pay cash dividends on our common stock for
the foreseeable future.
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Risk factors
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See Risk Factors beginning on page 11 and the
other information included in this prospectus for a discussion
of factors you should carefully consider before deciding whether
to purchase shares of our common stock.
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Proposed NASDAQ Global Market symbol
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QNST
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Financial advisor
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Qatalyst Partners LP is acting as our financial advisor in
connection with this offering. Qatalysts services consist
of (i) analyzing our business, condition and financial
position, (ii) preparing and implementing a plan for
identifying and selecting appropriate participants in the
underwriting syndicate, (iii) evaluating proposals that
were received from potential underwriters, (iv) negotiating
on our behalf the key terms of any contractual arrangements with
members of the underwriting syndicate, and (v) determining
various offering logistics. Qatalyst is not acting as an
underwriter and will not sell or offer to sell any securities
and will not identify, solicit or engage directly with potential
investors. In addition, Qatalyst will not underwrite or purchase
any of the offered securities or otherwise participate in any
such undertaking.
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The number of shares of common stock to be outstanding after
this offering is based on 34,912,597 shares of common stock
outstanding as of December 31, 2009, and excludes:
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an aggregate of 11,504,767 shares of common stock issuable
upon the exercise of outstanding stock options as of
December 31, 2009 pursuant to our 2008 Equity Incentive
Plan and having a weighted-average exercise price of $9.3429 per
share;
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an aggregate of 587,717 additional shares of common stock
reserved for future issuance under our 2008 Equity Incentive
Plan as of December 31, 2009; provided, however, that
immediately upon the execution and delivery of the underwriting
agreement for this offering, our 2008 Equity Incentive Plan will
terminate so that no further awards may be granted under our
2008 Equity Incentive Plan and the shares then remaining and
reserved for future issuance under our 2008 Equity Incentive
Plan shall become reserved for issuance under our 2010 Equity
Incentive Plan; and
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the shares reserved for future issuance under our 2010 Equity
Incentive Plan and up to 300,000 additional shares of common
stock reserved for future issuance under our 2010 Non-Employee
Directors Stock Award Plan, as well as any automatic
increases in the number of shares of common stock reserved for
future issuance under each of these benefit plans, which will
become effective immediately upon the execution and delivery of
the underwriting agreement for this offering.
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Unless we specifically state otherwise, the share information in
this prospectus is as of December 31, 2009 and reflects or
assumes:
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the automatic conversion of all outstanding shares of our
convertible preferred stock into an aggregate of
21,176,533 shares of common stock effective immediately
prior to the closing of this offering;
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that our amended and restated certificate of incorporation,
which we will file in connection with the completion of this
offering, is in effect; and
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no exercise of the underwriters over-allotment option to
purchase up to an additional 1,500,000 shares of common
stock from us.
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6
SUMMARY
CONSOLIDATED FINANCIAL DATA
The following table summarizes our consolidated financial data.
We have derived the following summary of our consolidated
statements of operations data for the fiscal years ended
June 30, 2007, 2008 and 2009 from our audited consolidated
financial statements appearing elsewhere in this prospectus. The
consolidated statements of operations data for the three months
ended September 30, 2008 and 2009 and consolidated balance
sheet data as of September 30, 2009 have been derived from
our unaudited consolidated financial statements appearing
elsewhere in this prospectus. Our historical results are not
necessarily indicative of the results that should be expected in
the future and our interim results are not necessarily
indicative of the results that should be expected for the full
fiscal year. The summary of our consolidated financial data set
forth below should be read together with our consolidated
financial statements and the related notes to those statements,
as well as the sections titled Selected Consolidated
Financial Data and Managements Discussion and
Analysis of Financial Condition and Results of Operations,
appearing elsewhere in this prospectus.
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Three Months
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Fiscal Year Ended June 30,
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Ended September 30,
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2007
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2008
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2009
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2008
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2009
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(In thousands, except per share data)
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Consolidated Statements of Operations Data:
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Net revenue
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$
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167,370
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$
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192,030
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$
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260,527
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$
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63,678
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$
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78,552
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Cost of revenue(1)
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108,945
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130,869
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181,593
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45,281
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55,047
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Gross profit
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58,425
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61,161
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78,934
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18,397
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23,505
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Operating expenses:(1)
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Product development
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14,094
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14,051
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14,887
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3,757
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4,470
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Sales and marketing
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8,487
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12,409
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16,154
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4,259
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3,625
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General and administrative
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11,440
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13,371
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13,172
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3,736
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3,441
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Total operating expenses
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34,021
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39,831
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44,213
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11,752
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11,536
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Operating income
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24,404
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21,330
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34,721
|
|
|
|
6,645
|
|
|
|
11,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
1,034
|
|
|
|
413
|
|
|
|
(3,538
|
)
|
|
|
(622
|
)
|
|
|
(619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
25,438
|
|
|
|
21,743
|
|
|
|
31,183
|
|
|
|
6,023
|
|
|
|
11,350
|
|
Provision for taxes
|
|
|
(9,828
|
)
|
|
|
(8,876
|
)
|
|
|
(13,909
|
)
|
|
|
(2,719
|
)
|
|
|
(4,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,610
|
|
|
$
|
12,867
|
|
|
$
|
17,274
|
|
|
$
|
3,304
|
|
|
$
|
6,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: 8% non-cumulative dividends on convertible preferred stock
|
|
|
(3,276
|
)
|
|
|
(3,276
|
)
|
|
|
(3,276
|
)
|
|
|
(819
|
)
|
|
|
(819
|
)
|
Undistributed earnings allocated to convertible preferred stock
|
|
|
(7,690
|
)
|
|
|
(5,925
|
)
|
|
|
(8,599
|
)
|
|
|
(1,527
|
)
|
|
|
(3,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic
|
|
$
|
4,644
|
|
|
$
|
3,666
|
|
|
$
|
5,399
|
|
|
$
|
958
|
|
|
$
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic
|
|
$
|
4,644
|
|
|
$
|
3,666
|
|
|
$
|
5,399
|
|
|
$
|
958
|
|
|
$
|
2,207
|
|
Undistributed earnings re-allocated to common stock
|
|
|
522
|
|
|
|
360
|
|
|
|
399
|
|
|
|
77
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
diluted
|
|
$
|
5,166
|
|
|
$
|
4,026
|
|
|
$
|
5,798
|
|
|
$
|
1,035
|
|
|
$
|
2,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
|
$
|
0.28
|
|
|
$
|
0.41
|
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
0.26
|
|
|
$
|
0.39
|
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing basic net income per
share
|
|
|
12,789
|
|
|
|
13,104
|
|
|
|
13,294
|
|
|
|
13,279
|
|
|
|
13,405
|
|
Weighted average shares used in computing diluted net income per
share
|
|
|
15,263
|
|
|
|
15,325
|
|
|
|
14,971
|
|
|
|
15,131
|
|
|
|
15,381
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Pro forma net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.50
|
|
|
|
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.48
|
|
|
|
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing pro forma basic net
income per share
|
|
|
|
|
|
|
|
|
|
|
34,471
|
|
|
|
|
|
|
|
34,582
|
|
Weighted average shares used in computing pro forma diluted net
income per share
|
|
|
|
|
|
|
|
|
|
|
36,148
|
|
|
|
|
|
|
|
36,558
|
|
|
|
|
(1)
|
|
Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
416
|
|
|
$
|
1,112
|
|
|
$
|
1,916
|
|
|
$
|
470
|
|
|
$
|
728
|
|
Product development
|
|
|
75
|
|
|
|
443
|
|
|
|
669
|
|
|
|
161
|
|
|
|
253
|
|
Sales and marketing
|
|
|
226
|
|
|
|
581
|
|
|
|
1,761
|
|
|
|
416
|
|
|
|
507
|
|
General and administrative
|
|
|
1,354
|
|
|
|
1,086
|
|
|
|
1,827
|
|
|
|
351
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009
|
|
|
|
|
Pro Forma as
|
|
|
Actual
|
|
Adjusted(1)
|
|
|
(In thousands)
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,095
|
|
|
$
|
193,161
|
|
Working capital
|
|
|
19,942
|
|
|
|
185,008
|
|
Total assets
|
|
|
235,410
|
|
|
|
400,476
|
|
Total liabilities
|
|
|
110,284
|
|
|
|
110,284
|
|
Total debt
|
|
|
66,177
|
|
|
|
66,177
|
|
Total stockholders equity
|
|
|
81,723
|
|
|
|
290,192
|
|
|
|
|
(1)
|
|
The pro forma as adjusted consolidated balance sheet data gives
effect to the conversion of all outstanding shares of
convertible preferred stock into shares of common stock
effective immediately prior to the closing of this offering and
to the sale of 10,000,000 shares of our common stock in
this offering at an assumed initial public offering price of
$18.00 per share, the midpoint of the range reflected on the
cover page of this prospectus, after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us. Each $1.00 increase (decrease) in the
assumed initial public offering price of $18.00 per share would
increase (decrease) each of cash and cash equivalents, working
capital, total assets and total stockholders equity by
$9.3 million, assuming that the number of shares offered by
us, as set forth on the cover page of this prospectus, remains
the same, and after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
We may also increase or decrease the number of shares we are
offering. Each increase (decrease) of 1,000,000 shares in
the number of shares offered by us would increase (decrease)
each of cash and cash equivalents, working capital, total assets
and total stockholders equity by $16.7 million,
assuming that the assumed initial public offering price remains
the same, and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us. The pro forma as adjusted information discussed
above is illustrative only and will adjust based on the actual
initial public offering price and other terms of this offering
determined at pricing.
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Fiscal Year Ended June 30,
|
|
Ended September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
(In thousands)
|
|
Consolidated Statements of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
25,197
|
|
|
$
|
24,751
|
|
|
$
|
32,570
|
|
|
$
|
(261
|
)
|
|
$
|
11,808
|
|
Depreciation and amortization
|
|
|
9,637
|
|
|
|
11,727
|
|
|
|
15,978
|
|
|
|
4,114
|
|
|
|
3,952
|
|
Capital expenditures
|
|
|
2,030
|
|
|
|
2,177
|
|
|
|
1,347
|
|
|
|
504
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Fiscal Year Ended June 30,
|
|
Ended September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
(In thousands)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
36,112
|
|
|
$
|
36,279
|
|
|
$
|
56,872
|
|
|
$
|
12,157
|
|
|
$
|
18,150
|
|
|
|
(1)
|
We define Adjusted EBITDA as net income less interest income
plus interest expense, provision for taxes, depreciation
expense, amortization expense, stock-based compensation expense
and foreign-exchange (loss) gain. Please see
Adjusted EBITDA for more information and
for a reconciliation of Adjusted EBITDA to our net income
calculated in accordance with U.S. generally accepted
accounting principles, or GAAP.
|
Adjusted
EBITDA
We include Adjusted EBITDA in this prospectus because
(i) we seek to manage our business to a consistent level of
Adjusted EBITDA as a percentage of net revenue, (ii) it is
a key basis upon which our management assesses our operating
performance, (iii) it is one of the primary metrics
investors use in evaluating Internet marketing companies,
(iv) it is a factor in the evaluation of the performance of
our management in determining compensation, and (v) it is
an element of certain maintenance covenants under our debt
agreements. We define Adjusted EBITDA as net income less
interest income plus interest expense, provision for taxes,
depreciation expense, amortization expense, stock-based
compensation expense and foreign-exchange (loss) gain.
We use Adjusted EBITDA as a key performance measure because we
believe it facilitates operating performance comparisons from
period to period by excluding potential differences caused by
variations in capital structures (affecting interest expense),
tax positions (such as the impact on periods or companies of
changes in effective tax rates or fluctuations in permanent
differences or discrete quarterly items) and the impact of
depreciation and amortization expense on definite-lived
intangible assets. Because Adjusted EBITDA facilitates internal
comparisons of our historical operating performance on a more
consistent basis, we also use Adjusted EBITDA for business
planning purposes, to incentivize and compensate our management
personnel and in evaluating acquisition opportunities.
In addition, we believe Adjusted EBITDA and similar measures are
widely used by investors, securities analysts, ratings agencies
and other interested parties in our industry as a measure of
financial performance and debt-service capabilities. Our use of
Adjusted EBITDA has limitations as an analytical tool, and you
should not consider it in isolation or as a substitute for
analysis of our results as reported under GAAP. Some of these
limitations are:
|
|
|
|
|
Adjusted EBITDA does not reflect our cash expenditures for
capital equipment or other contractual commitments;
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized may have to be replaced
in the future, and Adjusted EBITDA does not reflect cash capital
expenditure requirements for such replacements;
|
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
|
9
|
|
|
|
|
Adjusted EBITDA does not consider the potentially dilutive
impact of issuing equity-based compensation to our management
team and employees;
|
|
|
|
Adjusted EBITDA does not reflect the significant interest
expense or the cash requirements necessary to service interest
or principal payments on our indebtedness;
|
|
|
|
Adjusted EBITDA does not reflect certain tax payments that may
represent a reduction in cash available to us; and
|
|
|
|
other companies, including companies in our industry, may
calculate Adjusted EBITDA measures differently, which reduces
their usefulness as a comparative measure.
|
Because of these limitations, Adjusted EBITDA should not be
considered as a measure of discretionary cash available to us to
invest in the growth of our business. When evaluating our
performance, you should consider Adjusted EBITDA alongside other
financial performance measures, including various cash flow
metrics, net income and our other GAAP results.
The following table presents a reconciliation of Adjusted EBITDA
to net income, the most comparable GAAP measure, for each of the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Reconciliation of Adjusted EBITDA to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,610
|
|
|
$
|
12,867
|
|
|
$
|
17,274
|
|
|
$
|
3,304
|
|
|
$
|
6,513
|
|
Interest and other income (expense), net
|
|
|
(1,034
|
)
|
|
|
(413
|
)
|
|
|
3,538
|
|
|
|
622
|
|
|
|
619
|
|
Provision for taxes
|
|
|
9,828
|
|
|
|
8,876
|
|
|
|
13,909
|
|
|
|
2,719
|
|
|
|
4,837
|
|
Depreciation and amortization
|
|
|
9,637
|
|
|
|
11,727
|
|
|
|
15,978
|
|
|
|
4,114
|
|
|
|
3,952
|
|
Stock-based compensation expense
|
|
|
2,071
|
|
|
|
3,222
|
|
|
|
6,173
|
|
|
|
1,398
|
|
|
|
2,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
36,112
|
|
|
$
|
36,279
|
|
|
$
|
56,872
|
|
|
$
|
12,157
|
|
|
$
|
18,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
Before you invest in our common stock, you should be aware that
our business faces numerous financial and market risks,
including those described below, as well as general economic and
business risks. The following discussion provides information
concerning the material risks and uncertainties that we have
identified and believe may adversely affect our business,
financial condition and results of operations. Before you decide
whether to invest in our common stock, you should carefully
consider these risks and uncertainties, together with all of the
other information included in this prospectus.
Risks
Related to Our Business and Industry
We
operate in an immature industry and have a relatively new
business model, which makes it difficult to evaluate our
business and prospects.
We derive nearly all of our revenue from the sale of online
marketing and media services, which is an immature industry that
has undergone rapid and dramatic changes in its short history.
The industry in which we operate is characterized by
rapidly-changing Internet media, evolving industry standards,
and changing user and client demands. Our business model is also
evolving and is distinct from many other companies in our
industry, and it may not be successful. As a result of these
factors, the future revenue and income potential of our business
is uncertain. Although we have experienced significant revenue
growth in recent periods, we may not be able to sustain current
revenue levels or growth rates. Any evaluation of our business
and our prospects must be considered in light of these factors
and the risks and uncertainties often encountered by companies
in an immature industry with an evolving business model such as
ours. Some of these risks and uncertainties relate to our
ability to:
|
|
|
|
|
maintain and expand client relationships;
|
|
|
|
sustain and increase the number of visitors to our websites;
|
|
|
|
sustain and grow relationships with third-party website
publishers and other sources of web visitors;
|
|
|
|
manage our expanding operations and implement and improve our
operational, financial and management controls;
|
|
|
|
raise capital at attractive costs, or at all;
|
|
|
|
acquire and integrate websites and other businesses;
|
|
|
|
successfully expand our footprint in our existing client
verticals and enter new client verticals;
|
|
|
|
respond effectively to competition and potential negative
effects of competition on profit margins;
|
|
|
|
attract and retain qualified management, employees and
independent service providers;
|
|
|
|
successfully introduce new processes and technologies and
upgrade our existing technologies and services;
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protect our proprietary technology and intellectual property
rights; and
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respond to government regulations relating to the Internet,
personal data protection, email, software technologies and other
aspects of our business.
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If we are unable to address these risks, our business, results
of operations and prospects could suffer.
If we
do not effectively manage our growth, our operating performance
will suffer and we may lose clients.
We have experienced rapid growth in our operations and operating
locations, and we expect to experience continued growth in our
business, both through acquisitions and internal growth. This
growth has placed, and will continue to place, significant
demands on our management and our operational and financial
infrastructure. In particular, continued rapid growth and
acquisitions may make it more difficult for us to accomplish the
following:
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successfully scale our technology to accommodate a larger
business and integrate acquisitions;
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maintain our standing with key vendors, including Internet
search companies and third-party website publishers;
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maintain our client service standards; and
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develop and improve our operational, financial and management
controls and maintain adequate reporting systems and procedures.
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In addition, our personnel, systems, procedures and controls may
be inadequate to support our future operations. The improvements
required to manage our growth will require us to make
significant expenditures, expand, train and manage our employee
base and allocate valuable management resources. If we fail to
effectively manage our growth, our operating performance will
suffer and we may lose clients, third-party website publishers
and key personnel.
We
depend upon Internet search companies to attract a significant
portion of the visitors to our websites, and any change in the
search companies search algorithms or perception of us or
our industry could result in our websites being listed less
prominently in either paid or algorithmic search result
listings, in which case the number of visitors to our websites
and our revenue could decline.
We depend in significant part on various Internet search
companies, such as Google, Microsoft and Yahoo!, and other
search websites to direct a significant number of visitors to
our websites to provide our online marketing services to our
clients. Search websites typically provide two types of search
results, algorithmic and paid listings. Algorithmic, or organic,
listings are determined and displayed solely by a set of
formulas designed by search companies. Paid listings can be
purchased and then are displayed if particular words are
included in a users Internet search. Placement in paid
listings is generally not determined solely on the bid price,
but also takes into account the search engines assessment
of the quality of website featured in the paid listing and other
factors. We rely on both algorithmic and paid search results, as
well as advertising on other websites, to direct a substantial
share of the visitors to our websites.
Our ability to maintain the number of visitors to our websites
from search websites and other websites is not entirely within
our control. For example, Internet search websites frequently
revise their algorithms in an attempt to optimize their search
result listings or to maintain their internal standards and
strategies. Changes in the algorithms could cause our websites
to receive less favorable placements, which could reduce the
number of users who visit our websites. We have experienced
fluctuations in the search result rankings for a number of our
websites. We may make decisions that are suboptimal regarding
the purchase of paid listings or our proprietary bid management
technologies may contain defects or otherwise fail to achieve
their intended results, either of which could also reduce the
number of visitors to our websites. We may also make decisions
that are suboptimal regarding the placement of advertisements on
other websites and pricing, which could increase our costs to
attract such visitors or cause us to incur unnecessary costs.
Our approaches may be deemed similar to those of our competitors
and others in our industry that Internet search websites may
consider to be unsuitable or unattractive. Internet search
websites could deem our content to be unsuitable or below
standards or less attractive or worthy than those of other or
competing websites. In either such case, our websites may
receive less favorable placement. Any reduction in the number of
visitors to our websites would negatively affect our ability to
earn revenue. If visits to our websites decrease, we may need to
resort to more costly sources to replace lost visitors, and such
increased expense could adversely affect our business and
profitability.
Our
future growth depends in part on our ability to identify and
complete acquisitions.
Our growth over the past several years is in significant part
due to the large number of acquisitions we have completed. Since
the beginning of fiscal year 2007, we have completed over 100
acquisitions of third-party website publishing businesses and
other businesses that are complementary to our own for an
aggregate purchase price of approximately $189.5 million.
We intend to pursue acquisitions of complementary businesses and
technologies to expand our capabilities, client base and media.
We have evaluated, and expect to continue to evaluate, a wide
array of potential strategic transactions. However, we may not
be successful in identifying suitable acquisition candidates or
be able to complete acquisitions of such candidates. In
addition, we may not be able to obtain financing on favorable
terms, or at all, to fund acquisitions that we may wish to
pursue.
12
Any
acquisitions that we complete will involve a number of risks. If
we are unable to address and resolve these risks successfully,
such acquisitions could harm our business, results of operations
and financial condition.
The anticipated benefit of any acquisitions that we complete may
not materialize. In addition, the process of integrating
acquired businesses or technologies may create unforeseen
operating difficulties and expenditures. Some of the areas where
we may face acquisition-related risks include:
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diversion of management time and potential business disruptions;
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expenses, distractions and potential claims resulting from
acquisitions, whether or not they are completed;
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retaining and integrating employees from any businesses we may
acquire;
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issuance of dilutive equity securities, incurrence of debt or
reduction in cash balances;
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integrating various accounting, management, information, human
resource and other systems to permit effective management;
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incurring possible impairment charges, contingent liabilities,
amortization expense or write-offs of goodwill;
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difficulties integrating and supporting acquired products or
technologies;
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unexpected capital expenditure requirements;
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insufficient revenue to offset increased expenses associated
with acquisitions;
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underperformance problems associated with acquisitions; and
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becoming involved in acquisition-related litigation.
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Foreign acquisitions would involve risks in addition to those
mentioned above, including those related to integration of
operations across different cultures and languages, currency
risks and the particular economic, political, administrative and
management, and regulatory risks associated with specific
countries. We may not be able to address these risks
successfully, or at all, without incurring significant costs,
delay or other operating problems. Our inability to resolve such
risks could harm our business and results of operations.
A
substantial portion of our revenue is generated from a limited
number of clients and, if we lose a major client, our revenue
will decrease and our business and prospects would be adversely
impacted.
A substantial portion of our revenue is generated from a limited
number of clients. Our top three clients accounted for 32% and
28% of our net revenue for the fiscal year 2009 and the first
three months of fiscal year 2010, respectively. Our clients can
generally terminate their contracts with us at any time, with
limited prior notice or penalty. DeVry Inc., our largest client,
accounted for approximately 19% and 13% of our net revenue for
fiscal year 2009 and the first three months of fiscal year 2010,
respectively. DeVry has recently retained an advertising agency
and has reduced its purchases of leads from us. DeVry and other
clients may reduce their current level of business with us,
leading to lower revenue. We expect that a limited number of
clients will continue to account for a significant percentage of
our revenue, and the loss of, or material reduction in, their
marketing spending with us could decrease our revenue and harm
our business.
We are
dependent on two market verticals for a majority of our
revenue.
To date, we have generated a majority of our revenue from
clients in our education vertical. We expect that a majority of
our revenue in fiscal year 2010 will be generated from clients
in our education and financial services verticals. A downturn in
economic or market conditions adversely affecting the education
industry or the financial services industry would negatively
impact our business and financial condition. Over the past year,
education marketing spending has remained relatively stable, but
this stability may not continue. Marketing budgets for clients
in our education vertical are impacted by a number of factors,
including the availability of student financial aid, the
regulation of for-profit financial institutions and economic
conditions. Over the past year, some segments of the financial
services industry, particularly mortgages, credit cards and
deposits, have seen declines in marketing budgets given the
difficult market conditions. These declines may continue or
worsen. In addition, the education and financial services
industries are highly regulated. Changes
13
in regulations or government actions may negatively impact our
clients marketing practices and budgets and, therefore,
adversely affect our financial results.
The United States Higher Education Act, administered by the
U.S. Department of Education, provides that to be eligible
to participate in Federal student financial aid programs, an
educational institution must enter into a program participation
agreement with the Secretary of the Department of Education. The
agreement includes a number of conditions with which an
institution must comply to be granted initial and continuing
eligibility to participate. Among those conditions is a
prohibition on institutions providing any commission, bonus, or
other incentive payment based directly or indirectly on success
in securing enrollments to any individual or entity engaged in
recruiting or admission activities. The regulations promulgated
under the Higher Education Act specify a number of types of
compensation, or safe harbors, that do not
constitute incentive compensation in violation of this
agreement. One of these safe harbors permits an institution to
award incentive compensation for Internet-based recruitment and
admission activities that provide information about the
institution to prospective students, refer prospective students
to the institution, or permit prospective students to apply for
admission online. The U.S. Department of Education is currently
engaged in a negotiated rulemaking process in which it has
suggested repealing all existing safe harbors regarding
incentive compensation in recruiting, including the Internet
safe harbor. While we do not believe that compensation for
services constitutes incentive compensation under the Higher
Education Act, the elimination of the safe harbor could create
uncertainty for our education clients and impact the way in
which we are paid by our clients and, accordingly, could reduce
the amount of net revenue we generate from the education client
vertical.
In addition, some of our clients have had and may in the future
have issues regarding their academic accreditation, which can
adversely affect their ability to offer certain degree programs.
If any of our significant education clients lose their
accreditation, they may reduce or eliminate their marketing
spending, which could adversely affect our financial results.
If we
are unable to retain the members of our management team or
attract and retain qualified management team members in the
future, our business and growth could suffer.
Our success and future growth depend, to a significant degree,
on the continued contributions of the members of our management
team. Each member of our management team is an at-will employee
and may voluntarily terminate his or her employment with us at
any time with minimal notice. We also may need to hire
additional management team members to adequately manage our
growing business. We may not be able to retain or identify and
attract additional qualified management team members.
Competition for experienced management-level personnel in our
industry is intense. Qualified individuals are in high demand,
particularly in the Internet marketing industry, and we may
incur significant costs to attract and retain them. If we lose
the services of any of our senior managers or if we are unable
to attract and retain additional qualified senior managers, our
business and growth could suffer.
We
need to hire and retain additional qualified personnel to grow
and manage our business. If we are unable to attract and retain
qualified personnel, our business and growth could be seriously
harmed.
Our performance depends on the talents and efforts of our
employees. Our future success will depend on our ability to
attract, retain and motivate highly skilled personnel in all
areas of our organization and, in particular, in our
engineering/technology, sales and marketing, media, finance and
legal/regulatory teams. We plan to continue to grow our business
and will need to hire additional personnel to support this
growth. We have found it difficult from time to time to locate
and hire suitable personnel. If we experience similar
difficulties in the future, our growth may be hindered.
Qualified individuals are in high demand, particularly in the
Internet marketing industry, and we may incur significant costs
to attract and retain them. Many of our employees have also
become, or will soon become, substantially vested in their stock
option grants. Employees may be more likely to leave us
following our initial public offering as a result of the
establishment of a public market for our common stock. If we are
unable to attract and retain the personnel we need to succeed,
our business and growth could be harmed.
14
We
depend on third-party website publishers for a significant
portion of our visitors, and any decline in the supply of media
available through these websites or increase in the price of
this media could cause our revenue to decline or our cost to
reach visitors to increase.
A significant portion of our revenue is attributable to visitors
originating from advertising placements that we purchase on
third-party websites. In many instances, website publishers can
change the advertising inventory they make available to us at
any time and, therefore, impact our revenue. In addition,
website publishers may place significant restrictions on our
offerings. These restrictions may prohibit advertisements from
specific clients or specific industries, or restrict the use of
certain creative content or formats. If a website publisher
decides not to make advertising inventory available to us, or
decides to demand a higher revenue share or places significant
restrictions on the use of such inventory, we may not be able to
find advertising inventory from other websites that satisfy our
requirements in a timely and cost-effective manner. In addition,
the number of competing online marketing service providers and
advertisers that acquire inventory from websites continues to
increase. Consolidation of Internet advertising networks and
website publishers could eventually lead to a concentration of
desirable inventory on a small number of websites or networks,
which could limit the supply of inventory available to us or
increase the price of inventory to us. We cannot assure you that
we will be able to acquire advertising inventory that meets our
clients performance, price and quality requirements. If
any of these things occur, our revenue could decline or our
operating costs may increase.
We
have incurred a significant amount of debt, which may limit our
ability to fund general corporate requirements and obtain
additional financing, limit our flexibility in responding to
business opportunities and competitive developments and increase
our vulnerability to adverse economic and industry
conditions.
As of September 30, we had an outstanding term loan with a
principal balance of approximately $27.8 million and a
revolving credit facility pursuant to which we can borrow up to
an additional $100.0 million. As of September 30,
2009, we had drawn $14.8 million from our revolving credit
facility. In January 2010, we replaced our existing credit
facility with a credit facility with a total borrowing capacity
of $175.0 million. The new facility consists of a
$35.0 million four-year term loan, with principal
amortization of 10%, 15%, 35% and 40% annually, and a
$140.0 million four-year revolving credit facility. As of
September 30, we also had outstanding notes to sellers
arising from numerous acquisitions in the total principal amount
of $26.4 million. As a result of our debt:
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we may not have sufficient liquidity to respond to business
opportunities, competitive developments and adverse economic
conditions;
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we may not have sufficient liquidity to fund all of these costs
if our revenue declines or costs increase; and
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we may not have sufficient funds to repay the principal balance
of our debt when due.
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Our debt obligations may also impair our ability to obtain
additional financing, if needed. Our indebtedness is secured by
substantially all of our assets, leaving us with limited
collateral for additional financing. Moreover, the terms of our
indebtedness restrict our ability to take certain actions,
including the incurrence of additional indebtedness, mergers and
acquisitions, investments and asset sales. In addition, even if
we are able to raise needed equity financing, we are required to
use a portion of the net proceeds of certain types of equity
financings to repay the outstanding balance of our term loan. A
failure to pay interest or indebtedness when due could result in
a variety of adverse consequences, including the acceleration of
our indebtedness. In such a situation, it is unlikely that we
would be able to fulfill our obligations under our credit
facilities or repay the accelerated indebtedness or otherwise
cover our costs.
The
severe economic downturn in the United States poses additional
risks to our business, financial condition and results of
operations.
The United States has experienced, and is continuing to
experience, a severe economic downturn. The credit crisis,
deterioration of global economies, rising unemployment and
reduced equity valuations all create risks that could harm our
business. If macroeconomic conditions worsen, we are not able to
predict the impact such worsening conditions will have on the
online marketing industry in general, and our results of
operations
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specifically. Clients in particular verticals such as financial
services, particularly mortgage, credit cards and deposits,
small- to medium-sized business customers and home services are
facing very difficult conditions and their marketing spend has
been negatively affected. These conditions could also damage our
business opportunities in existing markets, and reduce our
revenue and profitability. While the effect of these and related
conditions poses widespread risk across our business, we believe
that it may particularly affect our efforts in the mortgage,
credit cards and deposits, small- to medium-sized business and
home services verticals, due to reduced availability of credit
for households and business and reduced household disposable
income. Economic conditions may not improve or may worsen.
Our
operating results have fluctuated in the past and may do so in
the future, which makes our results of operations difficult to
predict and could cause our operating results to fall short of
analysts and investors expectations.
While we have experienced continued revenue growth, our prior
quarterly and annual operating results have fluctuated due to
changes in our business, our industry and the general economic
climate. Similarly, our future operating results may vary
significantly from quarter to quarter due to a variety of
factors, many of which are beyond our control. Our fluctuating
results could cause our performance to be below the expectations
of securities analysts and investors, causing the price of our
common stock to fall. Because our business is changing and
evolving, our historical operating results may not be useful to
you in predicting our future operating results. Factors that may
increase the volatility of our operating results include the
following:
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changes in demand and pricing for our services;
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changes in our pricing policies, the pricing policies of our
competitors, or the pricing of Internet advertising or media;
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the addition of new clients or the loss of existing clients;
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changes in our clients advertising agencies or the
marketing strategies our clients or their advertising agencies
employ;
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changes in the economic prospects of our clients or the economy
generally, which could alter current or prospective
clients spending priorities, or could increase the time or
costs required to complete sales with clients;
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changes in the availability of Internet advertising or the cost
to reach Internet visitors;
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changes in the placement of our websites on search engines;
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the introduction of new product or service offerings by our
competitors; and
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costs related to acquisitions of businesses or technologies.
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Our
quarterly revenue and operating results may fluctuate
significantly from quarter to quarter due to seasonal
fluctuations in advertising spending.
The timing of our revenue, particularly from our education
client vertical, is affected by seasonal factors. For example,
the first quarter of each fiscal year typically demonstrates
seasonal strength and our second fiscal quarter typically
demonstrates seasonal weakness. In our second fiscal quarter,
our education clients often take fewer leads due to holiday
staffing and lower availability of lead supply caused by higher
media pricing for some forms of media during the holiday period,
causing our revenue to be sequentially lower. Our fluctuating
results could cause our performance to be below the expectations
of securities analysts and investors, causing the price of our
common stock to fall. To the extent our rate of growth slows, we
expect that the seasonality in our business may become more
apparent and may in the future cause our operating results to
fluctuate to a greater extent.
We may
need additional capital in the future to meet our financial
obligations and to pursue our business objectives. Additional
capital may not be available or may not be available on
favorable terms and our business and financial condition could
therefore be adversely affected.
While we anticipate the net proceeds of this offering, together
with availability under our existing credit facility, cash
balances and cash from operations, will be sufficient to fund
our operations for at least the next 12 months, we may need
to raise additional capital to fund operations in the future or
to finance acquisitions. If
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we seek to raise additional capital in order to meet various
objectives, including developing future technologies and
services, increasing working capital, acquiring businesses and
responding to competitive pressures, capital may not be
available on favorable terms or may not be available at all. In
addition, pursuant to the terms of our credit facility, we are
required to use a portion of the net proceeds of any equity
financing, other than this offering and any other public equity
offerings, to repay the outstanding balance of our term loan.
Lack of sufficient capital resources could significantly limit
our ability to take advantage of business and strategic
opportunities. Any additional capital raised through the sale of
equity or debt securities with an equity component would dilute
our stock ownership. If adequate additional funds are not
available, we may be required to delay, reduce the scope of, or
eliminate material parts of our business strategy, including
potential additional acquisitions or development of new
technologies.
If we
fail to compete effectively against other online marketing and
media companies and other competitors, we could lose clients and
our revenue may decline.
The market for online marketing is intensely competitive. We
expect this competition to continue to increase in the future.
We perceive only limited barriers to entry to the online
marketing industry. We compete both for clients and for limited
high quality advertising inventory. We compete for clients on
the basis of a number of factors, including return on marketing
expenditures, price, and client service.
We compete with Internet and traditional media companies for a
share of clients overall marketing budgets, including:
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online marketing or media services providers such as Monster
Worldwide in the education vertical and Bankrate in financial
services;
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offline and online advertising agencies;
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major Internet portals and search engine companies with
advertising networks such as Google, Yahoo!, MSN, and AOL;
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other online marketing service providers, including online
affiliate advertising networks and industry-specific portals or
lead generation companies;
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website publishers with their own sales forces that sell their
online marketing services directly to clients;
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in-house marketing groups at current or potential clients;
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offline direct marketing agencies; and
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television, radio and print companies.
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Competition for web traffic among websites and search engines,
as well as competition with traditional media companies, could
result in significant price pressure, declining margins,
reductions in revenue and loss of market share. In addition, as
we continue to expand the scope of our services, we may compete
with a greater number of websites, clients and traditional media
companies across an increasing range of different services,
including in vertical markets where competitors may have
advantages in expertise, brand recognition and other areas.
Large Internet companies with brand recognition, such as Google,
Yahoo!, MSN, and AOL, have significant numbers of direct sales
personnel and substantial proprietary advertising inventory and
web traffic that provide a significant competitive advantage and
have significant impact on pricing for Internet advertising and
web traffic. The trend toward consolidation in the Internet
advertising arena may also affect pricing and availability of
advertising inventory and web traffic. Many of our current and
potential competitors also enjoy other competitive advantages
over us, such as longer operating histories, greater brand
recognition, larger client bases, greater access to advertising
inventory on high-traffic websites, and significantly greater
financial, technical and marketing resources. As a result, we
may not be able to compete successfully. If we fail to deliver
results that are superior to those that other online marketing
service providers achieve, we could lose clients and our revenue
may decline.
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If the
market for online marketing services fails to continue to
develop, our future growth may be limited and our revenue may
decrease.
The online marketing services market is relatively new and
rapidly evolving, and it uses different measurements than
traditional media to gauge its effectiveness. Some of our
current or potential clients have little or no experience using
the Internet for advertising and marketing purposes and have
allocated only limited portions of their advertising and
marketing budgets to the Internet. The adoption of Internet
advertising, particularly by those entities that have
historically relied upon traditional media for advertising,
requires the acceptance of a new way of conducting business,
exchanging information and evaluating new advertising and
marketing technologies and services. In particular, we are
dependent on our clients adoption of new metrics to
measure the success of online marketing campaigns. We may also
experience resistance from traditional advertising agencies who
may be advising our clients. We cannot assure you that the
market for online marketing services will continue to grow. If
the market for online marketing services fails to continue to
develop or develops more slowly than we anticipate, our ability
to grow our business may be limited and our revenue may decrease.
Third-party
website publishers can engage in unauthorized or unlawful acts
that could subject us to significant liability or cause us to
lose clients.
We generate a significant portion of our web visitors from media
advertising that we purchase from third-party website
publishers. Some of these publishers are authorized to display
our clients brands, subject to contractual restrictions.
In the past, some of our third-party website publishers have
engaged in activities that certain of our clients have viewed as
harmful to their brands, such as displaying outdated
descriptions of a clients offerings or outdated logos. Any
activity by publishers that clients view as potentially damaging
to their brands can harm our relationship with the client and
cause the client to terminate its relationship with us,
resulting in a loss of revenue. In addition, the law is
unsettled on the extent of liability that an advertiser in our
position has for the activities of third-party website
publishers. We could be subject to costly litigation and, if we
are unsuccessful in defending ourselves, damages for the
unauthorized or unlawful acts of third-party website publishers.
Poor
perception of our business or industry as a result of the
actions of third parties could harm our reputation and adversely
affect our business, financial condition and results of
operations.
Our business is dependent on attracting a large number of
visitors to our websites and providing leads and clicks to our
clients, which depends in part on our reputation within the
industry and with our clients. There are companies within our
industry that regularly engage in activities that our
clients customers may view as unlawful or inappropriate.
These activities, such as spyware or deceptive promotions, by
third parties may be seen by clients as characteristic of
participants in our industry and, therefore, may have an adverse
effect on the reputation of all participants in our industry,
including us. Any damage to our reputation, including from
publicity from legal proceedings against us or companies that
work within our industry, governmental proceedings, consumer
class action litigation, or the disclosure of information
security breaches or private information misuse, could adversely
affect our business, financial condition and results of
operations.
Because
many of our client contracts can be cancelled by the client with
little prior notice or penalty, the cancellation of one or more
contracts could result in an immediate decline in our
revenue.
We derive our revenue from contracts with our Internet marketing
clients, most of which are cancelable with little or no prior
notice. In addition, these contracts do not contain penalty
provisions for cancellation before the end of the contract term.
The non-renewal, renegotiation, cancellation, or deferral of
large contracts, or a number of contracts that in the aggregate
account for a significant amount of our revenue, is difficult to
anticipate and could result in an immediate decline in our
revenue.
Unauthorized
access to or accidental disclosure of consumer
personally-identifiable information that we collect may cause us
to incur significant expenses and may negatively impact our
credibility and business.
There is growing concern over the security of personal
information transmitted over the Internet, consumer identity
theft and user privacy. Despite our implementation of security
measures, our computer systems may be
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susceptible to electronic or physical computer break-ins,
viruses and other disruptions and security breaches. Any
perceived or actual unauthorized disclosure of
personally-identifiable information regarding website visitors,
whether through breach of our network by an unauthorized party,
employee theft, misuse or error or otherwise, could harm our
reputation, impair our ability to attract website visitors and
attract and retain our clients, or subject us to claims or
litigation arising from damages suffered by consumers, and
thereby harm our business and operating results. In addition, we
could incur significant costs in complying with the multitude of
state, federal and foreign laws regarding the unauthorized
disclosure of personal information.
If we
do not adequately protect our intellectual property rights, our
competitive position and business may suffer.
Our ability to compete effectively depends upon our proprietary
systems and technology. We rely on trade secret, trademark and
copyright law, confidentiality agreements, technical measures
and patents to protect our proprietary rights. We currently have
one patent application pending in the United States and no
issued patents. Effective trade secret, copyright, trademark and
patent protection may not be available in all countries where we
currently operate or in which we may operate in the future. Some
of our systems and technologies are not covered by any
copyright, patent or patent application. We cannot guarantee
that: (i) our intellectual property rights will provide
competitive advantages to us; (ii) our ability to assert
our intellectual property rights against potential competitors
or to settle current or future disputes will not be limited by
our agreements with third parties; (iii) our intellectual
property rights will be enforced in jurisdictions where
competition may be intense or where legal protection may be
weak; (iv) any of the patents, trademarks, copyrights,
trade secrets or other intellectual property rights that we
presently employ in our business will not lapse or be
invalidated, circumvented, challenged, or abandoned;
(v) competitors will not design around our protected
systems and technology; or (vi) that we will not lose the
ability to assert our intellectual property rights against
others.
We are a party to a number of third-party intellectual property
license agreements and in the future, may need to obtain
additional licenses or renew existing license agreements. We are
unable to predict with certainty whether these license
agreements can be obtained or renewed on commercially reasonable
terms, or at all.
We have from time to time become aware of third parties who we
believe may have infringed on our intellectual property rights.
The use of our intellectual property rights by others could
reduce any competitive advantage we have developed and cause us
to lose clients, third-party website publishers or otherwise
harm our business. Policing unauthorized use of our proprietary
rights can be difficult and costly. In addition, litigation,
while it may be necessary to enforce or protect our intellectual
property rights or to defend litigation brought against us,
could result in substantial costs and diversion of resources and
management attention and could adversely affect our business,
even if we are successful on the merits.
Confidentiality
agreements with employees, consultants and others may not
adequately prevent disclosure of trade secrets and other
proprietary information.
We have devoted substantial resources to the development of our
proprietary systems and technology. In order to protect our
proprietary systems and technology, we enter into
confidentiality agreements with our employees, consultants,
independent contractors and other advisors. These agreements may
not effectively prevent unauthorized disclosure of confidential
information or unauthorized parties from copying aspects of our
services or obtaining and using information that we regard as
proprietary. Moreover, these agreements may not provide an
adequate remedy in the event of such unauthorized disclosures of
confidential information and we cannot assure you that our
rights under such agreements will be enforceable. In addition,
others may independently discover trade secrets and proprietary
information, and in such cases we could not assert any trade
secret rights against such parties. Costly and time-consuming
litigation could be necessary to enforce and determine the scope
of our proprietary rights, and failure to obtain or maintain
trade secret protection could reduce any competitive advantage
we have and cause us to lose clients, publishers or otherwise
harm our business.
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Third
parties may sue us for intellectual property infringement which,
if successful, could require us to pay significant damages or
curtail our offerings.
We cannot be certain that our internally-developed or acquired
systems and technologies do not and will not infringe the
intellectual property rights of others. In addition, we license
content, software and other intellectual property rights from
third parties and may be subject to claims of infringement if
such parties do not possess the necessary intellectual property
rights to the products they license to us. We have in the past
and may in the future be subject to legal proceedings and claims
that we have infringed the patent or other intellectual property
rights of a third-party. These claims sometimes involve patent
holding companies or other adverse patent owners who have no
relevant product revenue and against whom our own patents, if
any, may therefore provide little or no deterrence. In addition,
third parties have asserted and may in the future assert
intellectual property infringement claims against our clients,
which we have agreed in certain circumstances to indemnify and
defend against such claims. Any intellectual property related
infringement claims, whether or not meritorious, could result in
costly litigation and could divert management resources and
attention. Moreover, should we be found liable for infringement,
we may be required to enter into licensing agreements, if
available on acceptable terms or at all, pay substantial
damages, or limit or curtail our systems and technologies.
Moreover, we may need to redesign some of our systems and
technologies to avoid future infringement liability. Any of the
foregoing could prevent us from competing effectively and
increase our costs.
Additionally, the laws relating to use of trademarks on the
Internet are currently unsettled, particularly as they apply to
search engine functionality. For example, other Internet
marketing and search companies have been sued in the past for
trademark infringement and other intellectual property-related
claims for the display of ads or search results in response to
user queries that include trademarked terms. The outcomes of
these lawsuits have differed from jurisdiction to jurisdiction.
For this reason, it is conceivable that certain of our
activities could expose us to trademark infringement, unfair
competition, misappropriation or other intellectual property
related claims which could be costly to defend and result in
substantial damages or otherwise limit or curtail our
activities, and adversely affect our business or prospects.
Our
proprietary technologies may include design or performance
defects and may not achieve their intended results, either of
which could impair our future revenue growth.
Our proprietary technologies are relatively new, and they may
contain design or performance defects that are not yet apparent.
The use of our proprietary technologies may not achieve the
intended results as effectively as other technologies that exist
now or may be introduced by our competitors, in which case our
business could be harmed.
If we
are unable to price our services appropriately, our margins and
revenue may decline.
Our clients purchase our services according to a variety of
pricing formulae, the vast majority of which are based on pay
for performance, meaning clients pay only after we have
delivered the desired result to them. Regardless of how a given
client pays us, we ordinarily pay the vast majority of the costs
associated with delivering our services to our clients according
to contracts and other arrangements that do not always condition
payment to vendors upon receipt of payments from our clients.
This means we typically pay for the costs of providing our
marketing services before we receive payment from clients.
Additionally, certain of our marketing services costs are highly
variable and may fluctuate significantly during each calendar
month. Accordingly, we run the risk of not being able to recover
the entire cost of our services from clients if pricing or other
terms negotiated prior to the performance of services prove less
than the cost of performing such services. We have experienced
situations in the past where we incurred losses in the delivery
of our services to specific clients. If we are unable to avoid
recurrence of similar situations in the future through
negotiation of profitable pricing and other terms, our results
of operations will suffer.
If we
fail to keep pace with rapidly-changing technologies and
industry standards, we could lose clients or advertising
inventory and our results of operations may
suffer.
The business lines in which we currently compete are
characterized by rapidly-changing Internet media and marketing
standards, changing technologies, frequent new product and
service introductions, and changing
20
user and client demands. The introduction of new technologies
and services embodying new technologies and the emergence of new
industry standards and practices could render our existing
technologies and services obsolete and unmarketable or require
unanticipated investments in technology. Our future success will
depend in part on our ability to adapt to these rapidly-changing
Internet media formats and other technologies. We will need to
enhance our existing technologies and services and develop and
introduce new technologies and services to address our
clients changing demands. If we fail to adapt successfully
to such developments or timely introduce new technologies and
services, we could lose clients, our expenses could increase and
we could lose advertising inventory.
Changes
in government regulation and industry standards applicable to
the Internet and our business could decrease demand for our
technologies and services or increase our costs.
Laws and regulations that apply to Internet communications,
commerce and advertising are becoming more prevalent. These
regulations could increase the costs of conducting business on
the Internet and could decrease demand for our technologies and
services.
In the United States, federal and state laws have been enacted
regarding copyrights, sending of unsolicited commercial email,
user privacy, search engines, Internet tracking technologies,
direct marketing, data security, childrens privacy,
pricing, sweepstakes, promotions, intellectual property
ownership and infringement, trade secrets, export of encryption
technology, taxation and acceptable content and quality of
goods. Other laws and regulations may be adopted in the future.
Laws and regulations, including those related to privacy and use
of personal information, are changing rapidly outside the United
States as well which may make compliance with such laws and
regulations difficult and which may negatively affect our
ability to expand internationally. This legislation could:
(i) hinder growth in the use of the Internet generally;
(ii) decrease the acceptance of the Internet as a
communications, commercial and advertising medium;
(iii) reduce our revenue; (iv) increase our operating
expenses; or (v) expose us to significant liabilities.
The laws governing the Internet remain largely unsettled, even
in areas where there has been some legislative action. While we
actively monitor this changing legal and regulatory landscape to
stay abreast of changes in the laws and regulations applicable
to our business, we are not certain how our business might be
affected by the application of existing laws governing issues
such as property ownership, copyrights, encryption and other
intellectual property issues, libel, obscenity and export or
import matters to the Internet advertising industry. The vast
majority of such laws were adopted prior to the advent of the
Internet. As a result, they do not contemplate or address the
unique issues of the Internet and related technologies. Changes
in laws intended to address such issues could create uncertainty
in the Internet market. It may take years to determine how
existing laws apply to the Internet and Internet marketing. Such
uncertainty makes it difficult to predict costs and could reduce
demand for our services or increase the cost of doing business
as a result of litigation costs or increased service delivery
costs.
In particular, a number of U.S. federal laws impact our
business. The Digital Millennium Copyright Act, or DMCA, is
intended, in part, to limit the liability of eligible online
service providers for listing or linking to third-party websites
that include materials that infringe copyrights or other rights.
Portions of the Communications Decency Act, or CDA, are intended
to provide statutory protections to online service providers who
distribute third-party content. We rely on the protections
provided by both the DMCA and CDA in conducting our business. In
addition, the United States Higher Education Act provides that
to be eligible to participate in Federal student financial aid
programs, an educational institution must enter into a program
participation agreement with the Secretary of the Department of
Education. The agreement includes a number of conditions with
which an institution must comply to be granted initial and
continuing eligibility to participate. Among those conditions is
a prohibition on institutions providing any commission, bonus,
or other incentive payment based directly or indirectly on
success in securing enrollments to any individual or entity
engaged in recruiting or admission activities. The regulations
promulgated under the Higher Education Act specify a number of
types of compensation, or safe harbors, that do not
constitute incentive compensation in violation of this
agreement. One of these safe harbors permits an institution to
award incentive compensation for Internet-based recruitment and
admission activities that provide information about the
institution to prospective students, refer prospective students
to the institution, or permit prospective students to apply for
21
admission online. The U.S. Department of Education is
currently engaged in a negotiated rulemaking process in which it
has suggested repealing all existing safe harbors regarding
incentive compensation in recruiting, including the Internet
safe harbor. Any changes in these laws or judicial
interpretations narrowing their protections will subject us to
greater risk of liability and may increase our costs of
compliance with these regulations or limit our ability to
operate certain lines of business.
The financial services, education and medical industries are
highly regulated and our marketing activities on behalf of our
clients in those industries are also regulated. For example, our
mortgage websites and marketing services we offer are subject to
various federal, state and local laws, including state mortgage
broker licensing laws, federal and state laws prohibiting unfair
acts and practices, and federal and state advertising laws. Any
failure to comply with these laws and regulations could subject
us to revocation of required licenses, civil, criminal or
administrative liability, damage to our reputation or changes to
or limitations on the conduct of our business. Any of the
foregoing could cause our business, operations and financial
condition to suffer.
New
tax treatment of companies engaged in Internet commerce may
adversely affect the commercial use of our marketing services
and our financial results.
Due to the global nature of the Internet, it is possible that,
although our services and the Internet transmissions related to
them originate in California and Nevada, and in some cases,
England, governments of other states or foreign countries might
attempt to regulate our transmissions or levy sales, income or
other taxes relating to our activities. We have experienced
certain states taking expansive positions with regard to their
taxation of our services. Tax authorities at the international,
federal, state and local levels are currently reviewing the
appropriate tax treatment of companies engaged in Internet
commerce. New or revised state tax regulations may subject us or
our affiliates to additional state sales, income and other
taxes. We cannot predict the effect of current attempts to
impose sales, income or other taxes on commerce over the
Internet. New or revised taxes and, in particular, sales taxes,
would likely increase the cost of doing business online and
decrease the attractiveness of advertising and selling goods and
services over the Internet. New taxes could also create
significant increases in internal costs necessary to capture
data, and collect and remit taxes. Any of these events could
have an adverse effect on our business and results of operations.
Limitations
on our ability to collect and use data derived from user
activities could significantly diminish the value of our
services and cause us to lose clients and revenue.
When a user visits our websites, we use technologies, including
cookies, to collect information such as the
users Internet Protocol, or IP, address, offerings
delivered by us that have been previously viewed by the user and
responses by the user to those offerings. In order to determine
the effectiveness of a marketing campaign and to determine how
to modify the campaign, we need to access and analyze this
information. The use of cookies has been the subject of
regulatory scrutiny and users are able to block or delete
cookies from their browser. Periodically, certain of our clients
and publishers seek to prohibit or limit our collection or use
of this data. Interruptions, failures or defects in our data
collection systems, as well as privacy concerns regarding the
collection of user data, could also limit our ability to analyze
data from our clients marketing campaigns. This risk is
heightened when we deliver marketing services to clients in the
financial and medical services client verticals. If our access
to data is limited in the future, we may be unable to provide
effective technologies and services to clients and we may lose
clients and revenue.
As a
creator and a distributor of Internet content, we face potential
liability and expenses for legal claims based on the nature and
content of the materials that we create or distribute. If we are
required to pay damages or expenses in connection with these
legal claims, our operating results and business may be
harmed.
We create original content for our websites and marketing
messages and distribute third-party content on our websites and
in our marketing messages. As a creator and distributor of
original content and third-party provided content, we face
potential liability based on a variety of theories, including
defamation, negligence, copyright or trademark infringement or
other legal theories based on the nature, creation or
distribution of this information. It is also possible that our
website visitors could make claims against us for losses
incurred in
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reliance upon information provided on our websites. In addition,
as the number of users of forums and social media features on
our websites increases, we could be exposed to liability in
connection with material posted to our websites by users and
other third parties. These claims, whether brought in the United
States or abroad, could divert management time and attention
away from our business and result in significant costs to
investigate and defend, regardless of the merit of these claims.
In addition, if we become subject to these types of claims and
are not successful in our defense, we may be forced to pay
substantial damages.
Wireless
devices and mobile phones are increasingly being used to access
the Internet, and our online marketing services may not be as
effective when accessed through these devices, which could cause
harm to our business.
The number of people who access the Internet through devices
other than personal computers has increased substantially in the
last few years. Our online marketing services were designed for
persons accessing the Internet on a desktop or laptop computer.
The smaller screens, lower resolution graphics and less
convenient typing capabilities of these devices may make it more
difficult for visitors to respond to our offerings. In addition,
the cost of mobile advertising is relatively high and may not be
cost-effective for our services. If our services continue to be
less effective or economically attractive for clients seeking to
engage in marketing through these devices and this segment of
web traffic grows at the expense of traditional computer
Internet access, we will experience difficulty attracting
website visitors and attracting and retaining clients and our
operating results and business will be harmed.
We may
not succeed in expanding our businesses outside the United
States, which may limit our future growth.
One potential area of growth for us is in the international
markets. However, we have limited experience in marketing,
selling and supporting our services outside of the United States
and we may not be successful in introducing or marketing our
services abroad. There are risks inherent in conducting business
in international markets, such as:
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the adaptation of technologies and services to foreign
clients preferences and customs;
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application of foreign laws and regulations to us, including
marketing and privacy regulations;
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changes in foreign political and economic conditions;
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tariffs and other trade barriers, fluctuations in currency
exchange rates and potentially adverse tax consequences;
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language barriers or cultural differences;
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reduced or limited protection for intellectual property rights
in foreign jurisdictions;
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difficulties and costs in staffing and managing or overseeing
foreign operations; and
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education of potential clients who may not be familiar with
online marketing.
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If we are unable to successfully expand and market our services
abroad, our business and future growth may be harmed and we may
incur costs that may not lead to future revenue.
We
rely on Internet bandwidth and data center providers and other
third parties for key aspects of the process of providing
services to our clients, and any failure or interruption in the
services and products provided by these third parties could harm
our business.
We rely on third-party vendors, including data center and
Internet bandwidth providers. Any disruption in the network
access or co-location services provided by these third-party
providers or any failure of these third-party providers to
handle current or higher volumes of use could significantly harm
our business. Any financial or other difficulties our providers
face may have negative effects on our business, the nature and
extent of which we cannot predict. We exercise little control
over these third-party vendors, which increases our
vulnerability to problems with the services they provide. We
license technology and related databases from third parties to
facilitate analysis and storage of data and delivery of
offerings. We have experienced interruptions and delays in
service and availability for data centers, bandwidth and other
technologies in the
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past. Any errors, failures, interruptions or delays experienced
in connection with these third-party technologies and services
could adversely affect our business and could expose us to
liabilities to third parties.
Our systems also heavily depend on the availability of
electricity, which also comes from third-party providers. If we
or third-party data centers which we utilize were to experience
a major power outage, we would have to rely on
back-up
generators. These
back-up
generators may not operate properly through a major power outage
and their fuel supply could also be inadequate during a major
power outage or disruptive event. Furthermore, we do not
currently have backup generators at our Foster City, California
headquarters. Information systems such as ours may be disrupted
by even brief power outages, or by the fluctuations in power
resulting from switches to and from
back-up
generators. This could give rise to obligations to certain of
our clients which could have an adverse effect on our results
for the period of time in which any disruption of utility
services to us occurs.
Interruption
or failure of our information technology and communications
systems could impair our ability to effectively deliver our
services, which could cause us to lose clients and harm our
operating results.
Our delivery of marketing and media services depends on the
continuing operation of our technology infrastructure and
systems. Any damage to or failure of our systems could result in
interruptions in our ability to deliver offerings quickly and
accurately
and/or
process visitors responses emanating from our various web
presences. Interruptions in our service could reduce our revenue
and profits, and our reputation could be damaged if people
believe our systems are unreliable. Our systems and operations
are vulnerable to damage or interruption from earthquakes,
terrorist attacks, floods, fires, power loss, break-ins,
hardware or software failures, telecommunications failures,
computer viruses or other attempts to harm our systems, and
similar events.
We lease or maintain server space in various locations,
including in San Francisco, California. Our California
facilities are located in areas with a high risk of major
earthquakes. Our facilities are also subject to break-ins,
sabotage and intentional acts of vandalism, and to potential
disruptions if the operators of these facilities have financial
difficulties. Some of our systems are not fully redundant, and
our disaster recovery planning cannot account for all
eventualities. The occurrence of a natural disaster, a decision
to close a facility we are using without adequate notice for
financial reasons or other unanticipated problems at our
facilities could result in lengthy interruptions in our service.
Any unscheduled interruption in our service would result in an
immediate loss of revenue. If we experience frequent or
persistent system failures, the attractiveness of our
technologies and services to clients and website publishers
could be permanently harmed. The steps we have taken to increase
the reliability and redundancy of our systems are expensive,
reduce our operating margin, and may not be successful in
reducing the frequency or duration of unscheduled interruptions.
Any
constraints on the capacity of our technology infrastructure
could delay the effectiveness of our operations or result in
system failures, which would result in the loss of clients and
harm our business and results of operations.
Our future success depends in part on the efficient performance
of our software and technology infrastructure. As the numbers of
websites and Internet users increase, our technology
infrastructure may not be able to meet the increased demand. A
sudden and unexpected increase in the volume of user responses
could strain the capacity of our technology infrastructure. Any
capacity constraints we experience could lead to slower response
times or system failures and adversely affect the availability
of websites and the level of user responses received, which
could result in the loss of clients or revenue or harm to our
business and results of operations.
We
could lose clients if we fail to detect click-through or other
fraud on advertisements in a manner that is acceptable to our
clients.
We are exposed to the risk of fraudulent clicks or actions on
our websites or our third-party publishers websites. We
may in the future have to refund revenue that our clients have
paid to us and that was later attributed to, or suspected to be
caused by, fraud. Click-through fraud occurs when an individual
clicks on an
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ad displayed on a website or an automated system is used to
create such clicks with the intent of generating the revenue
share payment to the publisher rather than to view the
underlying content. Action fraud occurs when on-line forms are
completed with false or fictitious information in an effort to
increase the compensable actions in respect of which a web
publisher is to be compensated. From time to time we have
experienced fraudulent clicks or actions and we do not charge
our clients for such fraudulent clicks or actions when they are
detected. It is conceivable that this activity could negatively
affect our profitability, and this type of fraudulent act could
hurt our reputation. If fraudulent clicks or actions are not
detected, the affected clients may experience a reduced return
on their investment in our marketing programs, which could lead
the clients to become dissatisfied with our campaigns, and in
turn, lead to loss of clients and the related revenue.
Additionally, we have from time to time had to terminate
relationships with web publishers who we believed to have
engaged in fraud and we may have to do so in future. Termination
of such relationships entails a loss of revenue associated with
the legitimate actions or clicks generated by such web
publishers.
We
will incur significant increased costs as a result of operating
as a public company, which may adversely affect our operating
results and financial condition.
As a public company, we will incur significant accounting, legal
and other expenses that we did not incur as a private company.
We will incur costs associated with our public company reporting
requirements. We also anticipate that we will incur costs
associated with corporate governance requirements, including
requirements under the Sarbanes-Oxley Act of 2002, or
Sarbanes-Oxley Act, as well as rules implemented by the SEC and
The NASDAQ Global Market. We expect these rules and regulations
to increase our legal and financial compliance costs and to make
some activities more time-consuming and costly. Our management
and other personnel will need to devote a substantial amount of
time to these compliance initiatives. Furthermore, these laws
and regulations could make it more difficult or more costly for
us to obtain certain types of insurance, including director and
officer liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. The impact of
these requirements could also make it more difficult for us to
attract and retain qualified persons to serve on our board of
directors, our board committees or as executive officers. We
cannot predict or estimate the amount or timing of additional
costs we may incur to respond to these requirements. We are
currently evaluating and monitoring developments with respect to
these rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.
In addition, the Sarbanes-Oxley Act requires, among other
things, that we maintain effective internal control over
financial reporting and disclosure controls and procedures. In
particular, for the fiscal year ending June 30, 2011, we
must perform system and process evaluation and testing of our
internal control over financial reporting to allow management
and our independent registered public accounting firm to report
on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act, or Section 404. Our compliance with Section 404
will require that we incur substantial expense and expend
significant management time on compliance-related issues.
If we
fail to maintain proper and effective internal controls, our
ability to produce accurate financial statements on a timely
basis could be impaired, which would adversely affect our
ability to operate our business.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally
accepted accounting principles. We may in the future discover
areas of our internal financial and accounting controls and
procedures that need improvement. Our internal control over
financial reporting will not prevent or detect all error and all
fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the control systems objectives will be met. Because
of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all
control issues and instances of fraud will be detected. If we
are unable to maintain proper and effective internal controls,
we may not be able to produce accurate financial
25
statements on a timely basis, which could adversely affect our
ability to operate our business and could result in regulatory
action.
Risks
Related to This Offering and Ownership of Our Common
Stock
Our
stock price may be volatile, and you may not be able to resell
shares of our common stock at or above the price you
paid.
Prior to this offering there has been no public market for
shares of our common stock, and an active public market for our
shares may not develop or be sustained after this offering. We
and the representatives of the underwriters will determine the
offering price of our common stock through negotiation. This
price will not necessarily reflect the price at which investors
in the market will be willing to buy and sell our shares
following this offering. In addition, the trading price of our
common stock following this offering could be highly volatile
and could be subject to wide fluctuations in response to various
factors, some of which are beyond our control. These factors
include those discussed in this Risk Factors section
of this prospectus and others such as:
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changes in earnings estimates or recommendations by securities
analysts;
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announcements by us or our competitors of new services,
significant contracts, commercial relationships, acquisitions or
capital commitments;
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developments with respect to intellectual property rights;
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our ability to develop and market new and enhanced products on a
timely basis;
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our commencement of, or involvement in, litigation;
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changes in governmental regulations or in the status of our
regulatory approvals; and
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a slowdown in our industry or the general economy.
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In recent years, the stock market in general, and the market for
technology and Internet-based companies in particular, has
experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of those companies. Broad market and industry
factors may seriously affect the market price of our common
stock, regardless of our actual operating performance. These
fluctuations may be even more pronounced in the trading market
for our stock shortly following this offering. In addition, in
the past, following periods of volatility in the overall market
and the market price of a particular companys securities,
securities class action litigation has often been instituted
against these companies. Such litigation, if instituted against
us, could result in substantial costs and a diversion of our
managements attention and resources.
If
securities or industry analysts do not publish research or
reports about our business, or if they issue an adverse or
misleading opinion regarding our stock, 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. We do not currently have and
may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our stock would
be negatively impacted. In the event we obtain securities or
industry analyst coverage, if any of the analysts who cover us
issue an adverse opinion regarding our stock, our stock price
would likely decline. If one or more of these analysts cease
coverage of our company or fail to publish reports on us
regularly, we could lose visibility in the financial markets,
which in turn could cause our stock price or trading volume to
decline.
Our
directors, executive officers and principal stockholders and
their respective affiliates will continue to have substantial
control over us after this offering and could delay or prevent a
change in corporate control.
After this offering, our directors, executive officers and
holders of more than 5% of our common stock, together with their
affiliates, will beneficially own, in the aggregate,
approximately 59% of our outstanding
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common stock, assuming no exercise of the underwriters
option to purchase additional shares of our common stock in this
offering. As a result, these stockholders, acting together, will
continue to have substantial control over the outcome of matters
submitted to our stockholders for approval, including the
election of directors and any merger, consolidation or sale of
all or substantially all of our assets. In addition, these
stockholders, acting together, will continue to have significant
influence over the management and affairs of our company.
Accordingly, this concentration of ownership may have the effect
of:
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delaying, deferring or preventing a change in corporate control;
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impeding a merger, consolidation, takeover or other business
combination involving us; or
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discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
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Future
sales of shares by existing stockholders could cause our stock
price to decline.
If our existing stockholders sell, or indicate an intent to
sell, substantial amounts of our common stock in the public
market after the
180-day
contractual
lock-up,
which period may be extended in certain limited circumstances,
and other legal restrictions on resale discussed in this
prospectus lapse, the trading price of our common stock could
decline significantly and could decline below the initial public
offering price. Based on shares outstanding as of
December 31, 2009, upon the completion of this offering, we
will have outstanding 44,912,597 shares of common stock,
assuming no exercise of the underwriters over-allotment
option and no exercise of outstanding options. Of these shares,
10,000,000 shares of common stock, plus any shares sold
upon exercise of the underwriters over-allotment option,
will be immediately freely tradable, without restriction, in the
public market. The underwriters may, in their sole discretion,
permit our officers, directors, employees and current
stockholders to sell shares prior to the expiration of the
lock-up
agreements.
After the
lock-up
agreements pertaining to this offering expire and based on
shares outstanding as of December 31, 2009, the remaining
34,912,597 shares will be eligible for sale in the public
market. In addition, (i) the 11,504,767 shares subject
to outstanding options under our equity incentive plans as of
December 31, 2009 and (ii) the shares reserved for
future issuance under our equity incentive plans will become
eligible for sale in the public market in the future, subject to
certain legal and contractual limitations. If these additional
shares are sold, or if it is perceived that they will be sold,
in the public market, the price of our common stock could
decline substantially.
Purchasers
of common stock in this offering will experience immediate and
substantial dilution in the book value of their
investment.
The initial offering price of our common stock is substantially
higher than the expected net tangible book value per share of
our common stock immediately after this offering. Therefore, if
you purchase our common stock in this offering, you will incur
an immediate dilution of $14.99 in net tangible book value per
share from the price you paid, based on our shares outstanding
as of September 30, 2009. In addition, following this
offering, purchasers in the offering will have contributed
approximately 81% of the total consideration paid by
stockholders to us to purchase shares of our common stock, based
on our shares outstanding as of September 30, 2009. In
addition, if the underwriters exercise their option to purchase
additional shares or if outstanding options are exercised, you
will experience further dilution. For a further description of
the dilution that you will experience immediately after this
offering, see the section of this prospectus entitled
Dilution.
We
have broad discretion to determine how to use the funds raised
in this offering, and may use them in ways that may not enhance
our operating results or the price of our common
stock.
Our management will have broad discretion over the use of
proceeds from this offering, and we could spend the proceeds
from this offering in ways our stockholders may not agree with
or that do not yield a favorable return. We intend to use the
net proceeds from this offering for working capital, capital
expenditures and other general corporate purposes. We may also
use a portion of the net proceeds to make repayments on our debt
or acquire other businesses, products or technologies. If we do
not invest or apply the proceeds of
27
this offering in ways that improve our operating results, we may
fail to achieve expected financial results, which could cause
our stock price to decline.
Provisions
in our charter documents following this offering, under Delaware
law and in contractual obligations, could discourage a takeover
that stockholders may consider favorable and may lead to
entrenchment of management.
Our amended and restated certificate of incorporation and bylaws
that will be in effect as of the closing of this offering will
contain provisions that could have the effect of delaying or
preventing changes in control or changes in our management
without the consent of our board of directors. These provisions
will include:
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a classified board of directors with three-year staggered terms,
which may delay the ability of stockholders to change the
membership of a majority of our board of directors;
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no cumulative voting in the election of directors, which limits
the ability of minority stockholders to elect director
candidates;
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the exclusive right of our board of directors to elect a
director to fill a vacancy created by the expansion of the board
of directors or the resignation, death or removal of a director,
which prevents stockholders from being able to fill vacancies on
our board of directors;
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the ability of our board of directors to determine to issue
shares of preferred stock and to determine the price and other
terms of those shares, including preferences and voting rights,
without stockholder approval, which could be used to
significantly dilute the ownership of a hostile acquirer;
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a prohibition on stockholder action by written consent, which
forces stockholder action to be taken at an annual or special
meeting of our stockholders;
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the requirement that a special meeting of stockholders may be
called only by the chairman of the board of directors, the chief
executive officer or the board of directors, which may delay the
ability of our stockholders to force consideration of a proposal
or to take action, including the removal of directors; and
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advance notice procedures that stockholders must comply with in
order to nominate candidates to our board of directors or to
propose matters to be acted upon at a stockholders
meeting, which may discourage or deter a potential acquiror from
conducting a solicitation of proxies to elect the
acquirors own slate of directors or otherwise attempting
to obtain control of us.
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We are subject to certain anti-takeover provisions under
Delaware law. Under Delaware law, a corporation may not, in
general, engage in a business combination with any holder of 15%
or more of its capital stock unless the holder has held the
stock for three years or, among other things, the board of
directors has approved the transaction. For a description of our
capital stock, see Description of Capital Stock.
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 do not intend to declare and pay dividends on our capital
stock for the foreseeable future. We currently intend to invest
our future earnings, if any, to fund our growth. Additionally,
the terms of our credit facility restrict our ability to pay
dividends. Therefore, you are not likely to receive any
dividends on your common stock for the foreseeable future.
28
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, particularly in the sections titled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business, contains forward-looking statements that
involve substantial risks and uncertainties. All statements
other than statements of historical facts contained in this
prospectus, including statements regarding our future financial
condition, business strategy and plans and objectives of
management for future operations, are forward-looking
statements. In some cases, you can identify forward-looking
statements by terminology such as believe,
may, might, objective,
estimate, continue,
anticipate, intend, should,
plan, expect, predict,
potential, or the negative of these terms or other
similar expressions. We have based these forward-looking
statements largely on our current expectations and projections
about future events and financial trends that we believe may
affect our financial condition, results of operations, business
strategy and financial needs. These forward-looking statements
are subject to a number of risks, uncertainties and assumptions
described under the section titled Risk Factors and
elsewhere in this prospectus, regarding, among other things:
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our immature industry and relatively new business model;
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our ability to manage our growth effectively;
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our dependence on Internet search companies to attract Internet
visitors;
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our ability to successfully manage any future acquisitions;
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our dependence on a small number of large clients and our
dependence on a small number of client verticals for a majority
of our revenue;
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our ability to attract and retain qualified employees and key
personnel;
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our ability to accurately forecast our operating results and
appropriately plan our expenses;
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our ability to compete in our industry;
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our ability to enhance and maintain our client and vendor
relationships;
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our ability to develop new services and enhancements and
features to meet new demands from our clients;
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our ability to raise additional capital in the future, if needed;
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general economic conditions in our domestic and potential future
international markets;
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our ability to protect our intellectual property rights; and
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our expectations regarding the use of proceeds from this
offering.
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These risks are not exhaustive. Other sections of this
prospectus may include additional factors that could adversely
impact our business and financial performance. These statements
reflect our current views with respect to future events and are
based on assumptions and subject to risk and uncertainties.
Moreover, we operate in a very competitive and rapidly-changing
environment. New risk factors emerge from time to time and it is
not possible for our management to predict all risk factors, nor
can we assess the impact of all factors on our business or the
extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any
forward-looking statements.
You should not rely upon forward-looking statements as
predictions of future events. The events and circumstances
reflected in the forward-looking statements may not be achieved
or occur. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we cannot
guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assume
responsibility for the accuracy and completeness of the
forward-looking statements. Except as required by law, we
undertake no obligation to update publicly any forward-looking
statements for any reason after the date of this prospectus to
conform these statements to actual results or to changes in our
expectations.
You should read this prospectus and the documents that we
reference in this prospectus and have filed as exhibits to the
registration statement on
Form S-1,
of which this prospectus is a part, that we have filed with the
SEC with the understanding that our actual future results,
levels of activity, performance and achievements may be
materially different from what we expect. We qualify all of our
forward-looking statements by these cautionary statements.
29
USE OF
PROCEEDS
We estimate that the net proceeds to us from the sale of our
common stock in this offering will be approximately
$165.1 million, or approximately $190.2 million if the
underwriters exercise their right to purchase additional shares
of common stock from us to cover over-allotments in full, based
upon an assumed initial public offering price of $18.00 per
share, and after deducting estimated underwriting discounts and
commissions and estimated offering expenses. Each $1.00 increase
(decrease) in the assumed initial public offering price of
$18.00 per share would increase (decrease) the net proceeds to
us from this offering by approximately $9.3 million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same. We may also
increase or decrease the number of shares we are offering. Each
increase (decrease) of 1,000,000 shares in the number of
shares offered by us would increase (decrease) the net proceeds
to us from this offering by approximately $16.7 million,
assuming that the assumed initial public offering price remains
the same, and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us. We do not expect that a change in the offering
price or the number of shares by these amounts would have a
material effect on our uses of the net proceeds from this
offering, although it may impact the amount of time prior to
which we may need to seek additional capital.
We currently intend to use our net proceeds from this offering
for working capital, capital expenditures and other general
corporate purposes. We may also use a portion of the net
proceeds to repay debt, including our credit facility, or
acquire other businesses, products or technologies.
The expected use of net proceeds of this offering represents our
current intentions based upon our present plans and business
conditions. The amounts we actually expend in these areas may
vary significantly from our current intentions and will depend
upon a number of factors, including future sales growth, success
of our engineering efforts, cash generated from future
operations, if any, and actual expenses to operate our business.
As of the date of this prospectus, we cannot specify with
certainty all of the particular uses for the net proceeds to be
received upon the closing of this offering. Accordingly, our
management will have broad discretion in the application of the
net proceeds, and investors will be relying on the judgment of
our management regarding the application of the net proceeds of
this offering.
The amount and timing of our expenditures will depend on several
factors, including the amount and timing of our spending on
sales and marketing activities and research and development
activities, as well as our use of cash for other corporate
activities. Pending the uses described above, we intend to
invest the net proceeds in a variety of capital preservation
instruments, including short-term, interest-bearing, investment
grade instruments, certificates of deposit or direct or
guaranteed obligations of the U.S. government.
DIVIDEND
POLICY
We have never declared or paid any cash dividends on our capital
stock. We currently intend to retain all available funds and any
future earnings to support our operations and finance the growth
and development of our business. We do not intend to pay cash
dividends on our common stock for the foreseeable future. Any
future determination related to dividend policy will be made at
the discretion of our board of directors. The loan agreement for
our credit facility contains a prohibition on the payout of cash
dividends.
30
CAPITALIZATION
The following table sets forth our cash, cash equivalents,
current debt and capitalization as of September 30, 2009
(unaudited):
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on an actual basis;
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on a pro forma basis after giving effect to the conversion of
all outstanding shares of our convertible preferred stock into
21,176,533 shares of common stock effective immediately
prior to the closing of this offering; and
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on a pro forma as adjusted basis to reflect, in addition, the
filing of our amended and restated certificate of incorporation
and the sale of 10,000,000 shares of common stock that we
are offering at an assumed initial public offering price of
$18.00 per share, which is the midpoint of the range listed on
the cover page of this prospectus, after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us.
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You should read the information in this table together with our
consolidated financial statements and accompanying notes and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this prospectus.
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As of September 30, 2009
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Pro Forma as
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Actual
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Pro Forma
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Adjusted(1)
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(In thousands, except share data)
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Cash and cash equivalents
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$
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28,095
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$
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28,095
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$
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193,161
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Debt, current
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$
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13,182
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$
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13,182
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$
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13,182
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Debt, noncurrent
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$
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52,995
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$
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52,995
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$
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52,995
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Convertible preferred stock, $0.001 par value,
35,500,000 shares authorized, 21,176,533 shares issued
and outstanding, actual; 35,500,000 shares authorized, no
shares issued and outstanding, pro forma; no shares authorized,
no shares issued and outstanding, pro forma as adjusted
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43,403
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Stockholders equity:
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Preferred stock, $0.001 par value, no shares authorized,
issued and outstanding, actual; no shares authorized,
issued and outstanding, pro forma; 5,000,000 shares authorized,
no shares issued and outstanding, pro forma as adjusted
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Common stock, $0.001 par value, 50,500,000 shares
authorized, 15,624,890 shares issued and
13,455,343 shares outstanding, actual;
50,500,000 shares authorized, 36,801,423 shares issued
and 34,631,876 shares outstanding, pro forma;
100,000,000 shares authorized, 46,801,423 shares
issued and 44,631,876 shares outstanding, pro forma as
adjusted
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16
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37
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47
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Additional paid-in capital
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23,252
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66,634
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231,690
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Treasury stock, at cost (2,169,547 shares)
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(7,641
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)
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(7,641
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)
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(7,641
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)
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Accumulated other comprehensive income
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3
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3
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3
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Retained earnings
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66,093
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66,093
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66,093
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Total stockholders equity
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81,723
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125,126
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290,192
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Total capitalization
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$
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178,121
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$
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178,121
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$
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343,187
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31
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(1)
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Each $1.00 increase (decrease) in the assumed public offering
price of $18.00 per share, the midpoint of the range reflected
on the cover page of this prospectus, would increase (decrease)
each of cash and cash equivalents, additional paid-in capital,
total stockholders equity and total capitalization by
approximately $9.3 million, assuming that the number of
shares offered by us, as set forth on the cover page of this
prospectus, remains the same, and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us. We may also increase or decrease the
number of shares we are offering. Each increase (decrease) of
1,000,000 shares in the number of shares offered by us
would increase (decrease) each of cash and cash equivalents,
additional paid-in capital, total stockholders equity and
total capitalization by approximately $16.7 million,
assuming that the assumed initial public offering price remains
the same, and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us. The as adjusted information discussed above is
illustrative only and will adjust based on the actual initial
public offering price and other terms of this offering
determined at pricing.
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The outstanding share information in the table above is based on
34,631,876 shares of common stock outstanding as of
September 30, 2009, and excludes:
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an aggregate of 10,654,296 shares of common stock issuable
upon the exercise of outstanding stock options as of
September 30, 2009 pursuant to our 2008 Equity Incentive
Plan and having a weighted-average exercise price of $8.1714 per
share;
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an aggregate of 1,726,814 additional shares of common stock
reserved for future issuance under our 2008 Equity Incentive
Plan as of September 30, 2009; provided, however, that
immediately upon the execution and delivery of the underwriting
agreement for this offering, our 2008 Equity Incentive Plan will
terminate so that no further awards may be granted under our
2008 Equity Incentive Plan, and the shares then remaining and
reserved for future issuance under our 2008 Equity Incentive
Plan shall become available for future issuance under our 2010
Equity Incentive Plan; and
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the shares reserved for future issuance under our 2010 Equity
Incentive Plan and up to 300,000 additional shares of common
stock reserved for future issuance under our 2010 Non-Employee
Directors Stock Award Plan, as well as any automatic
increases in the number of shares of common stock reserved for
future issuance under each of these benefit plans, which will
become effective immediately upon the execution and delivery of
the underwriting agreement for this offering.
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32
DILUTION
If you invest in our common stock in this offering, your
interest will be diluted to the extent of the difference between
the initial public offering price per share of our common stock
and the pro forma as adjusted net tangible book value per share
of our common stock after this offering. As of
September 30, 2009, our pro forma net tangible book value
was $(30.9 million), or $(0.89) per share of common stock.
Our pro forma net tangible book value per share represents the
amount of our total tangible assets reduced by the amount of our
total liabilities and divided by the total number of shares of
our common stock outstanding as of September 30, 2009,
after giving effect to the automatic conversion of all
outstanding shares of convertible preferred stock into shares of
common stock immediately prior to the closing of this offering.
After giving effect to our sale in this offering of
10,000,000 shares of common stock at the assumed initial
public offering price of $18.00 per share, the midpoint of the
range reflected on the cover page of this prospectus, and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us, our pro forma as
adjusted net tangible book value as of September 30, 2009
would have been approximately $134.2 million, or $3.01 per
share. This represents an immediate increase of net tangible
book value of $3.90 per share to our existing stockholders and
an immediate dilution of $14.99 per share to investors
purchasing common stock in this offering. The following table
illustrates this per share dilution:
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Assumed initial public offering price per share
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$
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18.00
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Pro forma as adjusted net tangible book value per share as of
September 30, 2009, before giving effect to this offering
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$
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(0.89
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)
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Increase in pro forma as adjusted net tangible book value per
share attributed to new investors purchasing shares in this
offering
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3.90
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Pro forma net tangible book value per share after giving effect
to this offering
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3.01
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Dilution per share to new investors in this offering
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$
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14.99
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Each $1.00 increase (decrease) in the assumed initial public
offering price of $18.00 per share would increase (decrease) our
pro forma as adjusted net tangible book value by
$9.3 million, or $0.21 per share, and the pro forma as
adjusted dilution per share to investors in this offering by
$0.79 per share, assuming that the number of shares offered by
us, as set forth on the cover page of this prospectus, remains
the same, and after deducting estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
We may also increase or decrease the number of shares we are
offering. An increase of 1,000,000 shares in the number of
shares offered by us would increase our pro forma as adjusted
net tangible book value by approximately $16.7 million, or
$0.30 per share, and the pro forma as adjusted dilution per
share to investors in this offering would be $14.69 per share,
assuming that the assumed initial public offering price remains
the same, and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us. Similarly, a decrease of 1,000,000 shares in
the number of shares offered by us would decrease our pro forma
as adjusted net tangible book value by approximately
$16.7 million, or $0.31 per share, and the pro forma as
adjusted dilution per share to investors in this offering would
be $15.31 per share, assuming that the assumed initial public
offering price remains the same, and after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us. The pro forma as adjusted
information discussed above is illustrative only and will adjust
based on the actual initial public offering price and other
terms of this offering determined at pricing.
If the underwriters exercise their option to purchase additional
shares of our common stock from us in full in this offering, the
pro forma as adjusted net tangible book value per share after
the offering would be $3.45 per share, the increase in pro forma
as adjusted net tangible book value per share to existing
stockholders would be $4.34 per share and the dilution to new
investors purchasing shares in this offering would be $14.55 per
share.
33
The following table summarizes on a pro forma as adjusted basis
as of September 30, 2009:
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the total number of shares of common stock purchased from us by
our existing stockholders and by new investors purchasing shares
in this offering;
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the total approximate consideration paid to us by our existing
stockholders and by new investors purchasing shares in this
offering, assuming an initial public offering price of $18.00
per share (before deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us in
connection with this offering); and
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the average price per share paid by existing stockholders and by
new investors purchasing shares in this offering.
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Average
|
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Shares Purchased
|
|
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Total Consideration
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Price per
|
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|
Number
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Percent
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|
|
Amount
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Percent
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|
|
Share
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|
Existing stockholders
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|
34,631,876
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|
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|
78
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%
|
|
$
|
43,594,000
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|
|
19
|
%
|
|
$
|
1.26
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|
New investors
|
|
|
10,000,000
|
|
|
|
22
|
|
|
|
180,000,000
|
|
|
|
81
|
|
|
|
18.00
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
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Total
|
|
|
44,631,876
|
|
|
|
100.0
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%
|
|
$
|
223,594,000
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|
|
|
100.0
|
%
|
|
|
|
|
|
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|
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If the underwriters exercise their option to purchase additional
shares of our common stock in full, our existing stockholders
would own 75% and our new investors would own 25% of the total
number of shares of common stock outstanding upon completion of
this offering. The total consideration paid to us by our
existing stockholders would be approximately $43.6 million,
or 17%, and the total consideration paid to us by our new
investors would be $207.0 million, or 83%.
If all outstanding options under our equity incentive plans were
exercised, then our existing stockholders, including the holders
of these options, would own 82% and our new investors would own
18% of the total number of shares of our common stock
outstanding upon the closing of this offering. In such event,
the total consideration paid by our existing stockholders,
including the holders of these options, would be approximately
$130.7 million, or 42%, the total consideration paid by our
new investors would be $180.0 million, or 58%, the average
price per share paid by our existing stockholders would be $2.89
and the average price per share paid by our new investors would
be $18.00.
The above discussion and tables are based on
34,631,876 shares of common stock outstanding as of
September 30, 2009, and excludes:
|
|
|
|
|
an aggregate of 10,654,296 shares of common stock issuable
upon the exercise of outstanding stock options as of
September 30, 2009 pursuant to our 2008 Equity Incentive
Plan and having a weighted-average exercise price of $8.1714 per
share;
|
|
|
|
|
|
an aggregate of 1,726,814 additional shares of common stock
reserved for future issuance under our 2008 Equity Incentive
Plan as of September 30, 2009; provided, however, that
immediately upon the execution and delivery of the underwriting
agreement for this offering, our 2008 Equity Incentive Plan will
terminate so that no further awards may be granted under our
2008 Equity Incentive Plan, and the shares then remaining and
reserved for future issuance under our 2008 Equity Incentive
Plan shall become available for future issuance under our 2010
Non-Employee Directors Stock Award Plan; and
|
|
|
|
the shares reserved for future issuance under our 2010 Equity
Incentive Plan and up to 300,000 additional shares of common
stock reserved for future issuance under our 2010 Non-Employee
Directors Stock Award Plan, as well as any automatic
increases in the number of shares of common stock reserved for
future issuance under each of these benefit plans, which will
become effective immediately upon the execution and delivery of
the underwriting agreement for this offering.
|
34
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be
read together with our consolidated financial statements and
accompanying notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this prospectus. The selected
consolidated financial data in this section is not intended to
replace our consolidated financial statements and the related
notes. Our historical results are not necessarily indicative of
our future results and our interim results are not necessarily
indicative of the results that should be expected for the full
fiscal year.
We derived the consolidated statements of operations data for
the fiscal years ended June 30, 2007, 2008 and 2009 and the
consolidated balance sheets data as of June 30, 2008 and
2009 from our audited consolidated financial statements
appearing elsewhere in this prospectus. The consolidated
statements of operations data for the fiscal years ended
June 30, 2005 and 2006 and the consolidated balance sheets
data as of June 30, 2005, 2006 and 2007 are derived from
our audited consolidated financial statements, which are not
included in this prospectus. The consolidated statements of
operations data for the three months ended September 30,
2008 and 2009 and the consolidated balance sheet data as of
September 30, 2009 are derived from our unaudited
consolidated financial statements appearing elsewhere in this
prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
109,556
|
|
|
$
|
142,408
|
|
|
$
|
167,370
|
|
|
$
|
192,030
|
|
|
$
|
260,527
|
|
|
$
|
63,678
|
|
|
$
|
78,552
|
|
Cost of revenue(1)
|
|
|
65,653
|
|
|
|
85,820
|
|
|
|
108,945
|
|
|
|
130,869
|
|
|
|
181,593
|
|
|
|
45,281
|
|
|
|
55,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
43,903
|
|
|
|
56,588
|
|
|
|
58,425
|
|
|
|
61,161
|
|
|
|
78,934
|
|
|
|
18,397
|
|
|
|
23,505
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
12,644
|
|
|
|
17,265
|
|
|
|
14,094
|
|
|
|
14,051
|
|
|
|
14,887
|
|
|
|
3,757
|
|
|
|
4,470
|
|
Sales and marketing
|
|
|
5,734
|
|
|
|
7,166
|
|
|
|
8,487
|
|
|
|
12,409
|
|
|
|
16,154
|
|
|
|
4,259
|
|
|
|
3,625
|
|
General and administrative
|
|
|
4,842
|
|
|
|
6,835
|
|
|
|
11,440
|
|
|
|
13,371
|
|
|
|
13,172
|
|
|
|
3,736
|
|
|
|
3,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,220
|
|
|
|
31,266
|
|
|
|
34,021
|
|
|
|
39,831
|
|
|
|
44,213
|
|
|
|
11,752
|
|
|
|
11,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
20,683
|
|
|
|
25,322
|
|
|
|
24,404
|
|
|
|
21,330
|
|
|
|
34,721
|
|
|
|
6,645
|
|
|
|
11,969
|
|
Interest income
|
|
|
553
|
|
|
|
1,341
|
|
|
|
1,905
|
|
|
|
1,482
|
|
|
|
245
|
|
|
|
90
|
|
|
|
9
|
|
Interest expense
|
|
|
(9
|
)
|
|
|
(427
|
)
|
|
|
(732
|
)
|
|
|
(1,214
|
)
|
|
|
(3,544
|
)
|
|
|
(763
|
)
|
|
|
(748
|
)
|
Other income (expense), net
|
|
|
(31
|
)
|
|
|
(874
|
)
|
|
|
(139
|
)
|
|
|
145
|
|
|
|
(239
|
)
|
|
|
51
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
|
513
|
|
|
|
40
|
|
|
|
1,034
|
|
|
|
413
|
|
|
|
(3,538
|
)
|
|
|
(622
|
)
|
|
|
(619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
21,196
|
|
|
|
25,362
|
|
|
|
25,438
|
|
|
|
21,743
|
|
|
|
31,183
|
|
|
|
6,023
|
|
|
|
11,350
|
|
Provision for taxes
|
|
|
(8,136
|
)
|
|
|
(9,773
|
)
|
|
|
(9,828
|
)
|
|
|
(8,876
|
)
|
|
|
(13,909
|
)
|
|
|
(2,719
|
)
|
|
|
(4,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
13,060
|
|
|
|
15,589
|
|
|
|
15,610
|
|
|
|
12,867
|
|
|
|
17,274
|
|
|
|
3,304
|
|
|
|
6,513
|
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
(1,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,060
|
|
|
$
|
13,769
|
|
|
$
|
15,610
|
|
|
$
|
12,867
|
|
|
$
|
17,274
|
|
|
$
|
3,304
|
|
|
$
|
6,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: 8% non-cumulative dividends on convertible preferred stock
|
|
|
(3,218
|
)
|
|
|
(3,276
|
)
|
|
|
(3,276
|
)
|
|
|
(3,276
|
)
|
|
|
(3,276
|
)
|
|
|
(819
|
)
|
|
|
(819
|
)
|
Undistributed earnings allocated to convertible preferred stock
|
|
|
(6,240
|
)
|
|
|
(6,591
|
)
|
|
|
(7,690
|
)
|
|
|
(5,925
|
)
|
|
|
(8,599
|
)
|
|
|
(1,527
|
)
|
|
|
(3,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic
|
|
$
|
3,602
|
|
|
$
|
3,902
|
|
|
$
|
4,644
|
|
|
$
|
3,666
|
|
|
$
|
5,399
|
|
|
$
|
958
|
|
|
$
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic
|
|
$
|
3,602
|
|
|
$
|
3,902
|
|
|
$
|
4,644
|
|
|
$
|
3,666
|
|
|
$
|
5,399
|
|
|
$
|
958
|
|
|
$
|
2,207
|
|
Undistributed earnings re-allocated to common stock
|
|
|
436
|
|
|
|
525
|
|
|
|
522
|
|
|
|
360
|
|
|
|
399
|
|
|
|
77
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stockholders diluted
|
|
$
|
4,038
|
|
|
$
|
4,427
|
|
|
$
|
5,166
|
|
|
$
|
4,026
|
|
|
$
|
5,798
|
|
|
$
|
1,035
|
|
|
$
|
2,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.30
|
|
|
$
|
0.31
|
|
|
$
|
0.36
|
|
|
$
|
0.28
|
|
|
$
|
0.41
|
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.28
|
|
|
$
|
0.29
|
|
|
$
|
0.34
|
|
|
$
|
0.26
|
|
|
$
|
0.39
|
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing basic net income per
share
|
|
|
12,069
|
|
|
|
12,411
|
|
|
|
12,789
|
|
|
|
13,104
|
|
|
|
13,294
|
|
|
|
13,279
|
|
|
|
13,405
|
|
Weighted average shares used in computing diluted net income per
share
|
|
|
14,543
|
|
|
|
15,295
|
|
|
|
15,263
|
|
|
|
15,325
|
|
|
|
14,971
|
|
|
|
15,131
|
|
|
|
15,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.50
|
|
|
|
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.48
|
|
|
|
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing pro forma basic net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,471
|
|
|
|
|
|
|
|
34,582
|
|
Weighted average shares used in computing pro forma diluted net
income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,148
|
|
|
|
|
|
|
|
36,558
|
|
|
|
|
(1)
|
|
Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Fiscal Year Ended June 30,
|
|
September 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
48
|
|
|
$
|
66
|
|
|
$
|
416
|
|
|
$
|
1,112
|
|
|
$
|
1,916
|
|
|
$
|
470
|
|
|
$
|
728
|
|
Product development
|
|
|
3
|
|
|
|
(7
|
)
|
|
|
75
|
|
|
|
443
|
|
|
|
669
|
|
|
|
161
|
|
|
|
253
|
|
Sales and marketing
|
|
|
43
|
|
|
|
10
|
|
|
|
226
|
|
|
|
581
|
|
|
|
1,761
|
|
|
|
416
|
|
|
|
507
|
|
General and administrative
|
|
|
47
|
|
|
|
20
|
|
|
|
1,354
|
|
|
|
1,086
|
|
|
|
1,827
|
|
|
|
351
|
|
|
|
741
|
|
|
|
|
(2)
|
|
See Note 4 to our consolidated financial statements
included in this prospectus for an explanation of the method
used to calculate basic and diluted net loss per share and pro
forma basic and diluted net loss per share of common stock.
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
|
(In thousands)
|
|
Consolidated Balance Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
19,418
|
|
|
$
|
30,593
|
|
|
$
|
26,765
|
|
|
$
|
24,953
|
|
|
$
|
25,182
|
|
|
$
|
28,095
|
|
Working capital
|
|
|
39,859
|
|
|
|
36,294
|
|
|
|
42,769
|
|
|
|
17,022
|
|
|
|
16,426
|
|
|
|
19,942
|
|
Total assets
|
|
|
71,350
|
|
|
|
101,203
|
|
|
|
118,536
|
|
|
|
179,746
|
|
|
|
212,878
|
|
|
|
235,410
|
|
Total liabilities
|
|
|
26,657
|
|
|
|
39,567
|
|
|
|
37,831
|
|
|
|
86,032
|
|
|
|
96,289
|
|
|
|
110,284
|
|
Total debt
|
|
|
|
|
|
|
9,216
|
|
|
|
10,250
|
|
|
|
51,654
|
|
|
|
57,240
|
|
|
|
66,177
|
|
Total stockholders equity
|
|
|
4,246
|
|
|
|
18,350
|
|
|
|
37,312
|
|
|
|
50,311
|
|
|
|
73,186
|
|
|
|
81,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Fiscal Year Ended June 30,
|
|
September 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
(In thousands)
|
|
Consolidated Statements of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
23,200
|
|
|
$
|
21,659
|
|
|
$
|
25,197
|
|
|
$
|
24,751
|
|
|
$
|
32,570
|
|
|
$
|
(261
|
)
|
|
$
|
11,808
|
|
Depreciation and amortization
|
|
|
3,466
|
|
|
|
7,208
|
|
|
|
9,637
|
|
|
|
11,727
|
|
|
|
15,978
|
|
|
|
4,114
|
|
|
|
3,952
|
|
Capital expenditures
|
|
|
5,671
|
|
|
|
1,104
|
|
|
|
2,030
|
|
|
|
2,177
|
|
|
|
1,347
|
|
|
|
504
|
|
|
|
443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Fiscal Year Ended June 30,
|
|
September 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
(In thousands)
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1)
|
|
$
|
24,290
|
|
|
$
|
32,619
|
|
|
$
|
36,112
|
|
|
$
|
36,279
|
|
|
$
|
56,872
|
|
|
$
|
12,157
|
|
|
$
|
18,150
|
|
|
|
|
(1)
|
|
We define Adjusted EBITDA as net income less interest income
plus interest expense, provision for taxes, depreciation
expense, amortization expense, stock-based compensation expense
and foreign-exchange (loss) gain. Please see Summary
Consolidated Financial Data Adjusted EBITDA
for more information and for a reconciliation of Adjusted EBITDA
to our net income calculated in accordance with U.S. generally
accepted accounting principles.
|
37
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial
condition and results of operations in conjunction with the
consolidated financial statements and the notes thereto included
elsewhere in this prospectus. The following discussion contains
forward-looking statements that reflect our plans, estimates and
beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could
cause or contribute to these differences include those discussed
below and elsewhere in this prospectus, particularly in the
sections titled Risk Factors and Special Note
Regarding Forward-Looking Statements.
Overview
QuinStreet is a leader in vertical marketing and media on the
Internet. We have built a strong set of capabilities to engage
Internet visitors with targeted media and to connect our
marketing clients with their potential customers online. We
focus on serving clients in large, information-intensive
industry verticals where relevant, targeted media and offerings
help visitors make informed choices, find the products that
match their needs, and thus become qualified customer prospects
for our clients.
We deliver cost-effective marketing results to our clients,
predictably and scalably, most typically in the form of a
qualified lead or click. These leads or clicks can then convert
into a customer or sale for the client at a rate that results in
an acceptable marketing cost to them. We get paid by clients
primarily when we deliver qualified leads or clicks as defined
by our agreements with them. Because we bear the costs of media,
our programs must deliver a value to our clients and a media
yield, or our ability to generate an acceptable margin on our
media costs, that provides a sound financial outcome for us. Our
general process is:
|
|
|
|
|
We own or access targeted media;
|
|
|
|
We run advertisements or other forms of marketing messages and
programs in that media to create visitor responses or clicks
through to client offerings;
|
|
|
|
We match these responses or clicks to client offerings or brands
that meet visitor interests or needs, converting visitors into
qualified leads or clicks; and
|
|
|
|
We optimize client matches and media yield such that we achieve
desired results for clients and a sound financial outcome for us.
|
Our primary financial objective has been and remains creating
revenue growth, from sustainable sources, at target levels of
profitability. Our primary financial objective is not to
maximize profits, but rather to achieve target levels of
profitability while investing in various growth initiatives, as
we believe we are in the early stages of a large, long-term
market. We have been successful in increasing revenue each year
since our inception. We became profitable in 2002 and have
remained so since that time.
Our Direct Marketing Services, or DMS, business accounted for
95%, 98%, 99% and 99% of our net revenue in fiscal years 2007,
2008 and 2009 and the first three months of fiscal year 2010,
respectively. Our DMS business derives substantially all of its
net revenue from fees earned through the delivery of qualified
leads and clicks to our clients. Through a deep vertical focus,
targeted media presence and our technology platform, we are able
to reliably deliver targeted, measurable marketing results to
our clients.
Our two largest client verticals are education and financial
services. Our education vertical has historically been our
largest vertical, representing 78%, 74%, 58% and 51% of net
revenue in fiscal years 2007, 2008 and 2009 and the first three
months of fiscal year 2010, respectively. DeVry Inc., a
for-profit education company and our largest client, accounted
for 22%, 23%, 19%, and 13% of total net revenue for fiscal years
2007, 2008 and 2009 and the first three months of fiscal year
2010, respectively. Our financial services vertical, which we
have grown both organically and through acquisitions,
represented 7%, 11%, 31% and 39% of net revenue in fiscal years
2007, 2008 and 2009 and the first three months of fiscal year
2010, respectively. Other DMS verticals, consisting primarily of
home services,
business-to-business,
or B2B, and
38
healthcare, represented 10%, 13%, 10% and 9% of net revenue in
fiscal years 2007, 2008 and 2009 and the first three months of
fiscal year 2010, respectively.
In addition, we derived 5%, 2%, 1% and 1% of our net revenue in
fiscal years 2007, 2008 and 2009 and the first three months of
fiscal year 2010, respectively, from the provision of a hosted
solution and related services for clients in the direct selling
industry, also referred to as our Direct Selling Services, or
DSS, business.
We have generated substantially all of our revenue from sales to
clients in the United States.
We are subject to economic or business factors that affect our
client verticals. For instance, presently, clients in particular
verticals such as financial services, particularly mortgage,
credit cards and deposits, small- to medium-sized business
customers and home services are facing very difficult conditions
and their marketing spending has been negatively affected. In
general, we address challenges created by these adverse economic
or business conditions by shifting investment and resources to
other client verticals that might be less challenged or by
focusing on opportunities with specific clients and subsets of
client verticals that might be less affected by those
challenges. However, we also invest in client verticals that may
face near-term challenges but present long-term growth potential.
We face an additional challenge with regard to DeVry, our
largest client, which accounted for approximately 19% and 13% of
our net revenue for fiscal year 2009 and the first three months
of fiscal year 2010, respectively. DeVry has recently retained
an advertising agency and has reduced its purchases of leads
from us. We have been addressing this challenge by working with
DeVry and the agency to understand their evolving needs and
strategies and how we can best serve them going forward. In
addition, we have been expanding our business with other clients
in our education client vertical. We are also expanding our
client base in education to replace visitor matches previously
delivered to DeVry.
Trends
Affecting our Business
Seasonality
Our results from our education client vertical are subject to
significant fluctuation as a result of seasonality. In
particular, our quarters ending December 31 (our second fiscal
quarter) typically demonstrate seasonal weakness. In those
quarters, there is lower availability of lead supply from some
forms of media during the holiday period and our education
clients often request fewer leads due to holiday staffing. In
our quarters ending March 31, this trend generally reverses
with better lead availability and often new budgets at the
beginning of the year for our clients with financial years
ending December 31. For example, in the quarters ended
December 31, 2007 and 2008 net revenue from our
education clients declined 6% and 13%, respectively, from the
previous quarter.
Acquisitions
Beginning in fiscal year 2008, we executed on our strategy to
increase the depth within our existing verticals and diversify
our business among these verticals by substantially increasing
our spending on acquisitions of businesses and technologies. For
example, in February 2008, we acquired ReliableRemodeler.com,
Inc., or ReliableRemodeler, an Oregon-based company specializing
in online home renovation and contractor referrals for
$17.5 million in cash and $8.0 million in
non-interest-bearing, unsecured promissory notes, in an effort
to increase our presence within our home services vertical. In
April 2008, we acquired Cyberspace Communication Corporation, an
Oklahoma-based online marketing company doing business as
SureHits, for $27.5 million in cash and $18.0 million
in potential earn-out payments, in an effort to increase our
presence within the financial services vertical. During fiscal
years 2008 and 2009, in addition to the acquisitions mentioned
above, we acquired an aggregate of 21 and 34 online publishing
businesses, respectively.
In October 2009, we acquired the website business Insure.com
from Life Quote, Inc. for $15.0 million in cash and a
$1.0 million non-interest bearing, unsecured promissory
note. In November 2009, we acquired the website assets of the
Internet.com division of WebMediaBrands, Inc. for $16.0 million
in cash and a $2.0 million non-interest-bearing, unsecured
promissory note.
39
Our acquisition strategy may result in significant fluctuations
in our available working capital from period to period and over
the years. We may use cash, stock or promissory notes to acquire
various businesses or technologies, and we cannot accurately
predict the timing of those acquisitions or the impact on our
cash flows and balance sheet. Large acquisitions or multiple
acquisitions within a particular period may significantly impact
our financial results for that period. We may utilize debt
financing to make acquisitions, which could give rise to higher
interest expense and more restrictive operating covenants. We
may also utilize our stock as consideration, which could result
in substantial dilution.
Client
Verticals
To date, we have generated the majority of our revenue from
clients in our educational vertical. We expect that a majority
of our revenue in fiscal year 2010 will be generated from
clients in our education and financial services client
verticals. A downturn in economic or market conditions adversely
affecting the education industry or the financial services
industry would negatively impact our business and financial
condition. Over the past year, education marketing spending has
remained relatively stable, but we cannot assure you that this
stability will continue. Marketing budgets for clients in our
education vertical are impacted by a number of factors,
including the availability of student financial aid, the
regulation of for-profit financial institutions and economic
conditions. Over the past year, some segments of the financial
services industry, particularly mortgages, credit cards and
deposits, have seen declines in marketing budgets given the
difficult market conditions. These declines may continue or
worsen. In addition, the education and financial services
industries are highly regulated. Changes in regulations or
government actions may negatively impact our clients
marketing practices and budgets and, therefore, adversely affect
our financial results.
Development
and Acquisition of Vertical Media
One of the primary challenges of our business is finding or
creating media that is targeted enough to attract prospects
economically for our clients and at costs that work for our
business model. In order to continue to grow our business, we
must be able to continue to find or develop quality vertical
media on a cost-effective basis. Our inability to find or
develop vertical media could impair our growth or adversely
affect our financial performance.
Basis of
Presentation
General
We operate in two segments: DMS and DSS. For further discussion
or financial information about our reporting segments, see
Note 2 to our consolidated financial statements included in
this prospectus.
Net
Revenue
DMS.
We derive substantially all of our
revenue from fees earned through the delivery of qualified leads
or paid clicks. We deliver targeted and measurable results
through a vertical focus that we classify into the following key
client verticals: education, financial services, home services,
B2B and healthcare.
DSS.
We derived approximately 5%, 2%, 1% and
1% of our net revenue in fiscal years 2007, 2008 and 2009 and
the first three months of fiscal year 2010, respectively. We
expect DSS to continue to represent an immaterial portion of our
business.
Cost
of Revenue
Cost of revenue consists primarily of media costs, personnel
costs, amortization of acquisition-related intangible assets,
depreciation expense and amortization of internal software
development costs on revenue-producing technologies. Media costs
consist primarily of fees paid to website publishers that are
directly related to a revenue-generating event and PPC ad
purchases from Internet search companies. We pay these Internet
search companies and website publishers on a revenue-share,
cost-per-lead,
or CPL,
cost-per-click,
or CPC, and
cost-per-thousand-impressions,
or CPM, basis. Personnel costs include salaries, bonuses,
stock-based compensation expense and employee benefit costs.
Compensation expense is primarily related to individuals
associated with maintaining our servers and websites, our
editorial staff, client management, creative team, compliance
group and media purchasing analysts. We capitalize costs
associated with software developed or obtained for internal use.
40
Costs incurred in the development phase are capitalized and
amortized in cost of revenue over the products estimated
useful life. We anticipate that our cost of revenue will
increase in absolute dollars.
Operating
Expenses
We classify our operating expenses into three categories:
product development, sales and marketing and general and
administrative. Our operating expenses consist primarily of
personnel costs and, to a lesser extent, professional fees, rent
and allocated costs. Personnel costs for each category of
operating expenses generally include salaries, bonuses and
commissions, stock-based compensation expense and employee
benefit costs.
Product Development.
Product development
expenses consist primarily of personnel costs and professional
services fees associated with the development and maintenance of
our technology platforms, development and launching of our
websites, product-based quality assurance and testing. We
believe that continued investment in technology is critical to
attaining our strategic objectives and, as a result, we expect
technology development and enhancement expenses to increase in
absolute dollars in future periods.
Sales and Marketing.
Sales and marketing
expenses consist primarily of personnel costs (including
commissions) and, to a lesser extent, allocated overhead,
professional services, advertising, travel and marketing
materials. We expect sales and marketing expenses to increase in
absolute dollars as we hire additional personnel in sales and
marketing to support our increasing revenue base and product
offerings.
General and Administrative.
General and
administrative expenses consist primarily of personnel costs of
our executive, finance, legal, employee benefits and compliance
and other administrative personnel, as well as accounting and
legal professional services fees and other corporate expenses.
We expect general and administrative expenses to increase in
absolute dollars in future periods as we continue to invest in
corporate infrastructure and incur additional expenses
associated with being a public company, including increased
legal and accounting costs, investor relations costs, higher
insurance premiums and compliance costs associated with
Section 404 of the Sarbanes-Oxley Act of 2002.
Interest
and Other Income (Expense), Net
Interest and other income (expense), net, consists primarily of
interest income and interest expense. Interest expense is
related to our credit facilities and the promissory notes issued
in connection with our acquisitions. The outstanding balance of
our credit facilities and acquisition-related promissory notes
was $40.5 million and $26.3 million, respectively, as
of September 30, 2009. We expect interest expense to
increase in the near future as we entered into a new credit
facility in January 2010 with a larger borrowing capacity and a
higher rate of interest. Borrowings under our credit facility
could also subsequently increase as we continue to implement our
acquisition strategy. Interest income represents interest
received on our cash and cash equivalents, which we expect will
increase in the near term with the investment of the net
proceeds of this offering.
Income
Tax Expense
We are subject to tax in the United States as well as other tax
jurisdictions or countries in which we conduct business.
Earnings from our limited
non-U.S. activities
are subject to local country income tax and may be subject to
current U.S. income tax.
As of September 30, 2009, we did not have net operating
loss carryforwards for federal income tax purposes and had
approximately $2.8 million in California net operating loss
carryforwards that begin to expire in March 2011, and that we
expect to utilize in an amended return. The California net
operating loss carryforwards will not offset future taxable
income, but may instead result in a refund of historical taxes
paid. As of September 30, 2009, our Japanese subsidiary had
net operating loss carryforwards of approximately $370,000 that
will begin to expire in 2011. These net operating loss
carryforwards were fully reserved as of September 30, 2009.
As of September 30, 2009, we had net deferred tax assets of
$5.5 million. Our net deferred tax assets consist primarily
of accruals, reserves and stock-based compensation expense not
currently deductible for tax
41
purposes. We assess the need for a valuation allowance on the
deferred tax assets by evaluating both positive and negative
evidence that may exist. Any adjustment to the deferred tax
asset valuation allowance would be recorded in the income
statement of the periods that the adjustment is determined to be
required.
On July 1, 2007, we adopted the authoritative accounting
guidance prescribing a threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The
guidance also provides for de-recognition of tax benefits,
classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure and transition. The
guidance utilizes a two-step approach for evaluating uncertain
tax positions. Step one, Recognition, requires a company to
determine if the weight of available evidence indicates that a
tax position is more likely than not to be sustained upon audit,
including resolution of related appeals or litigation processes,
if any. If a tax position is not considered more likely
than not to be sustained then no benefits of the position
are to be recognized. Step two, Measurement, is based on the
largest amount of benefit, which is more likely than not to be
realized on ultimate settlement.
Effective July 1, 2007, we adopted the accounting guidance
on uncertainties in income tax. The cumulative effect of
adoption to the opening balance of the retained earnings account
was $1,705.
Critical
Accounting Policies and Estimates
In presenting our consolidated financial statements in
conformity with U.S. generally accepting accounting
principals, or GAAP, we are required to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenue, costs and expenses and related disclosures.
Some of the estimates and assumptions we are required to make
relate to matters that are inherently uncertain as they pertain
to future events. We base these estimates and assumptions on
historical experience or on various other factors that we
believe to be reasonable and appropriate under the
circumstances. On an ongoing basis, we reconsider and evaluate
our estimates and assumptions. Actual results may differ
significantly from these estimates.
We believe that the critical accounting policies listed below
involve our more significant judgments, assumptions and
estimates and, therefore, could have the greatest potential
impact on our consolidated financial statements. In addition, we
believe that a discussion of these policies is necessary to
understand and evaluate the consolidated financial statements
contained in this prospectus.
For further information on our critical and other significant
accounting policies, see Note 2 of our consolidated
financial statements included in this prospectus.
Revenue
Recognition
We derive revenue from two segments: DMS and DSS. DMS revenue,
which constituted 95%, 98% and 99% of our net revenue for fiscal
years 2007, 2008 and 2009, respectively, is derived primarily
from fees that are earned through the delivery of qualified
leads or paid clicks. We recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the
fee is fixed or determinable and collectability is reasonably
assured. Delivery is deemed to have occurred at the time a lead
or click is delivered to the client, provided that no
significant obligations remain.
From time to time, we may agree to credit clients for certain
leads or clicks if they fail to meet the contractual or other
guidelines of a particular client. We have established a sales
reserve based on historical experience. To date, our reserve has
been adequate for these credits. The adequacy of this reserve
depends on our ability to estimate the number of credits that we
will grant to our clients. If we were to change any of the
assumptions or judgments made in calculating the amount of the
reserve, it could cause a material change in the net revenue
that we report in a particular period. Our assessment of the
likelihood of collection is also a critical element in
determining the timing of revenue recognition. If we do not
believe that collection is reasonably assured, revenue will be
recognized on the earlier of the date that the collection is
reasonably assured or collection is made.
42
For a portion of our revenue, we have agreements with publishers
of online media used in the generation of leads or clicks. We
receive a fee from our clients and pay a fee to our publishers
either on a revenue-share, CPL, CPC or CPM basis. We are the
primary obligor in the transaction. As a result, the fees paid
by our clients are recognized as revenue and the fees paid to
our publishers are included in cost of revenue.
DSS revenue consists of
(i) set-up
and professional services fees and (ii) usage and hosting
fees.
Set-up
and professional service fees that do not provide stand-alone
value to our clients are recognized over the contractual term of
the agreement or the expected client relationship period,
whichever is longer, effective when the application reaches the
go-live date. We define the go-live date
as the date when the application enters into a production
environment or all essential functionalities have been
delivered. We recognize usage and hosting fees on a monthly
basis as earned. Deferred revenue consists of billings or
payments in advance of reaching all the above revenue
recognition criteria, primarily comprising deferred DSS revenue.
Stock-Based
Compensation
Through June 30, 2006, we accounted for our stock-based
employee compensation arrangements in accordance with the
intrinsic value provisions of Accounting Principles Board, or
APB, Opinion No. 25, Accounting for Stock Issued to
Employees, or APB 25, and related interpretations and complied
with the disclosure provisions of SFAS No. 123, Accounting
for Stock Based Compensation, and SFAS No. 148, Accounting
for Stock-Based Compensation Transition and Disclosure. Under
the intrinsic value method, compensation expense is measured on
the date of the grants as the difference between the fair value
of our common stock and the exercise or purchase price
multiplied by the number of stock options granted.
Effective July 1, 2006, we adopted SFAS 123(R), which
requires non-public companies that used the minimum value method
under SFAS 123 for either recognition or pro forma
disclosures to apply SFAS 123(R) using the
prospective-transition method. As such, we continue to apply the
intrinsic value method to equity awards outstanding at the date
of adoption of SFAS 123(R) that were measured using the
minimum value method. In accordance with SFAS 123(R), we
recognize the compensation cost of employee stock-based awards
granted subsequent to June 30, 2006 in the statement of
operations using the straight-line method over the vesting
period of the award.
The following table sets forth the total stock-based
compensation expense included in the related financial statement
line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
416
|
|
|
$
|
1,112
|
|
|
$
|
1,916
|
|
|
$
|
470
|
|
|
$
|
728
|
|
Product development
|
|
|
75
|
|
|
|
443
|
|
|
|
669
|
|
|
|
161
|
|
|
|
253
|
|
Sales and marketing
|
|
|
226
|
|
|
|
581
|
|
|
|
1,761
|
|
|
|
416
|
|
|
|
507
|
|
General and administrative
|
|
|
1,354
|
|
|
|
1,086
|
|
|
|
1,827
|
|
|
|
351
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,071
|
|
|
$
|
3,222
|
|
|
$
|
6,173
|
|
|
$
|
1,398
|
|
|
$
|
2,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We estimated the fair value of each option granted using the
Black-Scholes option-pricing method using the following
assumptions for the periods presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Fiscal Year Ended June 30,
|
|
September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
Weighted average stock price volatility
|
|
48%
|
|
52%
|
|
62%
|
|
61%
|
|
73%
|
Expected term (in years)
|
|
4.6 - 6.1
|
|
4.6
|
|
4.6
|
|
4.6
|
|
4.6
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
4.6% - 4.9%
|
|
2.8% - 4.5%
|
|
1.8% - 3.1%
|
|
3.1%
|
|
2.5%
|
43
As of each stock option grant date, we considered the fair value
of the underlying common stock, determined as described below,
in order to establish the options exercise price.
As there has been no public market for our common stock prior to
this offering, and therefore a lack of company-specific
historical and implied volatility data, we have determined the
share price volatility for options granted based on an analysis
of reported data for a peer group of companies that granted
options with substantially similar terms. The expected
volatility of options granted has been determined using an
average of the historical volatility measures of this peer group
of companies for a period equal to the expected life of the
option. We intend to continue to consistently apply this process
using the same or similar entities until a sufficient amount of
historical information regarding the volatility of our own share
price becomes available, or unless circumstances change such
that the identified entities are no longer similar to us. In
this latter case, more suitable entities whose share prices are
publicly available would be utilized in the calculation.
The expected life of options granted has been determined
utilizing the simplified method as prescribed by the
SECs Staff Accounting Bulletin, or SAB, No. 107,
Share-Based Payment
, or SAB 107. The risk-free
interest rate is based on a daily treasury yield curve rate
whose term is consistent with the expected life of the stock
options. We have not paid and do not anticipate paying cash
dividends on our shares of common stock; therefore, the expected
dividend yield is assumed to be zero.
In addition, SFAS 123R requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates,
whereas SFAS 123 permitted companies to record forfeitures
based on actual forfeitures. We apply an estimated forfeiture
rate based on our historical forfeiture experience.
Since the beginning of fiscal year 2007 through
December 31, 2009, we granted stock options with exercise
prices as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Fair
|
|
|
|
|
|
|
|
|
Value per Share
|
|
|
|
|
Number of Shares
|
|
|
|
for Financial
|
|
|
|
|
Underlying Options
|
|
Exercise Price
|
|
Reporting Purposes at
|
|
SFAS 123R
|
Grant Dates
|
|
Granted
|
|
per Share
|
|
Grant Date
|
|
Fair Value
|
|
July 20, 2006
|
|
|
88,100
|
|
|
$
|
9.01
|
|
|
$
|
9.01
|
|
|
$
|
428,034
|
|
September 28, 2006
|
|
|
133,794
|
|
|
|
9.40
|
|
|
|
9.40
|
|
|
|
678,175
|
|
December 1, 2006
|
|
|
713,000
|
|
|
|
9.40
|
|
|
|
9.40
|
|
|
|
3,590,525
|
|
January 31, 2007(1)
|
|
|
165,000
|
|
|
|
10.34
|
|
|
|
9.40
|
|
|
|
831,617
|
|
January 31, 2007
|
|
|
81,550
|
|
|
|
9.40
|
|
|
|
9.40
|
|
|
|
391,412
|
|
March 23, 2007
|
|
|
35,100
|
|
|
|
9.40
|
|
|
|
9.40
|
|
|
|
176,908
|
|
May 31, 2007
|
|
|
1,161,400
|
|
|
|
10.28
|
|
|
|
10.28
|
|
|
|
5,226,881
|
|
September 27, 2007
|
|
|
116,700
|
|
|
|
10.28
|
|
|
|
10.28
|
|
|
|
560,720
|
|
January 30, 2008
|
|
|
729,200
|
|
|
|
10.28
|
|
|
|
10.28
|
|
|
|
3,330,840
|
|
April 25, 2008
|
|
|
469,500
|
|
|
|
10.28
|
|
|
|
10.28
|
|
|
|
2,365,294
|
|
July 25, 2008
|
|
|
1,780,600
|
|
|
|
10.28
|
|
|
|
10.28
|
|
|
|
9,554,343
|
|
October 2, 2008
|
|
|
277,900
|
|
|
|
10.28
|
|
|
|
10.28
|
|
|
|
1,385,081
|
|
January 28, 2009
|
|
|
331,800
|
|
|
|
9.01
|
|
|
|
9.01
|
|
|
|
1,686,738
|
|
April 29, 2009
|
|
|
184,800
|
|
|
|
9.01
|
|
|
|
9.01
|
|
|
|
957,467
|
|
August 7, 2009
|
|
|
1,875,050
|
|
|
|
9.01
|
|
|
|
13.93
|
|
|
|
17,716,410
|
|
August 7, 2009(1)
|
|
|
87,705
|
|
|
|
9.91
|
|
|
|
13.93
|
|
|
|
805,939
|
|
October 6, 2009
|
|
|
210,600
|
|
|
|
11.08
|
|
|
|
16.88
|
|
|
|
2,505,529
|
|
November 17, 2009
|
|
|
1,080,500
|
|
|
|
19.00
|
|
|
|
19.00
|
|
|
|
10,159,077
|
|
|
|
|
(1)
|
|
Options granted with an exercise price per share equal to 110%
of the fair market value of one share of our common stock, as
determined by our board of directors on the date of grant.
|
44
We have historically granted stock options at exercise prices
equal to or greater than the fair market value as determined by
our board of directors on the date of grant, with input from
management. Because our common stock is not publicly traded, our
board of directors exercises significant judgment in determining
the fair value of our common stock on the date of grant based on
a number of objective and subjective factors. Factors considered
by our board of directors included:
|
|
|
|
|
company performance, our growth rate and financial condition at
the approximate time of the option grant;
|
|
|
|
the value of companies that we consider peers based on a number
of factors including, but not limited to, similarity to us with
respect to industry, business model, stage of growth, financial
risk or other factors;
|
|
|
|
changes in the company and our prospects since the last time the
board approved option grants and made a determination of fair
value;
|
|
|
|
amounts recently paid by investors for our common stock and
convertible preferred stock in
arms-length
transactions with stockholders;
|
|
|
|
the rights, preferences and privileges of preferred stock
relative to those of our common stock;
|
|
|
|
future financial projections; and
|
|
|
|
valuations completed in conjunction with, and at the time of,
each option grant.
|
We prepared contemporaneous valuations at each of the grant
dates consistent with the method outlined in the AICPA Practice
Guide, Valuation of Privately-Held-Company Equity Securities
Issued as Compensation, for all option grant dates in fiscal
year 2008, 2009 and three months ended September 30, 2009.
The methodology we used derived equity values utilizing a
probability-weighted expected return method, or PWERM, that
weighs various potential liquidity outcomes with each outcome
assigned a probability to arrive at the weighted equity value.
For each of the possible events, a range of future equity values
is estimated, based on the market, income or cost approaches and
over a range of possible event dates, all plus or minus a
standard deviation for value and timing. The timing of these
events is based on discussion with our management. For each
future equity value scenario, the rights and preferences of each
stockholder class are considered in order to determine the
appropriate allocation of value to common shares. The value of
each common share is then multiplied by a discount factor
derived from the calculated discount rate and the expected
timing of the event (plus or minus a standard deviation of
time). The value per common share is then multiplied by an
estimated probability for each of the possible events based on
discussion with our management. The calculated value per common
share under each scenario is then discounted for a lack of
marketability. A probability-weighted value per share of common
stock is then determined. Under the PWERM, the value of our
common stock is estimated based upon an analysis of values for
our common stock assuming the following various possible future
events for the company:
|
|
|
|
|
initial public offering;
|
|
|
|
strategic merger or sale;
|
|
|
|
dissolution/no value to common stockholders; and
|
|
|
|
remaining a private company.
|
When using the PWERM, a market-comparable approach, an income
approach and a cost approach were used to estimate our aggregate
enterprise value at each valuation date. The market-comparable
approach estimates the fair market value of a company by
applying market multiples of publicly-traded firms in the same
or similar lines of business to the results and projected
results of the company being valued. When choosing the
market-comparable companies to be used for the market-comparable
approach, we focused on companies operating within the online
marketing and lead generation space. The comparable companies
remained largely unchanged during the valuation process. The
income approach involves applying an appropriate risk-adjusted
discount rate to projected debt free cash flows, based on
forecasted revenue and
45
costs. The cost approach involves identifying a companys
significant tangible assets, estimating the individual current
market values of each and then totaling them to derive the value
of the business as a whole. We used the cost approach method
under an assumption of dissolution.
We also prepared financial forecasts for each valuation report
date used in the computation of the enterprise value for both
the market-comparable approach and the income approach. The
financial forecasts were based on assumed revenue growth rates
that took into account our past experience and contemporaneous
future expectations. The risks associated with achieving these
forecasts were assessed in selecting the appropriate cost of
capital, which ranged from 15% to 17%.
We have performed these valuations since December 2003.
As an additional indicator of fair value, we note in the
individual valuation discussions below pricing of all sales of
our common stock for transactions occurring during the quarter
of the respective grant dates. Over the past several years, a
number of investors have purchased, or attempted to purchase,
shares from employees, former employees and other stockholders.
In some instances, we have exercised our right of first refusal
with regard to such proposed purchases and, accordingly,
purchased the shares for the price proposed by the investors,
and in other instances, we have chosen not to exercise our right
of first refusal and have permitted the proposed buyers to
complete the transactions with the sellers on the terms
disclosed to us.
While these transactions were not consummated in a highly liquid
market, we do believe that the transactions provide an
additional indicator of fair value based on the volume and
number of buyers. These transaction prices have indicated, as
additional support to our valuation analyses, that we have not
historically determined fair market values below the indications
of value for transactions in our common stock.
Discussion
of specific valuation inputs from July 2008 through November
2009
July 25, 2008.
On July 25, 2008, our
board of directors determined a fair value of our common stock
of $10.28 per share, based on the factors described above as
well as a contemporaneous valuation report dated July 17,
2008. The valuation used a risk-adjusted discount of 16%, a
non-marketability discount of 23.4% and an estimated time to an
initial public offering or a strategic merger or sale of greater
than 12 months. The expected outcomes were weighted 50%
toward an initial public offering, 30% towards a strategic
merger or sale, 18% towards remaining a private company and 2%
towards a liquidation scenario. This valuation indicated a fair
value of $9.42 per share for our common stock. We determined to
set the fair value per share of our common stock at $10.28 per
share as of July 25, 2008, above the $9.42 per share
valuation as of July 17, 2008, since these valuations by
their nature involve estimates and judgments and, in our
opinion, the relatively small difference did not justify
reducing the fair market value determination for our common
stock. During the three months ended September 30, 2008, we
exercised our right of first refusal to repurchase
115,275 shares of common stock at an average price of
$8.47, with a low price of $8.00 and a high price of $8.60.
During this same period, we chose not to exercise our right of
first refusal for transactions totaling 30,000 shares of
common stock at an average price of $8.75, with a low price of
$8.50 and a high price of $9.00.
October 2, 2008.
On October 2, 2008,
our board of directors determined a fair value of our common
stock of $10.28 per share, based on the factors described above
as well as a contemporaneous valuation report dated
September 24, 2008. The valuation used a risk-adjusted
discount of 16%, a non-marketability discount of 26.8%, an
estimated time to an initial public offering of greater than
12 months and an estimated time to a strategic merger or
sale of less than 12 months. The expected outcomes were
weighted 50% toward an initial public offering, 30% towards a
strategic merger or sale, 18% towards remaining a private
company and 2% towards a liquidation scenario. This valuation
indicated a fair value of $9.94 per share for our common stock.
We determined to set the fair value per share of our common
stock at $10.28 per share as of October 2, 2008, above the
$9.94 per share valuation as of September 24, 2008, since
these valuations by their nature involve estimates and judgments
and, in our opinion, the relatively small difference did not
justify reducing the fair market value determination for our
common stock. During the three months ended December 31,
2009, we exercised our right of first refusal to repurchase
8,000 shares of common stock at a price of $8.50. During
this
46
same period, we chose not to exercise our right of first refusal
for transactions totaling 57,000 shares of common stock at
a price of $8.50.
January 28, 2009.
On January 28,
2008, our board of directors determined a fair value of our
common stock of $9.01 per share, based on the factors described
above as well as a contemporaneous valuation report dated
December 31, 2008. The valuation used a risk-adjusted
discount of 15%, a non-marketability discount of 25%, an
estimated time to an initial public offering of 12 months
and an estimated time to a strategic merger or sale of more than
12 months. The expected outcomes were weighted 50% toward
an initial public offering, 30% towards a strategic merger or
sale, 18% towards remaining a private company and 2% towards a
liquidation scenario. This valuation indicated a fair value of
$9.01 per share for our common stock. During the three months
ended March 30, 2009, we exercised our right of first
refusal to repurchase 40,000 shares of common stock at an
average price of $7.31, with a low price of $6.25 and a high
price of $8.00. During this same period, there were no
transactions in our stock in which we chose not to exercise our
right of first refusal.
April 29, 2009.
On April 29, 2009,
our board of directors determined a fair value of our common
stock of $9.01 per share, based on the factors described above
as well as a contemporaneous valuation report dated
March 31, 2009. The valuation used a risk-adjusted discount
of 15%, a non-marketability discount of 20%, an estimated time
to an initial public offering of more than 12 months and an
estimated time to a strategic merger or sale of more than
12 months. The expected outcomes were weighted 50% toward
an initial public offering, 30% towards a strategic merger or
sale, 18% towards remaining a private company and 2% towards a
liquidation scenario. This valuation indicated a fair value of
$8.29 per share for our common stock. We determined to set the
fair value per share of our common stock at $9.01 per share as
of April 29, 2009, above the $8.29 per share valuation as
of March 31, 2009, since these valuations by their nature
involve estimates and judgments and, in our opinion, the
relatively small difference did not justify reducing the fair
market value determination for our common stock. During the
three months ended June 30, 2009, we did not exercise our
right of first refusal to repurchase any common stock. During
this same period, we chose not to exercise our right of first
refusal for transactions totaling 30,000 shares of common stock
at a price of $8.00.
August 7, 2009.
On August 7, 2009,
our board of directors determined a fair value of our common
stock of $9.01 per share, based on the factors described above
as well as a contemporaneous valuation report dated
June 30, 2009. The valuation used a risk-adjusted discount
of 15%, a non-marketability discount of 20%, an estimated time
to an initial public offering of more than 12 months and an
estimated time to a strategic merger or sale of more than
12 months. The expected outcomes were weighted 50% toward
an initial public offering, 30% towards a strategic merger or
sale, 18% towards remaining a private company and 2% towards a
liquidation scenario. This valuation indicated a fair value of
$9.00 per share for our common stock. During the three months
ended September 30, 2009, we exercised our right of first
refusal to repurchase 71,895 shares of common stock at an
average price of $8.03, with a low price of $7.00 and a high
price of $8.80. During this same period, we chose not to
exercise our right of first refusal for transactions totaling
144,583 shares of common stock at an average price of
$8.09, with a low price of $8.00 and a high price of $8.50.
Prior to the issuance of our financial statements for the three
month period ended September 30, 2009 in connection with
the initial filing of our registration statement on
Form S-1,
we decided to revise our estimate of fair value of our common
stock as of August 7, 2009. In reassessing the estimate of
fair value of our common stock, we considered the preliminary
estimated valuation range communicated by our underwriters as
well as the results of our contemporaneous valuation performed
on November 17, 2009, immediately prior to the initial
filing of our registration statement on
Form S-1.
The revised fair value as of August 7, 2009 was derived
based on a linear increase of our valuation between
April 29, 2008 (date of our last fair value determination
prior to issuance of our audited financial statements) and
November 17, 2009 (date of our initial filing of our
registration statement on
Form S-1).
We also compared the results of the calculation described above
with an estimate of fair value as of August 7, 2009 based
on the estimated fair value at November 17, 2009 adjusted
for the increase of the NASDAQ composite index between these two
dates, and noted no material differences. As a result of
reassessing the fair value of our common stock, we expect to
record additional compensation expense, excluding the effect of
forfeitures, of $8.1 million, of which $0.4 million
was recorded in our financial statements for the three months
ended September 30, 2009.
47
October 6, 2009.
On October 6, 2009,
our board of directors determined a fair value of our common
stock of $11.08 per share, based on the factors described above
as well as a contemporaneous valuation report dated
September 15, 2009. The valuation used a risk-adjusted
discount of 15%, a non-marketability discount of 15%, an
estimated time to an initial public offering of less than
9 months and an estimated time to a strategic merger or
sale of more than 12 months. The expected outcomes were
weighted 50% toward an initial public offering, 30% towards a
strategic merger or sale, 18% towards remaining a private
company and 2% towards a liquidation scenario. This valuation
indicated a fair value of $11.08 per share for our common stock.
Consistent with our August 7, 2009 grant, we reassessed the
fair value of our common stock as of October 6, 2009. Given
the relatively immaterial number of shares issued, we derived
the revised estimate of fair value as of October 6, 2009
assuming a linear increase of our valuation between
April 29, 2009 and November 17, 2009. We expect to
record compensation expense associated with the October 6,
2009 grants of $997,000 through the end of fiscal year 2010.
Significant events occurring between the October 6, 2009
and November 17, 2009 grants.
Subsequent to
the October 6, 2009 board of directors meeting, we
initiated a process to evaluate underwriters for a potential
initial public offering. On November 2, 2009, our board of
directors approved managements recommendation of an
underwriting group and its recommendation to attempt an initial
public offering on an accelerated time line. On November 5,
2009, management, the underwriters, Qatalyst Partners, our
independent registered public accounting firm and external legal
counsel for the company and the underwriters held an
organizational meeting to formally begin the initial
public offering process and the process of underwriter due
diligence.
November 17, 2009.
On November 17,
2009, our board of directors determined a fair value of our
common stock of $19.00 per share, based on a contemporaneous
valuation report dated October 31, 2009 and the preliminary
estimated valuation range communicated by our underwriters. The
valuation used a risk-adjusted discount of 15%, a
non-marketability discount of 5%, an estimated time to an
initial public offering of less than 4 months and an
estimated time to a strategic merger or sale of more than
12 months. The expected outcomes were weighted 80% toward
an initial public offering, 10% towards a strategic merger or
sale and 10% towards remaining a private company. This valuation
indicated a fair value of $17.87 per share for our common stock.
We determined the fair value per share of our common stock to be
$19.00 as of November 17, 2009, which was higher than the
$17.87 per share value indicated by our valuation analysis as of
October 31, 2009, based upon preliminary indications of
potential pricing ranges for our initial public offering. We
expect to record compensation expense associated with the
November 17, 2009 grants of $3.4 million through the
end of fiscal year 2010.
Based on an estimated initial public offering price of $18.00
per share, the fair value of the options outstanding at
December 31, 2009 was $139 million, of which
$75 million related to vested options and $64 million
related to unvested options.
Recoverability
of Intangible Assets, Including Goodwill
Intangible assets consist primarily of content, domain names,
customer and publisher relationships, non-compete agreements,
and other intangible assets. Intangible assets acquired in a
business combination are measured at fair value at the date of
acquisition. We amortize all intangible assets on a straight
line basis over their expected lives. As of June 30, 2009
and September 30, 2009, we had $106.7 million and
$119.5 million of goodwill, respectively, and
$34.0 million and $36.6 million of other intangible
assets, respectively, with estimable useful lives on our
consolidated balance sheets.
We review our indefinite-lived intangible assets for impairment
at least annually or as indicators of impairment exist based on
comparing the fair value of the asset to the carrying value of
the asset. Goodwill is currently our only indefinite-lived
intangible asset. We perform our annual goodwill impairment test
in the fourth quarter for each of our DMS and DSS reporting
units. Our goodwill impairment test requires the use of
fair-value techniques, which are inherently subjective.
We performed our goodwill impairment test on our DMS reporting
unit by comparing the fair value of the business enterprise as
adjusted for the value of the DSS reporting unit to its carrying
value. The business enterprise value as a whole calculated on
April 20, 2009 for our goodwill impairment test in the
fourth quarter of 2009 differs from the implied market
capitalization based on the fair value of an individual share of
our
48
common stock used for granting stock options as March 31,
2009, as described below under Managements
Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Estimates
Stock-Based Compensation, because the business enterprise
value is the estimated value that would be received for the sale
of the company as a whole in an orderly transaction between
market participants, whereas the estimated value used to
determine the fair value of an individual share of common stock
was determined on the basis of a non-marketable minority share
of a non-public company. The calculation of the non-marketable
minority interest of an individual share takes into
consideration interest bearing debt, the fair value of stock
options issued, shares outstanding and a marketability discount
on common stock that is not freely tradable in a public market.
Fair value of our DSS reporting unit was estimated in April 2009
using the income approach. Under the income approach, we
calculated the fair value of our DSS reporting unit based on the
present value of estimated future cash flows.
The valuation of goodwill could be affected if actual results
differ substantially from our estimates. Circumstances that
could affect the valuation of goodwill include, among other
things, a significant change in our business climate and buying
habits of our subscriber base along with increased costs to
provide systems and technologies required to support our content
and search capabilities. Based on our analysis in the fourth
quarter of 2009, no impairment of goodwill was indicated. We
have determined that a 10% change in our cash flow assumptions
or a marginal change in our discount rate as of the date of our
most recent goodwill impairment test would not have changed the
outcome of the test.
We evaluate the recoverability of our long-lived assets in
accordance with SFAS No. 144, Accounting for the Impairment
or Disposal of Long-lived Assets, or SFAS 144.
SFAS 144 requires recognition of impairment of long-lived
assets in the event that the net book value of such assets
exceeds the future undiscounted net cash flows attributable to
such assets. In accordance with SFAS 144, we recognize
impairment, if any, in the period of identification to the
extent the carrying amount of an asset exceeds the fair value of
such asset. Based on our analysis, no impairment was recorded in
fiscal year 2009.
Results
of Operations
The following table sets forth our consolidated statement of
operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
167,370
|
|
|
|
100.0
|
%
|
|
$
|
192,030
|
|
|
|
100.0
|
%
|
|
$
|
260,527
|
|
|
|
100.0
|
%
|
|
$
|
63,678
|
|
|
|
100.0
|
%
|
|
$
|
78,552
|
|
|
|
100.0
|
%
|
Cost of revenue(1)
|
|
|
108,945
|
|
|
|
65.1
|
|
|
|
130,869
|
|
|
|
68.2
|
|
|
|
181,593
|
|
|
|
69.7
|
|
|
|
45,281
|
|
|
|
71.1
|
|
|
|
55,047
|
|
|
|
70.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
58,425
|
|
|
|
34.9
|
|
|
|
61,161
|
|
|
|
31.8
|
|
|
|
78,934
|
|
|
|
30.3
|
|
|
|
18,397
|
|
|
|
28.9
|
|
|
|
23,505
|
|
|
|
29.9
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
14,094
|
|
|
|
8.4
|
|
|
|
14,051
|
|
|
|
7.3
|
|
|
|
14,887
|
|
|
|
5.7
|
|
|
|
3,757
|
|
|
|
5.9
|
|
|
|
4,470
|
|
|
|
5.7
|
|
Sales and marketing
|
|
|
8,487
|
|
|
|
5.1
|
|
|
|
12,409
|
|
|
|
6.5
|
|
|
|
16,154
|
|
|
|
6.2
|
|
|
|
4,259
|
|
|
|
6.7
|
|
|
|
3,625
|
|
|
|
4.6
|
|
General and administrative
|
|
|
11,440
|
|
|
|
6.8
|
|
|
|
13,371
|
|
|
|
7.0
|
|
|
|
13,172
|
|
|
|
5.1
|
|
|
|
3,736
|
|
|
|
5.9
|
|
|
|
3,441
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
24,404
|
|
|
|
14.6
|
|
|
|
21,330
|
|
|
|
11.1
|
|
|
|
34,721
|
|
|
|
13.3
|
|
|
|
6,645
|
|
|
|
10.4
|
|
|
|
11,969
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,905
|
|
|
|
1.1
|
|
|
|
1,482
|
|
|
|
0.8
|
|
|
|
245
|
|
|
|
0.1
|
|
|
|
90
|
|
|
|
0.1
|
|
|
|
9
|
|
|
|
|
|
Interest expense
|
|
|
(732
|
)
|
|
|
(0.4
|
)
|
|
|
(1,214
|
)
|
|
|
(0.6
|
)
|
|
|
(3,544
|
)
|
|
|
(1.4
|
)
|
|
|
(763
|
)
|
|
|
(1.2
|
)
|
|
|
(748
|
)
|
|
|
(1.0
|
)
|
Other income (expense), net
|
|
|
(139
|
)
|
|
|
(0.1
|
)
|
|
|
145
|
|
|
|
0.1
|
|
|
|
(239
|
)
|
|
|
(0.1
|
)
|
|
|
51
|
|
|
|
0.1
|
|
|
|
120
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
25,438
|
|
|
|
15.2
|
|
|
|
21,743
|
|
|
|
11.3
|
|
|
|
31,183
|
|
|
|
12.0
|
|
|
|
6,023
|
|
|
|
9.5
|
|
|
|
11,350
|
|
|
|
14.4
|
|
Provision for income taxes
|
|
|
(9,828
|
)
|
|
|
(5.9
|
)
|
|
|
(8,876
|
)
|
|
|
(4.6
|
)
|
|
|
(13,909
|
)
|
|
|
(5.3
|
)
|
|
|
(2,719
|
)
|
|
|
(4.3
|
)
|
|
|
(4,837
|
)
|
|
|
(6.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,610
|
|
|
|
9.3
|
%
|
|
$
|
12,867
|
|
|
|
6.7
|
%
|
|
$
|
17,274
|
|
|
|
6.6
|
%
|
|
$
|
3,304
|
|
|
|
5.2
|
%
|
|
$
|
6,513
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
(1)
|
|
Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
416
|
|
|
|
0.2
|
%
|
|
$
|
1,112
|
|
|
|
0.6
|
%
|
|
$
|
1,916
|
|
|
|
0.7
|
%
|
|
$
|
470
|
|
|
|
0.7
|
%
|
|
$
|
728
|
|
|
|
0.9
|
%
|
Product development
|
|
|
75
|
|
|
|
0.0
|
|
|
|
443
|
|
|
|
0.2
|
|
|
|
669
|
|
|
|
0.3
|
|
|
|
161
|
|
|
|
0.3
|
|
|
|
253
|
|
|
|
0.3
|
|
Sales and marketing
|
|
|
226
|
|
|
|
0.1
|
|
|
|
581
|
|
|
|
0.3
|
|
|
|
1,761
|
|
|
|
0.7
|
|
|
|
416
|
|
|
|
0.7
|
|
|
|
507
|
|
|
|
0.6
|
|
General and administrative
|
|
|
1,354
|
|
|
|
0.8
|
|
|
|
1,086
|
|
|
|
0.6
|
|
|
|
1,827
|
|
|
|
0.7
|
|
|
|
351
|
|
|
|
0.6
|
|
|
|
741
|
|
|
|
0.9
|
|
Three
Months Ended September 30, 2008 and 2009
Net
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
September 30,
|
|
2008-2009
|
|
|
2008
|
|
2009
|
|
% Change
|
|
|
(In thousands)
|
|
|
|
Net revenue
|
|
$
|
63,678
|
|
|
$
|
78,552
|
|
|
|
23
|
%
|
Cost of revenue
|
|
|
45,281
|
|
|
|
55,047
|
|
|
|
22
|
%
|
Net revenue increased $14.9 million, or 23%, from the three
months ended September 30, 2008 to the three months ended
September 30, 2009. Substantially all of this increase was
attributable to an increase in revenue from our financial
services client vertical. Financial services client vertical net
revenue increased from $15.2 million in the three months
ended September 30, 2008 to $31.0 million in the
corresponding 2009 period, an increase of $15.8 million, or
104%. The increase in financial services client vertical revenue
was driven by lead and click volume increases at relatively
steady prices.
Cost
of Revenue
Cost of revenue increased $9.8 million, or 22%, from the
three months ended September 30, 2008 to the three months
ended September 30, 2009. The increase in cost of revenue
was driven by a $9.3 million increase in media costs due to
lead and click volume increases. Gross margin, which is the
difference between net revenue and cost of revenue as a
percentage of net revenue, increased from 28.9% for the three
months ended September 30, 2008 to 29.9% for the three
months ended September 30, 2009. The increase in gross
margin is attributable to revenue growth of 23% from the three
months ended September 30, 2008 to the three months ended
September 30, 2009 in conjunction with a moderate
compensation expense increase of only 2% for the same period due
to a reduction in workforce in the third quarter of fiscal year
2009.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2008-2009%
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Product development
|
|
$
|
3,757
|
|
|
$
|
4,470
|
|
|
|
19
|
%
|
Sales and marketing
|
|
|
4,259
|
|
|
|
3,625
|
|
|
|
(15
|
)%
|
General and administrative
|
|
|
3,736
|
|
|
|
3,441
|
|
|
|
(8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
11,752
|
|
|
$
|
11,536
|
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Development Expenses
Product development expenses increased $713,000, or 19%, from
the three months ended September 30, 2008 to the three
months ended September 30, 2009. The increase is
attributable to increased performance bonuses and compensation
expense of $552,000 from the three months ended September 30,
2008 to the three months ended September 30, 2009 and, to a
lesser extent, increased stock-based compensation expense of
$92,000 and professional services fees of $89,000 associated
with the development of our technology platforms.
50
Sales and
Marketing Expenses
Sales and marketing expenses declined $634,000, or 15%, from the
three months ended September 30, 2008 to the three months
ended September 30, 2009. The decline is due to a 23%
decrease in our sales and marketing headcount and related
compensation expenses of $769,000, partially offset by increased
stock-based compensation expense of $91,000. The decline in
headcount and related compensation expense is driven by a
reduction in workforce in the third quarter of fiscal year 2009.
General
and Administrative Expenses
General and administrative expenses decreased $295,000, or 8%,
from the three months ended September 30, 2008 to the three
months ended September 30, 2009. The decline is driven by a
decrease in our legal expenses of $633,000 attributable to the
settlement of an ongoing legal matter in the fourth quarter of
fiscal year 2009, partially offset by increased stock-based
compensation expense of $390,000.
Interest
and Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
2008-2009%
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Interest income
|
|
$
|
90
|
|
|
$
|
9
|
|
|
|
(90
|
)%
|
Interest expense
|
|
|
(763
|
)
|
|
|
(748
|
)
|
|
|
(2
|
)%
|
Other income (expense), net
|
|
|
51
|
|
|
|
120
|
|
|
|
135
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(622
|
)
|
|
$
|
(619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net was flat from the three
months ended September 30, 2008, to the three months ended
September 2009. The decrease in interest income is due to a
decline in our invested cash balances. Other income (expense),
net increased $69,000, or 135%, from the three months ended
September 30, 2008 to the three months ended
September 30, 2009 due to the weakening of the
U.S. dollar against the Canadian dollar.
Provision
for Taxes
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
September 30,
|
|
|
2008
|
|
2009
|
|
|
(In thousands)
|
|
Provision for taxes
|
|
$
|
2,719
|
|
|
$
|
4,837
|
|
Effective tax rate
|
|
|
45.1
|
%
|
|
|
42.6
|
%
|
The decline in our effective tax rate from the three months
ended September 30, 2008 to the three months ended
September 30, 2009 was impacted by decreased state income
tax expense in jurisdictions in which we no longer had a
physical presence, the unavailability of research and
development tax credits during the three months ended
September 30, 2008 and, to a lesser extent, increased tax
deductions associated with employee stock option disqualifying
dispositions. The decline was offset by increased non-deductible
stock-based compensation expense.
Comparison
of Fiscal Years Ended June 30, 2007, 2008 and
2009
Net
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
2007-2008
|
|
2008-2009
|
|
|
2007
|
|
2008
|
|
2009
|
|
% Change
|
|
% Change
|
|
|
(In thousands)
|
|
|
|
|
|
Net revenue
|
|
$
|
167,370
|
|
|
$
|
192,030
|
|
|
$
|
260,527
|
|
|
|
15
|
%
|
|
|
36
|
%
|
Cost of revenue
|
|
|
108,945
|
|
|
|
130,869
|
|
|
|
181,593
|
|
|
|
20
|
%
|
|
|
39
|
%
|
51
Net revenue increased $68.5 million, or 36%, from fiscal
year 2008 to fiscal year 2009, attributable primarily to an
increase in our financial services and education client
verticals, offset in part by a decline in our DSS business.
Financial services client vertical net revenue increased from
$21.9 million in fiscal year 2008 to $79.7 million in
fiscal year 2009, an increase of $57.8 million, or 264%.
Revenue growth in our financial services client vertical was
driven by lead and click volume increases at relatively steady
prices and the full effect of the acquisition of SureHits in the
fourth quarter of fiscal year 2008. Our education client
vertical net revenue increased from $142.2 million in
fiscal year 2008 to $151.4 million in fiscal year 2009, an
increase of $9.1 million, or 6%, half due to lead volume
increases and half due to pricing increases. Our other client
verticals net revenue increased from $24.3 million in
fiscal year 2008 to $26.3 million in fiscal year 2009, an
increase of $2.0 million, or 8%, due primarily to the full
effect of the acquisition of the assets of Vendorseek L.L.C.,
within our B2B client vertical in the fourth quarter of fiscal
year 2008. The revenue increase in our other client verticals
was partially offset by declines in our home services client
vertical due to both a challenging economic environment and lack
of available consumer credit.
Net revenue increased $24.7 million, or 15%, from fiscal
year 2007 to fiscal year 2008, attributable primarily to
increases in our education, financial services and other client
verticals, partially offset by declines in our DSS business.
Education client vertical net revenue increased from
$131.0 million to $142.2 million, an increase of
$11.2 million, or 9%, due to lead volume increases at
relatively steady prices. Financial services client vertical net
revenue increased from $12.2 million to $21.9 million,
an increase of $9.7 million, or 80%. Revenue growth in our
financial services client vertical was driven by the acquisition
of SureHits in the fourth quarter of fiscal year 2008. Net
revenue from our other client verticals increased from
$16.6 million in fiscal year 2007 to $24.3 million in
fiscal year 2008, an increase of $7.7 million, or 46%, due
to a $6.0 million increase in our home services client
vertical primarily resulting from the acquisition of
ReliableRemodeler in the third quarter of fiscal year 2008 and,
to a lesser extent, organic growth.
Cost
of Revenue
Cost of revenue increased $50.7 million, or 39%, from
fiscal year 2008 to fiscal year 2009, driven by a $43.3 million
increase in media costs due to lead and click volume increases
and, to a lesser extent, increased amortization of
acquisition-related intangible assets of $4.2 million resulting
from acquisitions in fiscal years 2008 and 2009. Our gross
margin declined from 31.8% in fiscal year 2008 to 30.3% in
fiscal year 2009 due primarily to the acquisition of SureHits,
which is characterized by lower gross margins.
Cost of revenue increased $21.9 million, or 20%, from
fiscal year 2007 to fiscal year 2008, driven by a
$14.0 million increase in media costs due to lead volume
increases and, to a lesser extent, increased personnel costs of
$2.7 million due to an 11% increase in average headcount
and related compensation expense increases, as well as increased
amortization of acquisition-related intangible assets resulting
from acquisitions in fiscal year 2008. Gross margin declined
from 34.9% in fiscal year 2007 to 31.8% in fiscal year 2008 due
to increases in both the above mentioned headcount and related
compensation expense (including stock-based compensation
expense), as well as increases in fixed costs, and increased
amortization of acquired intangible assets associated with
acquisitions during fiscal year 2008.
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2007-2008
|
|
|
2008-2009
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Product development
|
|
$
|
14,094
|
|
|
$
|
14,051
|
|
|
$
|
14,887
|
|
|
|
|
|
|
|
6
|
%
|
Sales and marketing
|
|
|
8,487
|
|
|
|
12,409
|
|
|
|
16,154
|
|
|
|
46
|
%
|
|
|
30
|
%
|
General and administrative
|
|
|
11,440
|
|
|
|
13,371
|
|
|
|
13,172
|
|
|
|
17
|
%
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
34,021
|
|
|
$
|
39,831
|
|
|
$
|
44,213
|
|
|
|
17
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
Product
Development Expenses
Product development expenses increased $836,000, or 6%, from
fiscal year 2008 to fiscal year 2009, due to increased
management performance bonuses and increased stock-based
compensation expense. The increased management performance
bonuses were paid in connection with our achievement of
specified financial metrics during fiscal year 2009 that were
not achieved in the corresponding prior year period, as well as
an increase in the number of individuals eligible for such
bonuses. The increase in product development expenses was
partially offset by a reduction in workforce in the third
quarter of fiscal year 2009. Product development expenses
remained flat from fiscal year 2007 to fiscal year 2008.
Sales and
Marketing Expenses
Sales and marketing expenses increased $3.7 million, or
30%, from fiscal year 2008 to fiscal year 2009, due to increased
stock-based compensation expense of $1.2 million, increased
personnel costs of $888,000, increased consulting fees of
$340,000, increased advertising and marketing expenses
associated with marketing campaigns of $331,000 and increased
depreciation and amortization of $193,000. The increase in
personnel costs was due to an 18% increase in average headcount
and related compensation expenses driven by the acquisition of
ReliableRemodeler in the third quarter of fiscal year 2008.
Increased consulting, advertising and marketing expenses was due
to overall increases in sales and marketing activities
associated with the increased volume of business in fiscal year
2009 as compared to the prior year period. The increase was
partially offset by a reduction in workforce in the third
quarter of fiscal year 2009.
Sales and marketing expenses increased $3.9 million, or
46%, from fiscal year 2007 to fiscal year 2008, due to increased
personnel costs of $3.9 million driven by a 47% increase in
average headcount and a one-time payout of a management
retention bonus in the second quarter of fiscal year 2008, and,
to a lesser extent, increased stock-based compensation expense.
The increase in personnel costs was driven by the acquisition of
ReliableRemodeler in the third quarter of fiscal year 2008.
General
and Administrative Expenses
General and administrative expenses remained relatively flat in
fiscal year 2009 compared to fiscal year 2008. The slight
decline consisted of a decrease in legal expenses of $987,000,
partially offset by an increase in stock-based compensation
expense of $741,000. The decline in legal expenses is
attributable to a decrease in expenses related to an ongoing
legal matter which was settled prior to the fourth quarter of
fiscal year 2009. In connection with the settlement, we paid a
one-time, non-refundable fee of $850,000. We recognized an
intangible asset of $226,000 related to the estimated fair value
of the license and expensed the remaining $624,000 as a
settlement expense.
General and administrative expenses increased $1.9 million,
or 17%, from fiscal year 2007 to fiscal year 2008. The increase
was driven by increased legal fees of $973,000 associated with
the legal matter discussed above, increased personnel costs of
$1.2 million due to a 6% increase in average headcount and
a one-time payout of management retention bonuses in the second
quarter of fiscal year 2008.
Interest
and Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2007-2008
|
|
|
2008-2009
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,905
|
|
|
$
|
1,482
|
|
|
$
|
245
|
|
|
|
(22
|
)%
|
|
|
(83
|
)%
|
Interest expense
|
|
|
(732
|
)
|
|
|
(1,214
|
)
|
|
|
(3,544
|
)
|
|
|
66
|
%
|
|
|
192
|
%
|
Other income (expense), net
|
|
|
(139
|
)
|
|
|
145
|
|
|
|
(239
|
)
|
|
|
(204
|
)%
|
|
|
(265
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net
|
|
$
|
1,034
|
|
|
$
|
413
|
|
|
$
|
(3,538
|
)
|
|
|
(60
|
)%
|
|
|
(957
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net declined
$4.0 million from fiscal year 2008 to fiscal year 2009 due
to increased interest expense, lowered interest income and
foreign currency losses. The increase in interest
53
expense is due to an increase in non-cash imputed interest on
acquisition-related notes payable and a draw down on our credit
facilities. Decreased interest income is due to a decline in our
invested cash balances. The decline in other income (expense),
net was due to foreign currency losses driven by weakening of
the Canadian dollar against the U.S. dollar.
Interest and other income (expense), net declined $621,000 from
fiscal year 2007 to fiscal year 2008 due to increased non-cash
imputed interest expense associated with an increase in
acquisition-related notes payable and the draw down on our
credit facilities, reduced interest income due to lower average
investment balances and declining average interest rates. The
increase in other income (expense), net relates to a change in
the functional currency of one of our subsidiaries and the
resulting reclassification of an unrealized currency translation
gain from other comprehensive income to other income (expense),
net.
Provision
for Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
(In thousands)
|
|
Provision for taxes
|
|
$
|
9,828
|
|
|
$
|
8,876
|
|
|
$
|
13,909
|
|
Effective tax rate
|
|
|
38.6
|
%
|
|
|
40.8
|
%
|
|
|
44.6
|
%
|
The increase in our effective tax rate from fiscal year 2008 to
fiscal year 2009 was impacted by increased state income tax
expense in connection with our acquisitions of businesses in
various jurisdictions within the U.S. in which we did not
previously have a presence and, to a lesser extent, increased
foreign income taxes and non-deductible stock-based compensation
expense. The increase in our effective tax rate was partially
offset by increased research and development tax credits
recorded in connection with the Emergency Economic
Stabilization Act of 2008, or the Act. On October 3,
2008, the Act, which contains the Tax Extenders and
Alternative Minimum Tax Relief Act of 2008 was signed into
law. Under the Act, the research credit was retroactively
extended for amounts paid or incurred after December 31,
2007 and before January 1, 2010.
The increase in our effective tax rate from fiscal year 2007 to
fiscal year 2008 was due to increased non-deductible stock-based
compensation expense and a decline in federal research and
development tax credits in fiscal year 2008 due to the
expiration of research and development credit laws in
December 31, 2007.
54
Quarterly
Results of Operations
The following table sets forth our unaudited quarterly
consolidated statements of operations data for fiscal year 2008,
fiscal year 2009 and the first quarter of fiscal year 2010. We
have prepared the statements of operations for each of these
quarters on the same basis as the audited consolidated financial
statements included elsewhere in this prospectus and, in the
opinion of the management, each statement of operation includes
all adjustments, consisting solely of normal recurring
adjustments, necessary for the fair statement of the results of
operations for these periods. This information should be read in
conjunction with the audited consolidated financial statements
and related notes included elsewhere in this prospectus. These
quarterly operating results are not necessarily indicative of
our operating results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
|
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net revenue
|
|
$
|
44,383
|
|
|
$
|
40,806
|
|
|
$
|
49,739
|
|
|
$
|
57,102
|
|
|
$
|
63,678
|
|
|
$
|
59,235
|
|
|
$
|
69,813
|
|
|
$
|
67,801
|
|
|
$
|
78,552
|
|
|
|
|
|
Cost of revenue
|
|
|
30,551
|
|
|
|
28,623
|
|
|
|
32,840
|
|
|
|
38,855
|
|
|
|
45,281
|
|
|
|
42,969
|
|
|
|
46,780
|
|
|
|
46,563
|
|
|
|
55,047
|
|
|
|
|
|
Gross profit
|
|
|
13,832
|
|
|
|
12,183
|
|
|
|
16,899
|
|
|
|
18,247
|
|
|
|
18,397
|
|
|
|
16,266
|
|
|
|
23,033
|
|
|
|
21,238
|
|
|
|
23,505
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
3,696
|
|
|
|
3,524
|
|
|
|
3,355
|
|
|
|
3,476
|
|
|
|
3,757
|
|
|
|
3,723
|
|
|
|
3,512
|
|
|
|
3,895
|
|
|
|
4,470
|
|
|
|
|
|
Sales and marketing
|
|
|
1,952
|
|
|
|
4,122
|
|
|
|
2,948
|
|
|
|
3,387
|
|
|
|
4,259
|
|
|
|
4,164
|
|
|
|
3,594
|
|
|
|
4,137
|
|
|
|
3,625
|
|
|
|
|
|
General and administrative
|
|
|
3,542
|
|
|
|
3,217
|
|
|
|
3,242
|
|
|
|
3,370
|
|
|
|
3,736
|
|
|
|
3,171
|
|
|
|
2,865
|
|
|
|
3,400
|
|
|
|
3,441
|
|
|
|
|
|
Operating income
|
|
|
4,642
|
|
|
|
1,320
|
|
|
|
7,354
|
|
|
|
8,014
|
|
|
|
6,645
|
|
|
|
5,208
|
|
|
|
13,062
|
|
|
|
9,806
|
|
|
|
11,969
|
|
|
|
|
|
Interest income
|
|
|
546
|
|
|
|
489
|
|
|
|
282
|
|
|
|
165
|
|
|
|
90
|
|
|
|
87
|
|
|
|
44
|
|
|
|
24
|
|
|
|
9
|
|
|
|
|
|
Interest expense
|
|
|
(164
|
)
|
|
|
(143
|
)
|
|
|
(242
|
)
|
|
|
(665
|
)
|
|
|
(763
|
)
|
|
|
(1,107
|
)
|
|
|
(879
|
)
|
|
|
(795
|
)
|
|
|
(748
|
)
|
|
|
|
|
Other income (expense), net
|
|
|
(13
|
)
|
|
|
10
|
|
|
|
74
|
|
|
|
74
|
|
|
|
51
|
|
|
|
(291
|
)
|
|
|
(16
|
)
|
|
|
17
|
|
|
|
120
|
|
|
|
|
|
Income before income taxes
|
|
|
5,011
|
|
|
|
1,676
|
|
|
|
7,468
|
|
|
|
7,588
|
|
|
|
6,023
|
|
|
|
3,897
|
|
|
|
12,211
|
|
|
|
9,052
|
|
|
|
11,350
|
|
|
|
|
|
Provision for taxes
|
|
|
(2,123
|
)
|
|
|
(750
|
)
|
|
|
(2,799
|
)
|
|
|
(3,204
|
)
|
|
|
(2,719
|
)
|
|
|
(1,547
|
)
|
|
|
(5,818
|
)
|
|
|
(3,825
|
)
|
|
|
(4,837
|
)
|
|
|
|
|
Net income
|
|
$
|
2,888
|
|
|
$
|
926
|
|
|
$
|
4,669
|
|
|
$
|
4,384
|
|
|
$
|
3,304
|
|
|
$
|
2,350
|
|
|
$
|
6,393
|
|
|
$
|
5,227
|
|
|
$
|
6,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
8,420
|
|
|
$
|
4,424
|
|
|
$
|
10,335
|
|
|
$
|
13,100
|
|
|
$
|
12,157
|
|
|
$
|
10,956
|
|
|
$
|
18,571
|
|
|
$
|
15,188
|
|
|
$
|
18,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly
Revenue Trends
Our quarterly net revenue decreased $3.6 million, or 8%,
from $44.4 million for the three months ended
September 30, 2007 to $40.8 million for the three
months ended December 31, 2007. For these respective
periods, our education client vertical revenue decreased by
$1.9 million due to seasonality; our financial services
client vertical revenue decreased by $501,000; our other client
verticals revenue decreased by $1.2 million due to a
decrease in revenue from our home services client vertical; and
our DSS business revenue was flat.
Our quarterly net revenue increased $8.9 million, or 22%,
from $40.8 million for the three months ended
December 31, 2007 to $49.7 million for the three
months ended March 31, 2008. For these respective periods,
our education client vertical revenue increased by
$4.4 million due to seasonality; our financial services
client vertical revenue increased by $1.1 million due to
organic growth; our other client verticals revenue increased by
$3.5 million due to growth in our home services client
vertical as a result of the acquisition of Reliable Remodeler
and organic growth; and our DSS business revenue was flat.
Our quarterly net revenue increased $7.4 million, or 15%,
from $49.7 million for the three months ended
March 31, 2008 to $57.1 million for the three months
ended June 30, 2008. For these respective periods, our
education client vertical revenue decreased by $193,000; our
financial services client vertical revenue increased by
$6.4 million due to the acquisition of SureHits and organic
growth; our other client verticals revenue increased by
$1.2 million due to growth in our home services client
vertical as a result of the acquisition of ReliableRemodeler;
and our DSS business revenue was flat.
55
Our quarterly net revenue increased $6.6 million, or 12%,
from $57.1 million for the three months ended June 30,
2008 to $63.7 million for the three months ended
September 30, 2008. For these respective periods, our
education client vertical revenue increased by $2.2 million
due to organic growth; our financial services client vertical
revenue increased by $4.5 million due to organic growth;
our other client verticals revenue was flat and our DSS business
revenue decreased by $228,000.
Our quarterly net revenue decreased $4.4 million, or 7%,
from $63.7 million for the three months ended
September 30, 2008 to $59.2 million for the three
months ended December 31, 2008. For these respective
periods, our education client vertical revenue decreased by
$5.3 million due to seasonality; our financial services
client vertical revenue increased by $2.8 million due to
organic growth; our other client verticals revenue decreased by
$2.2 million due to a decline in our home services client
vertical as a result of difficult economic conditions; and our
DSS business revenues increase by $262,000.
Our quarterly net revenue increased $10.6 million, or 18%,
from $59.2 million for the three months ended
December 31, 2008 to $69.8 million for the three
months ended March 31, 2009. For these respective periods,
our education client vertical revenue increased by
$4.5 million due to seasonality; our financial services
client vertical revenue increased by $6.6 million due to
organic growth; our other client verticals revenue decreased by
$482,000; and our DSS business revenue was flat.
Our quarterly net revenue decreased $2.0 million, or 3%,
from $69.8 the three months ended March 31, 2009 to
$67.8 million the three months ended June 30, 2009.
For these respective periods, our education client vertical
revenue increased by $860,000; our financial services client
vertical revenue decreased by $2.6 million due to decreased
marketing spend by one of our clients; our other client
verticals revenue was flat and our DSS business revenue
decreased by $299,000.
Our quarterly net revenue increased $10.8 million, or 16%,
from $67.8 million for the three months ended June 30,
2009 to $78.6 million for the three months ended
September 30, 2009. For these respective periods, our
education client vertical revenue increased by $938,000; our
financial services client vertical revenue increased by
$9.0 million due to organic growth; our other client
verticals revenue increased by $987,000; and our DSS business
revenue decreased by $194,000.
Adjusted
EBITDA
Our use of Adjusted EBITDA.
We include
Adjusted EBITDA in this prospectus because (i) we seek to
manage our business to a consistent level of Adjusted EBITDA as
a percentage of net revenue, (ii) it is a key basis upon
which our management assesses our operating performance,
(iii) it is one of the primary metrics investors use in
evaluating Internet marketing companies, (iv) it is a
factor in the evaluation of the performance of our management in
determining compensation, and (v) it is an element of
certain maintenance covenants under our debt agreements. We
define Adjusted EBITDA as net income less interest and other
income plus interest and other expense, provision for taxes,
depreciation expense, amortization expense, stock-based
compensation expense and foreign-exchange (loss) gain.
Restructuring charges have not been expensed and have not been
adjusted for in our Adjusted EBITDA.
We use Adjusted EBITDA as a key performance measure because we
believe it facilitates operating performance comparisons from
period to period by excluding potential differences caused by
variations in capital structures (affecting interest expense),
tax positions (such as the impact on periods or companies of
changes in effective tax rates or fluctuations in permanent
differences or discrete quarterly items) and the impact of
depreciation and amortization expense on definite-lived
intangible assets. Because Adjusted EBITDA facilitates internal
comparisons of our historical operating performance on a more
consistent basis, we also use Adjusted EBITDA for business
planning purposes, to incentivize and compensate our management
personnel and in evaluating acquisition opportunities.
In addition, we believe Adjusted EBITDA and similar measures are
widely used by investors, securities analysts, ratings agencies
and other interested parties in our industry as a measure of
financial performance and debt-service capabilities. Our use of
Adjusted EBITDA has limitations as an analytical tool, and you
56
should not consider it in isolation or as a substitute for
analysis of our results as reported under GAAP. Some of these
limitations are:
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Adjusted EBITDA does not reflect our cash expenditures for
capital equipment or other contractual commitments;
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although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized may have to be replaced
in the future, and Adjusted EBITDA does not reflect cash capital
expenditure requirements for such replacements;
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Adjusted EBITDA does not reflect changes in, or cash
requirements for, our working capital needs;
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Adjusted EBITDA does not consider the potentially dilutive
impact of issuing equity-based compensation to our management
team and employees;
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Adjusted EBITDA does not reflect the significant interest
expense or the cash requirements necessary to service interest
or principal payments on our indebtedness;
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Adjusted EBITDA does not reflect certain tax payments that may
represent a reduction in cash available to us; and
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other companies, including companies in our industry, may
calculate Adjusted EBITDA measures differently, which reduces
their usefulness as a comparative measure.
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Because of these limitations, Adjusted EBITDA should not be
considered as a measure of discretionary cash available to us to
invest in the growth of our business. When evaluating our
performance, you should consider Adjusted EBITDA alongside other
financial performance measures, including various cash flow
metrics, net loss and our other GAAP results.
The following table presents a reconciliation of Adjusted EBITDA
to net income, the most comparable GAAP measure, for each of the
periods indicated:
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Three Months Ended,
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Sept. 30,
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Dec. 31,
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Mar. 31,
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June 30,
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Sept. 30,
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Dec. 31,
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Mar. 31,
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June 30,
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Sept. 30,
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2007
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2007
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2008
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2008
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2008
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2008
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2009
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2009
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2009
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(In thousands)
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Net income
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$
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2,888
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|
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$
|
926
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$
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4,669
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$
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4,384
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|
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$
|
3,304
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|
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$
|
2,350
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$
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6,393
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$
|
5,227
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$
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6,513
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Interest and other income (expense), net
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(369
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)
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(356
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)
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(114
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)
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|
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426
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|
|
|
622
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|
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1,311
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|
851
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|
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754
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|
|
619
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Provision for taxes
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2,123
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|
|
750
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2,799
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|
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3,204
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|
|
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2,719
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|
|
|
1,547
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5,818
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|
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3,825
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|
|
|
4,837
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Depreciation and amortization
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2,577
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|
|
|
2,501
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|
|
|
2,500
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|
|
|
4,149
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|
|
|
4,114
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|
|
|
4,237
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|
|
|
4,035
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|
|
|
3,592
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|
|
|
3,952
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Stock based compensation expense
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|
1,201
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|
|
|
603
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|
|
|
481
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|
|
|
937
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|
|
|
1,398
|
|
|
|
1,511
|
|
|
|
1,474
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|
|
|
1,790
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|
|
|
2,229
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|
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Adjusted EBITDA
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$
|
8,420
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$
|
4,424
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|
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$
|
10,335
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|
|
$
|
13,100
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|
|
$
|
12,157
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|
|
$
|
10,956
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|
|
$
|
18,571
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|
|
$
|
15,188
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|
|
$
|
18,150
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Adjusted EBITDA quarterly trends.
We seek to
manage our business to a consistent level of Adjusted EBITDA as
a percentage of net revenue. We do so on a fiscal year basis by
varying our operations to balance revenue growth and costs
throughout the fiscal year. We do not seek to manage our
business to a consistent level of Adjusted EBITDA on a quarterly
basis. For fiscal years 2003 to 2009, Adjusted EBITDA as a
percentage of revenue was 22%, 20%, 22%, 23%, 22%, 19% and 22%,
respectively.
For quarterly periods from September 30, 2007 to
September 30, 2009, Adjusted EBITDA as a percentage of
revenue was 19%, 11%, 21%, 23%, 19%, 18%, 27%, 22%, and 23%,
respectively. In general, Adjusted EBITDA as a percentage of
revenue tends to be seasonally weaker in the quarters ending
September 30 and, particularly, December 31 and stronger in
quarters ending March 31 and June 30. For the three months
ended December 31, 2007, Adjusted EBITDA as a percentage of
revenue was 11%. This was due to typical seasonal weakness and a
one-time management tenure bonus. For the three months ended
March 31, 2009, Adjusted EBITDA as a percentage of revenue
was 27%. This was due to a reduction in work force undertaken at
the beginning of that period based on concerns held by our
management team regarding the deteriorating economic climate.
The economic climate did not have a negative effect on us in a
fashion that impacted our revenue growth, and our reduced cost
basis resulting from our work force reduction, combined with our
57
revenue growth, resulted in an Adjusted EBITDA margin for the
period that exceeded our historical quarterly Adjusted EBITDA
margin performance. We manage our business to a desired Adjusted
EBITDA margin level on a fiscal year basis, not on a quarterly
basis, and investors should expect our Adjusted EBITDA margins
to vary from quarter to quarter.
Liquidity
and Capital Resources
Our primary operating cash requirements include the payment of
media costs, personnel costs, costs of information technology
systems and office facilities.
Since our inception, we have financed our operations and
acquisitions primarily through cash flow from operations,
private placements of our convertible preferred stock and
borrowing under our bank credit facilities and seller notes. We
have generated approximately $138.3 million in cash flows
from operations and have received a total of approximately
$37.4 million from private share placements and an
additional $5.4 million from the exercise of stock options
to purchase shares of our common stock. Our principal sources of
liquidity as of September 30, 2009, consisted of cash and
cash equivalents of $28.1 million and our revolving credit
facility which had $57.3 million available for borrowing as
of such date.
Net
Cash Provided by or Used in Operating Activities
Net cash used in operating activities was $0.3 million in
the three months ended September 30, 2008 and net cash
provided by operating activities was $11.8 million in the
three months ended September 30, 2009 and
$25.2 million, $24.8 million and $32.6 million in
fiscal years 2007, 2008 and 2009, respectively. Our net cash
provided by or used in operating activities is primarily a
result of our net income adjusted by non-cash expenses such as
depreciation and amortization, stock-based compensation expense,
provision for sales returns and changes in working capital
components, and is influenced by the timing of cash collections
from our clients and cash payments for purchases of media and
other expenses.
Net cash provided by operating activities in the three months
ended September 30, 2009, was driven by net income of
$6.5 million, non-cash depreciation, amortization and
stock-based compensation expense of $6.2 million and an
increase in accrued liabilities of $4.2 million, moderated
by an increase in accounts receivable of $5.8 million. The
increase in accrued liabilities is due to timing of payments and
the overall growth of our business. The increase in accounts
receivable is attributable to increased revenue, as well as
timing of receipts.
Net cash used in operating activities in the three months ended
September 30, 2008 was impacted by an increase in accounts
receivable of $8.6 million, and to a lesser extent, a
decline in accrued liabilities of $1.9 million. The decline
was offset by net income of $3.3 million and non-cash
depreciation, amortization and stock-based compensation expense
of $5.5 million. The increase in accounts receivable is
attributable to increased revenue and timing of receipts. The
decline in accrued liabilities is due to timing of payments.
Net cash provided by operating activities in fiscal 2009 was due
to net income of $17.3 million, non-cash depreciation,
amortization and stock-based compensation expense of
$22.2 million, moderated by an increase in accounts
receivable of $9.0 million and increased deferred tax
assets of $4.1 million. The increase in accounts receivable
is due to increased revenue of 36% associated with the growth of
our business, as well as due to timing of receipts. The increase
in deferred tax assets is due to temporary differences between
the financial statement carrying amount and the tax basis of
existing assets and liabilities.
Net cash provided by operating activities in fiscal 2008 was due
to net income of $12.9 million, non-cash depreciation,
amortization and stock-based compensation expense of
$14.9 million and increased accounts payable and accrued
liabilities of $3.0 million, moderated by an increase in
deferred tax assets of $3.8 million and excess tax benefits
from exercise of stock options of $1.7 million. The
increase in accounts payable and accrued liabilities is due to
timing of payments. The increase in deferred tax assets is due
to temporary differences between the financial statement
carrying amount and the tax basis of existing assets and
liabilities. The increase in excess tax benefits is attributable
to exercises of stock options resulting in tax deductions in
excess of recorded stock-based compensation expense.
58
Net cash provided by operating activities in fiscal 2007 was
largely due to net income of $15.6 million and non-cash
depreciation, amortization and stock-based compensation expense
of $11.7 million.
Net
Cash Used in Investing Activities
Our investing activities include acquisitions of media websites
and businesses; purchases, sales and maturities of marketable
securities; capital expenditures; and capitalized internal
development costs. Net cash used in investing activities was
$11.2 million and $12.5 million in the three months
ended September 30, 2008 and 2009, respectively, and was
$26.4 million, $49.2 million and $27.3 million in
fiscal years 2007, 2008 and 2009, respectively. Capital
expenditures and internal software development costs totaled
$0.9 million and $0.8 million in the three months
ended September 30, 2008 and 2009, respectively, and
$3.5 million, $3.6 million and $2.4 million in
fiscal years 2007, 2008 and 2009, respectively.
Cash used in investing activities in the three months ended
September 30, 2009 was impacted by the acquisition of
Payler Corp. D/B/A HSH Associates Financial Publishers, or HSH,
a New Jersey-based online company providing comprehensive
mortgage rate information for an initial $6.0 million cash
payment, as well as by purchases of the operations of 12 other
website publishing businesses for an aggregate of approximately
$4.6 million in cash payments.
Cash used in investing activities in fiscal year 2009 was
impacted by the acquisition of U.S. Citizens for Fair Credit
Card Terms, Inc, or CardRatings, for an initial cash payment of
$10.4 million, as well as purchases of the operations of 33
other website publishing businesses for an aggregate of
approximately $14.6 million in cash payments. Cash used in
investing activities in fiscal year 2008 was driven by the
acquisitions of SureHits, ReliableRemodeler and Vendorseek
amounting to total cash payments of $54.7 million, as well
as purchases of the operations of 20 website publishing
businesses for an aggregate of approximately $9.5 million
in cash payments. Cash used in investing activities in fiscal
year 2008 was partially offset by proceeds from sales and
maturities of marketable securities, net of purchases of
marketable securities, of $17.5 million. Cash used in
investing activities in fiscal year 2007 was driven by purchases
of the operations of 32 website publishing businesses for an
aggregate of approximately $11.8 million in cash payments,
as well as purchases of marketable securities, net of proceeds
from sales and maturities or marketable securities, of
$11.0 million.
Net
Cash Provided by or Used in Financing Activities
Cash provided by financing activities was $3.6 million and
$6.9 million in the three months ended September 30,
2009 and 2008, respectively. Cash provided by financing
activities in the three months ended September 30, 2009 was
due to proceeds from a draw down of our revolving credit
facility of $6.5 million, partially offset by
$3.3 million in principal payments on acquisition-related
notes payable and our term loan, as well as repurchases of our
common stock.
Cash used in financing activities was $5.0 million and
$2.8 million in fiscal years 2009 and 2007, respectively,
and cash provided by financing activities was $22.8 million
in fiscal year 2008. Cash used in financing activities in fiscal
year 2009 was due to principal payments on acquisition-related
notes payable and our term loan of $13.1 million and stock
repurchases of $1.3 million, partially offset by proceeds
from a draw down of our revolving credit facility of
$8.6 million. Cash provided by financing activities in
fiscal year 2008 was driven by proceeds from our term loan of
$29.0 million and proceeds from issuance of common stock as
a result of stock option exercises of $2.6 million,
partially offset by $5.6 million in stock repurchases and
principal payments on acquisition-related notes payable of
$4.9 million. Cash used in financing activities in fiscal
year 2007 was driven by principal payments on
acquisition-related notes payable of $3.9 million,
partially offset by proceeds from issuance of common stock as a
result of stock option exercises of $0.7 million.
Capital
Resources
We believe that our cash and cash equivalents, funds generated
from our operations and available amounts under our credit
facilities, together with the net proceeds of this offering,
will be sufficient to meet our working capital and
non-acquisition related capital expenditure requirements for at
least the next
59
12 months. In order to expand our business or acquire
additional complementary businesses or technologies, we may need
to raise additional funds through equity or debt financings. If
required, additional financing may not be available on terms
that are favorable to us, if at all. If we raise additional
funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders will be
reduced and these securities might have rights, preferences and
privileges senior to those of our current stockholders. No
assurance can be given that additional financing will be
available or that, if available, such financing can be obtained
on terms favorable to our stockholders and us.
During the last three years, inflation and changing prices have
not had a material effect on our business and we do not expect
that inflation or changing prices will materially affect our
business in the foreseeable future.
Off-Balance
Sheet Arrangements
During the periods presented, we did not have any relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purpose.
Contractual
Obligations
The following table summarizes our contractual obligations at
June 30, 2009 and the effect such obligations are expected
to have on our liquidity and cash flow in future periods.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Payments Due by Period
|
|
|
|
Total
|
|
|
Less Than 1 Year
|
|
|
1 to 3 Years
|
|
|
3 to 5 Years
|
|
|
More Than 5 Years
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
34,757
|
|
|
$
|
3,000
|
|
|
$
|
11,250
|
|
|
$
|
20,507
|
|
|
$
|
|
|
Notes payable
|
|
|
25,069
|
|
|
|
10,214
|
|
|
|
12,005
|
|
|
|
2,850
|
|
|
|
|
|
Operating lease obligations
|
|
|
1,368
|
|
|
|
1,104
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61,194
|
|
|
$
|
14,318
|
|
|
$
|
23,519
|
|
|
$
|
23,357
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the acquisition of SureHits, we also may be
required to make certain earn-out payments in the aggregate
amount of $13.5 million, payable in increments in the
amount of $4.5 million annually on January 1 of 2010, 2011
and 2012, contingent upon the achievement of specified financial
targets. In November 2009, we acquired the website assets of the
Internet.com division of WebMediaBrands, Inc. for $16.0 million
in cash and a $2.0 million non-interest bearing, unsecured
promissory note.
In August 2006, we entered into a loan and security agreement
which makes available a $30 million revolving credit
facility from a financial institution. In January 2008, we
signed an amendment to this loan and security agreement,
expanding the revolving credit availability to $60 million.
In September 2008, we replaced our existing revolving credit
facility of $60 million with credit facilities totaling
$100 million and in November 2009, we extended that
capacity to $130 million. As of September 30, 2009,
the facilities consisted of a $30 million five-year term
loan, with principal amortization of 10%, 10%, 20%, 25% and 35%
annually, and a $100 million revolving credit facility. We
may repay the remaining balance of the term loan and some or all
of our revolving credit facility from the proceeds of this
offering. Borrowings under the credit facilities are
collateralized by our assets and interest is payable quarterly
at specified margins above either LIBOR or the Prime Rate. As of
September 30, 2009, the interest rate varied dependent upon
the ratio of funded debt to adjusted EBITDA and ranged from
LIBOR + 1.875% to 2.625% or Prime + 0.75% to 1.25% for the
revolving credit facility and from LIBOR + 2.25% to 3.0% or
Prime + 0.75% to 1.25% for the term loan. Adjusted EBITDA, as
defined in our bank credit facility, is substantially similar to
our measure of Adjusted EBITDA set forth under Prospectus
Summary Summary Consolidated Financial Data.
As of September 30, 2009, $27.8 million was
outstanding under the term loan and $12.8 million was
outstanding under the revolving credit facility. The credit
facilities expire in September 2013. Under the loan
60
and revolving credit facility agreement, we are required to
maintain certain minimum financial ratios computed as follows:
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|
|
|
|
Quick ratio: ratio of (a) the sum of unrestricted cash and
cash equivalents and trade receivables less than 90 days
from invoice date to (b) current liabilities and face
amount of any letters of credit less the current portion of
deferred revenue.
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|
Fixed charge coverage: ratio of (a) trailing 12 months
of adjusted EBITDA to (b) the sum of capital expenditures,
net cash interest expense, cash taxes, cash dividends and
trailing 12 months payments of indebtedness. Payment of
unsecured indebtedness is excluded to the degree that sufficient
unused revolving credit facility exists such that the relevant
debt payment could have been made from the credit facility.
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|
|
|
Funded debt to adjusted EBITDA: ratio of (a) the sum of all
obligations owing to lending institutions, the face amount of
any letters of credit, indebtedness owing in connection with
seller notes and indebtedness owing in connection with capital
lease obligations to (b) trailing 12-month adjusted EBITDA.
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We were in compliance with these minimum financial ratios as of
June 30, 2008 and 2009 and as of September 30, 2009.
In January 2010, we replaced our existing credit facility with a
credit facility with a total borrowing capacity of
$175.0 million. The new facility consists of a
$35.0 million four-year term loan, with principal
amortization of 10%, 15%, 35% and 40% annually, and a
$140.0 million four-year revolving credit facility. We are
not required to repay any portion of this new facility from the
proceeds of this offering.
The operating lease obligations reflected in the table above
primarily include our corporate office leases.
The notes payable reflected in the table above consist of
non-interest-bearing, unsecured promissory notes issued in
connection with acquisitions.
Guarantees
We have agreements whereby we indemnify our officers and
directors for certain events or occurrences while the officer or
director is, or was serving, at our request in such capacity.
The term of the indemnification period is for the officer or
directors lifetime. The maximum potential amount of future
payments we could be required to make under these
indemnification agreements is unlimited; however, we have a
director and officer insurance policy that limits our exposure
and enables us to recover a portion of any future amounts paid.
As a result of our insurance policy coverage, we believe the
estimated fair value of these indemnification agreements is
minimal. Accordingly, we have not recorded any liabilities for
these agreements.
In the ordinary course of our business, we enter into standard
indemnification provisions in our agreements with our clients.
Pursuant to these provisions, we indemnify our clients for
losses suffered or incurred in connection with certain
third-party claims that our product infringed any United States
patent, copyright or other intellectual property rights. With
respect to our DSS products, we also indemnify our clients for
losses incurred in connection with third-party claims that the
items and content we provide infringe upon the intellectual
property rights of any third party. In some cases we are also
obligated to either secure the rights to use, replace or modify
the items and content, and, in the event that we are unable to
achieve the foregoing, the client is entitled to terminate the
agreement and receive a refund of certain payments made to us.
Each of these agreements contain general limitations on our
liability.
The potential amount of future payments to defend lawsuits or
settle indemnified claims under these indemnification provisions
may be unlimited; however, we believe the estimated fair value
of these indemnity provisions is minimal, and accordingly, we
have not recorded any liabilities for these agreements.
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Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board, or
FASB, issued a new accounting standard that changes the
accounting for business combinations, including the measurement
of acquirer shares issued in consideration for a business
combination, the recognition of contingent consideration, the
accounting for pre-acquisition gain and loss contingencies, the
recognition of capitalized in-process research and development,
the accounting for acquisition-related restructuring cost
accruals, the treatment of acquisition-related transaction costs
and the recognition of changes in the acquirers income tax
valuation allowance. The new standard applies prospectively to
business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The adoption of
the new standard did not have a material impact on our
consolidated financial statements, but is likely to have a
material impact on how we account for any future business
combinations into which we may enter.
In May 2009, the FASB issued a new accounting standard that
establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued. In particular, the new standard
sets forth (1) the period after the balance sheet date
during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition
or disclosure in the financial statements; (2) the
circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its
financial statements; and (3) the disclosures that an
entity should make about events or transactions that occurred
after the balance sheet date. We applied the requirement of this
standard effective June 30, 2009 and included additional
disclosures in the notes to our consolidated financial
statements.
In June 2009, the FASB issued a new accounting standard that
provides for a codification of accounting standards to be the
authoritative source of generally accepted accounting principles
in the United States. Rules and interpretive releases of the SEC
under federal securities laws are also sources of authoritative
GAAP for SEC registrants. We adopted the provisions of the
authoritative accounting guidance for the interim reporting
period ended September 30, 2009. The adoption did not have
a material effect on our consolidated results of operations or
financial condition.
In October 2009, the FASB issued a new accounting standard that
changes the accounting for arrangements with multiple
deliverables. Specifically, the new standard requires an entity
to allocate arrangement consideration at the inception of an
arrangement to all of its deliverables based on their relative
selling prices. In addition, the new standard eliminates the use
of the residual method of allocation and requires the
relative-selling-price method in all circumstances in which an
entity recognizes revenue for an arrangement with multiple
deliverables. In October 2009, the FASB also issued a new
accounting standard that changes revenue recognition for
tangible products containing software and hardware elements.
Specifically, if certain requirements are met, revenue
arrangements that contain tangible products with software
elements that are essential to the functionality of the products
are scoped out of the existing software revenue recognition
accounting guidance and will be accounted for under the
multiple-element arrangements revenue recognition guidance
discussed above. Both standards will be effective for us in the
first quarter of fiscal year 2011. Early adoption is permitted.
We do not anticipate the adoption of these standards to have a
material impact on our consolidated financial statements.
Quantitative
and Qualitative Disclosures about Market Risk
Foreign
Currency Exchange Risk
To date, our international client agreements have been
denominated solely in U.S. dollars, and accordingly, we
have not been exposed to foreign currency exchange rate
fluctuations related to client agreements, and do not currently
engage in foreign currency hedging transactions. However, as the
local accounts for our India and Canada operations are
maintained in the local currency of India and Canada, we are
subject to foreign currency exchange rate fluctuations
associated with remeasurement to U.S. dollars. A
hypothetical change of 10% in foreign currency exchange rates
would not have a material impact on our consolidated financial
condition or results of operations.
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Interest
Rate Risk
We had cash, cash equivalents and short-term investments
totaling $28.1 million, $25.2 million and
$27.3 million at September 30, 2009, June 30,
2009 and June 30, 2008, respectively. These amounts were
invested primarily in money market funds, short-term deposits
and marketable securities with original maturities of less than
three months. The unrestricted cash, cash equivalents and
short-term investments are held for working capital purposes and
short-term acquisitions financing. We do not enter into
investments for trading or speculative purposes. We believe that
we do not have any material exposure to changes in the fair
value as a result of changes in interest rates due to the
short-term nature of our cash equivalents and short-term
investments. Declines in interest rates, however, would reduce
future investment income.
As of September 30, 2009, we had outstanding a credit
facility consisting of a term loan, with principal amortization
of 10%, 10%, 20%, 25% and 35% annually, and a $100 million
revolving credit facility. As of September 30, 2009, we had
$27.8 million outstanding on our term loan and
$12.8 million outstanding on our revolving credit facility.
Interest on the credit facility is payable quarterly at
specified margins above either LIBOR or the Prime Rate. The
interest rate varies dependent upon the ratio of funded debt to
adjusted EBITDA and ranges from LIBOR + 1.875% to 2.625% or
Prime + 0.75% to 1.25% for the revolving credit facility and
from LIBOR + 2.25% to 3.0% or Prime + 0.75% to 1.25% for the
term loan. A hypothetical change of 1% in the interest rate on
our credit facility would lead to higher interest expense, but
we do not believe it would materially affect our overall
consolidated financial condition or results of operations.
In January 2010, we replaced our existing credit facility with a
credit facility with a total borrowing capacity of
$175.0 million. The new facility consists of a
$35.0 million four-year term loan, with principal
amortization of 10%, 15%, 35% and 40% annually, and a
$140.0 million four-year revolving credit facility.
Interest on borrowings under the new credit facility is payable
quarterly at specified margins above either LIBOR or the Prime
Rate. The interest rate varies dependent upon the ratio of
funded debt to adjusted EBITDA and ranges from LIBOR + 2.125% to
2.875% or Prime + 1.00% to 1.50% for the revolving credit
facility and from LIBOR + 2.50% to 3.25% or Prime + 1.00% to
1.50% for the term loan. The interest rates on the new credit
facility are higher than on the previous credit facility. Our
exposure to interest rate risk under the new credit facility
will depend on the extent to which we utilize such facility. If
our borrowings under the new facility are comparable to our
borrowings under the previous credit facility, we do not believe
our exposure to interest rate risk will be materially different.
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BUSINESS
Our
Company
QuinStreet is a leader in vertical marketing and media on the
Internet. We have built a strong set of capabilities to engage
Internet visitors with targeted media and to connect our
marketing clients with their potential customers online. We
focus on serving clients in large, information-intensive
industry verticals where relevant, targeted media and offerings
help visitors make informed choices, find the products that
match their needs, and thus become qualified customer prospects
for our clients. Our current primary client verticals are the
education and financial services industries. We also have a
presence in the home services,
business-to-business,
or B2B, and healthcare industries.
We generate revenue by delivering measurable online marketing
results to our clients. These results are typically in the form
of qualified leads or clicks, the outcomes of customer prospects
submitting requests for information on, or to be contacted
regarding, client products, or their clicking on or through to
specific client offers. These qualified leads or clicks are
generated from our marketing activities on our websites or on
third-party websites with whom we have relationships. Clients
primarily pay us for leads that they can convert into customers,
typically in a call center or through other offline customer
acquisition processes, or for clicks from our websites that they
can convert into applications or customers on their websites. We
are predominantly paid on a negotiated or market-driven
per lead or per click basis. Media costs
to generate qualified leads or clicks are borne by us as a cost
of providing our services.
Founded in 1999, we have been a pioneer in the development and
application of measurable marketing on the Internet. Clients pay
us for the actual opt-in actions by prospects or customers that
result from our marketing activities on their behalf, versus
traditional impression-based advertising and marketing models in
which an advertiser pays for more general exposure to an
advertisement. We have been particularly focused on developing
and delivering measurable marketing results in the search engine
ecosystem, the entry point of the Internet for most
of the visitors we convert into qualified leads or clicks for
our clients. We own or partner with vertical content websites
that attract Internet visitors from organic search engine
rankings due to the quality and relevancy of their content to
search engine users. We also acquire targeted visitors for our
websites through the purchase of
pay-per-click,
or PPC, advertisements on search engines. We complement search
engine companies by building websites with content and offerings
that are relevant and responsive to their searchers, and by
increasing the value of the PPC search advertising they sell by
matching visitors with offerings and converting them into
customer prospects for our clients.
Market
Opportunity
Our clients are shifting more of their marketing budgets from
traditional media channels such as direct mail, television,
radio, and newspapers to the Internet because of increasing
usage of the Internet by their potential customers. We believe
that direct marketing is the most applicable and relevant
marketing segment to us because it is targeted and measurable.
According to the July 2009 research report, Consumer
Behavior Online: A 2009 Deep Dive, by Forrester Research,
Americans spend 33% of their time with media on the Internet,
but online direct marketing was forecasted to represent only 16%
of the $149 billion in total annual U.S. direct
marketing spending in 2009, as reported by the Direct Marketing
Association. The Internet is an effective direct marketing
medium due to its targeting and measurability characteristics.
If direct marketing budgets shift to the Internet in proportion
to Americans share of time spent with media on the
Internet from 16% to 33% of the $149 billion in
total spending that could represent an increased
market opportunity of $25 billion. In addition, as
traditional media categories such as television and radio shift
from analog to digital formats, they can become channels for the
targeted and measurable marketing techniques and capabilities we
have developed for the Internet, thus expanding our addressable
market opportunity. Further future market potential will also
come from international markets.
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Change
in marketing strategy and approach
We believe that marketing approaches are changing as budgets
shift from offline, analog advertising media to digital
advertising media such as Internet marketing. These changing
approaches are fundamental, and require a shift to fundamentally
new competencies, including:
From
qualitative, impression-driven marketing to analytic,
data-driven marketing
We believe that the growth in Internet marketing is enabling a
more data-driven approach to advertising. The measurability of
online marketing allows marketers to collect a significant
amount of detailed data on the performance of their marketing
campaigns, including the effectiveness of ad format and
placement and user responses. This data can then be analyzed and
used to improve marketing campaign performance and
cost-effectiveness on substantially shorter cycle times than
with traditional offline media.
From
account management-based client relationships to results-based
client relationships
We believe that marketers are becoming increasingly focused on
strategies that deliver specific, measurable results. For
example, marketers are attempting to better understand how their
marketing spending produces measurable objectives such as
meeting their target marketing cost per new customer. As
marketers adopt more results-based approaches, the basis of
client relationships with their marketing services providers is
shifting from being more account management-based to being more
results-oriented.
From
marketing messages pushed on audiences to marketing messages
pulled by self-directed audiences
Traditional marketing messages such as television and radio
advertisements are broadcast to a broad audience. The Internet
is enabling more self-directed and targeted marketing. For
example, when Internet visitors click on PPC search
advertisements, they are expressing an interest in and
proactively engaging with information about a product or service
related to that advertisement. The growth of self-directed
marketing, primarily through online channels, allows marketers
to present more targeted and potentially more relevant marketing
messages to potential customers who have taken the first step in
the buying process, which can in turn increase the effectiveness
of marketers spending.
From
marketing spending focused on large media buys to marketing
spending optimized for fragmented media
We believe that media is becoming increasingly fragmented and
that marketing strategies are changing to adapt to this trend.
There are millions of Internet websites, tens of thousands of
which have significant numbers of visitors. While this
fragmentation can create challenges for marketers, it also
allows for improved audience segmentation and the delivery of
highly targeted marketing messages, but new technologies and
approaches are necessary to effectively manage marketing given
the increasing complexity resulting from more media
fragmentation.
Increasing
complexity of online marketing
Online marketing is a dynamic and increasingly complex
advertising medium. There are numerous online channels for
marketers to reach potential customers, including search
engines, Internet portals, vertical content websites, affiliate
networks, display and contextual ad networks, email, video
advertising, and social media. We refer to these and other
marketing channels as media. Each of these channels may involve
multiple ad formats and different pricing models, amplifying the
complexity of online marketing. We believe that this complexity
increases the demand for our vertical marketing and media
services due to our capabilities and to our experience managing
and optimizing online marketing programs across multiple
channels. Also marketers and agencies often lack our ability to
aggregate offerings from multiple clients in the same industry
vertical, an approach that allows us to cover a wide selection
of visitor segments and provide more potential matches to
Internet visitor needs. This approach can allow us to convert
more Internet visitors into qualified leads or clicks from
targeted media sources, giving us an advantage when buying or
monetizing that media.
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Our
Business Model
We deliver cost-effective marketing results to our clients,
predictably and scalably, most typically in the form of a
qualified lead or click. These leads or clicks can then convert
into a customer or sale for the client at a rate that results in
an acceptable marketing cost to them. We get paid by clients
primarily when we deliver qualified leads or clicks as defined
in our agreements. Because we bear the costs of media, our
programs must deliver a value to our clients and a media yield,
or our ability to generate an acceptable margin on our media
costs, that provides a sound financial outcome for us. Our
general process is:
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We own or access targeted media.
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We run advertisements or other forms of marketing messages and
programs in that media to create visitor responses or clicks
through to client offerings.
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We match these responses or clicks to client offerings or brands
that meet visitor interests or needs, converting visitors into
qualified leads or clicks.
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We optimize client matches and media yield such that we achieve
desired results for clients and a sound financial outcome for us.
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Media cost, or the cost to attract targeted Internet visitors,
is the largest cost input to producing the measurable marketing
results we deliver to clients. Balancing our clients cost
and conversion objectives, or the rate at which the leads or
clicks that we deliver to them convert into customers, with our
media costs and yield objectives, represents the primary
challenge in our business model. We have been able to
effectively balance these competing demands by focusing on our
media sources and capabilities, conversion optimization, and our
mix of offerings and client coverage. We also seek to mitigate
media cost risk by working with third-party website publishers
predominantly on a revenue-share basis; media purchased on a
non-revenue-share basis has represented a small minority of our
media costs and of the Internet visitors we convert into
qualified leads or clicks for clients.
Media
and Internet visitor mix
We are a client-driven organization. We seek to be one of the
largest providers of measurable marketing results on the
Internet in the client industry verticals we serve by meeting
the needs of clients for results, reliability and volume.
Meeting those client needs requires that we maintain a
diversified and flexible mix of Internet visitor sources due to
the dynamic nature of online media. Our media mix changes with
changes in Internet visitor usage patterns. We adapt to those
changes on an ongoing basis, and also proactively adjust our mix
of vertical media sources to respond to client or
vertical-specific circumstances and to achieve our financial
objectives. Our financial objectives are to achieve consistent,
sustainable financial performance, but can differ by client or
industry vertical, depending on factors such as our need to
invest in the development of media sources, marketing programs,
or client relationships. Generally, our Internet visitor sources
include:
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websites owned and operated by us, with content and offerings
that are relevant to our clients target customers;
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visitors acquired from PPC advertisements purchased on major
search engines and sent to our websites;
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revenue sharing agreements with third-party websites with whom
we have a relationship and whose content is relevant to our
clients target customers;
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email lists owned by third parties and warranted to us by their
owners to comply with the CAN-SPAM Act;
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email lists owned by us, and generated on an
opt-in
basis
from Internet visitors to our websites; and
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display ads run through online advertising networks or directly
with major websites or portals.
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Conversion
optimization
Once we acquire targeted Internet visitors from any of our
numerous online media sources, we seek to convert that media
into qualified leads or clicks at a rate that balances client
results with our media costs or yield objectives. We start by
defining the segments and interests of Internet visitors in our
verticals, and by providing them with the information and
product offerings on our websites and in our marketing programs
that best meet their needs. Achieving acceptable client results
and media yield then requires ongoing testing, measuring,
analysis, feedback, and adaptation of the key components of our
Internet marketing programs. These components include the
marketing or advertising messaging, content mix, visitor
navigation path, mix and coverage of client offerings presented,
and point-of-sale conversion messaging the content
that is presented to an Internet visitor immediately prior to
converting that individual into a lead or click for our clients.
This data complexity is managed by us with technology, data
reporting, marketing processes, and personnel. We believe that
our scale and ten-year track record give us an advantage, as
managing this complexity often implies a steep experience-based
learning curve.
Offerings
and client coverage
The Internet is a self-directed medium. Internet visitors choose
the websites they visit and their online navigation paths, and
always have the option of clicking away to a different website
or web page. Having offerings or clients that match the
interests or needs of website visitors is key to providing
results and adequate media yield. Our vertical focus allows us
to continuously revise and improve this matching process, to
better understand the various segments of visitors and client
offerings available to be matched, and to ensure that we enable
Internet visitors to find what they seek.
Our
Competitive Advantages
Vertical
focus and expertise
We focus our efforts on large, attractive market verticals, and
on building our depth of media and coverage of clients and
client offerings within them. We have been a pioneer in
developing vertical marketing and media on the Internet, and in
providing measureable marketing results to clients. We focus on
clients who are moving their marketing spending to measurable
online formats and on information-intensive verticals with large
underlying market opportunities and high product or customer
lifetime values. This focus allows us to utilize targeted media,
in-depth industry and client knowledge, and customer
segmentation and breadth of client offerings, or coverage, to
deliver results for our clients and greater media yield.
Measurable
marketing experience and expertise
We have substantial experience at designing and deploying
marketing programs that allow Internet visitors to find the
information or product offerings they seek, and that can deliver
economically attractive, measurable results to our clients,
cost-effectively for us. Such results require frequent testing
and balancing of numerous variables, including Internet visitor
sources, mix of content and of client and product offerings,
visitor navigation paths, prospect qualification, and
advertising creative design, among others. The complexity of
executing these marketing campaigns is challenging. Due to our
scale and ten-year track record, we have successfully executed
thousands of Internet marketing programs, and we have gained
significant experience managing and optimizing this complexity
to meet our clients volume, quality and cost objectives.
Targeted
media
Targeted media attracts Internet visitors who are relatively
narrowly focused demographically or in their interests. Targeted
media can deliver better measurable marketing results for our
clients, at lower media costs for us, due to higher rates of
conversion of Internet visitors into leads or clicks for
targeted offerings and, often, due to less competition from
display advertisers. We have significant experience at creating,
identifying, monetizing, and managing targeted media on the
Internet. Many of the targeted media sources for our marketing
programs are proprietary or more defensible because of our
direct ownership of websites in our verticals, our acquisition
of targeted Internet visitors directly from search engines to
our websites, and our exclusive or long-term relationships
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with media properties or sources owned by others. Examples of
websites that we own and operate include WorldWideLearn.com,
ArmyStudyGuide.com and Chef2Chef.com in our education client
vertical; CardRatings.com, MoneyRates.com and Insure.com in our
financial services client vertical; AllAboutLawns.com and
OldHouseWeb.com in our home services client vertical; and
ElderCarelink.com in our healthcare client vertical.
Proprietary
technology
We have developed a core technology platform and a common set of
applications for managing and optimizing measurable marketing
programs across multiple verticals at scale. The primary
objectives and effects of our technologies are to achieve higher
media yield, deliver better results for our clients, and more
efficiently and effectively manage our scale and complexity. We
continuously strive to develop technologies that allow us to
better match Internet visitors in our verticals to the
information, clients or product offerings they seek at scale. In
so doing, our technologies can allow us to simultaneously
improve visitor satisfaction, increase our media yield, and
achieve higher rates of conversions of leads or clicks for our
clients a virtuous cycle of increased value for
Internet visitors and our clients and competitive advantage for
us. Some of the key applications in our technology platform are:
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an ad server for tracking the placement and performance of
content, creative messaging, and offerings on our websites and
on those of publishers with whom we work;
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database-driven applications for dynamically matching content,
offers or brands to Internet visitors expressed needs or
interests;
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a platform for measuring and managing the performance of tens of
thousands of PPC search engine advertising campaigns;
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dashboards or reporting tools for displaying operating and
financial metrics for thousands of ongoing marketing campaigns;
and,
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a compliance tool capable of cataloging and filtering content
from the thousands of websites on which our marketing programs
appear to ensure adherence to client branding guidelines and to
regulatory requirements.
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Approximately one-third of our employees are engineers, focused
on building, maintaining and operating our technology platform.
Client
relationships
We believe we are a reliable source of measurably effective
marketing results for our clients. We endeavor to work
collaboratively and in a data-driven way with clients to improve
our results for them. Our client retention rate is high. We
experienced no attrition among clients that individually
accounted for over $100,000 in monthly revenue to us for the
one-year period ended September 30, 2009. Those clients
represented 75% of our revenue over that time period. In
addition, most of our revenue growth comes from existing
clients; 88% of our
year-over-year
revenue growth in the quarter ended September 30, 2009 came
from incremental revenue from existing clients, defined as
clients we had worked with for at least one year. We believe our
high client retention and per client growth rates are due to:
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our close, often direct, relationships with most of our large
clients;
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our ability to deliver measurable and attractive return on
investment, or ROI, on clients marketing spending;
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our ownership of, or exclusive access to large amounts of,
targeted media inventory and associated Internet visitors in the
industry verticals on which we focus; and,
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our ability to consistently and reliably deliver large
quantities of qualified leads or clicks.
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We believe that our high client retention rates, combined with
our depth and breadth of online media in our primary client
verticals, indicate that we are becoming an important marketing
channel partner for our clients to reach their prospective
customers.
Client-driven
online marketing approach
We focus on providing measurable Internet marketing and media
services to our clients in a way that protects and enhances
their brands and their relationships with prospective customers.
The Internet marketing programs we execute are designed to
adhere to strict client branding and regulatory guidelines, and
are designed to match our clients brands and offers with
expressed customer interest. We have contractual arrangements
with third-party website publishers to ensure that they follow
our clients brand guidelines, and we utilize our
proprietary technologies and trained personnel to help ensure
compliance. In addition, we believe that providing relevant,
helpful content and client offers that match an Internet
visitors self-selected interest in a product or service,
such as requesting information about an education program or
financial product, makes that visitor more likely to convert
into a customer for our clients.
We do not engage in online marketing practices such as spyware
or deceptive promotions that do not provide value to Internet
visitors and that can undermine our clients brands. A
small minority of our Internet visitors reach our websites or
client offerings through advertisements in emails. We employ
practices to ensure that we comply with the CAN-SPAM Act
governing unsolicited commercial email.
Acquisition
strategy and success
We have successfully acquired vertical marketing and media
companies on the Internet, including vertical website
businesses, marketing services companies, and technologies. We
believe we can integrate and generate value from acquisitions
due to our scale, breadth of capabilities, and common technology
platform.
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Our ability to monetize Internet media, coupled with client
demand for our services, provides us with a particular advantage
in acquiring targeted online media properties in the verticals
on which we focus.
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Our capabilities in online media can allow us to generate a
greater volume of leads or clicks, and therefore create more
value, than other owners of marketing services companies that
have aggregated client budgets or relationships.
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We can often apply technologies across our business volume to
create more value than previous owners of the technology.
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Scale
We are one of the largest Internet vertical marketing and media
companies in the world. Our scale allows us to better meet the
needs of large clients for reliability, volume and quality of
service. It allows us to invest more in technologies that
improve media yield, client results and our operating
efficiency. We are also able to invest more in other forms of
research and development, including determining and developing
new types of vertical media, new approaches to engaging website
visitors, and new segments of Internet visitors and client
budgets, all of which can lead to advantages in media costs,
effectiveness in delivering client results, and then to more
growth and greater scale.
Our
Strategy
Our goal is to be one of the largest and most successful
marketing and media companies on the Internet, and eventually in
other digitized media forms. We believe that we are in the early
stages of a very large and long-term business opportunity. Our
strategy for pursuing this opportunity includes the following
key components:
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Focus on generating sustainable revenues by providing
measurable value to our clients.
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Build QuinStreet and our industry sustainably by behaving
ethically in all we do and by providing quality content and
website experiences to Internet visitors.
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Remain vertically focused, choosing to grow through depth,
expertise and coverage in our current industry verticals; enter
new verticals selectively over time, organically and through
acquisitions.
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Build a world class organization, with
best-in-class
capabilities for delivering measurable marketing results to
clients and high yields or returns on media costs.
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Develop and evolve the best technologies and platform for
managing vertical marketing and media on the Internet; focus on
technologies that enhance media yield, improve client results
and achieve scale efficiencies.
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Build, buy and partner with vertical content websites that
provide the most relevant and highest quality visitor
experiences in the client and media verticals we serve.
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Be a client-driven organization; develop a broad set of media
sources and capabilities to reliably meet client needs.
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Our
Culture
Our values are the foundation of our successful business
culture. They represent the standards we strive to achieve and
the organization we continuously seek to become. These have been
our guiding principles since our founding in 1999. Our values
are:
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1.
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Performance.
We understand our business
objectives and apply a whatever it takes approach to
meeting them. We are driven to achieve. We are committed to our
own personal and professional development and to that of our
colleagues.
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2.
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High Standards.
We hold each other and
ourselves to the highest standards of performance,
professionalism and personal behavior. We act with the highest
of ethical standards. We tolerate and forgive mistakes, but not
patterns.
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3.
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Teamwork.
We deal with one another
openly, honestly and non-hierarchically in an atmosphere of
mutual trust and respect and in pursuit of common stretch goals.
We have an obligation to dissent in an effort to reach the best
answers. We smooth the way for effective, dynamic team
discussions by demonstrating care and concern for each
individual in all of our interactions. We support decisions,
once made.
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4.
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Customer Empathy.
We strive every day
to better understand and anticipate the needs of our customers,
including our website visitors, clients and publishers. We
leverage our unique insights into higher customer loyalty and
competitive advantage.
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5.
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Prioritization.
We always work on what
is most important to achieving Company objectives first. If we
do not know, we ask or discuss competing demands.
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6.
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Urgency.
We know our goals and measure
our progress toward them daily.
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7.
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Progress.
We are pioneers. We make
decisions based on facts and analysis, as well as intuition, but
we expect to make mistakes in the pursuit of rapid progress. We
learn from mistakes on short cycle times and iterate our way to
success.
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8.
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Innovation and Flexibility.
We prize
creativity. We embrace new ideas and approaches as opportunities
to improve our performance or work environment. We resist pride
of authorship; it limits progress. We actively benchmark and
work to understand and employ best practices.
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9.
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Recognition.
We are a meritocracy.
Advancement and recognition are earned through contribution and
performance. We celebrate each others victories and
efforts.
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10.
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Fun.
We believe that work, done well,
can and should be fun. We strive to create an upbeat, supportive
environment and try not to take ourselves too seriously. We do
not tolerate negativism, pessimism or nay saying...we dont
have time.
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70
Clients
In fiscal years 2007, 2008 and 2009 and the three months ended
September 30, 2009, our top 20 clients accounted for 76%,
70%, 68% and 70% of net revenue, respectively. Our largest
client, DeVry Inc., accounted for 22%, 23%, 19% and 13% of net
revenue in these periods, respectively. Since our service was
first offered in 2001, we have developed a broad client base
with many multi-year relationships. We enter into Internet
marketing contracts with our clients, most of which are
cancelable with little or no prior notice. In addition, these
contracts do not contain penalty provisions for cancellation
before the end of the contract term.
Sales and
Marketing
We have an internal sales team that consists of employees
focused on signing new clients and account managers who maintain
and seek to increase our business with existing clients. Our
sales people and account managers are each focused on a
particular client business vertical so that they develop an
expertise in the marketing needs of our clients in that
particular vertical.
Our marketing programs include attendance at trade shows and
conferences and limited advertising.
Technology
and Infrastructure
We have developed a suite of technologies to manage, improve and
measure the results of the marketing programs we offer our
clients. We use a combination of proprietary and third-party
software as well as hardware from established technology
vendors. We use specialized software for client management,
building and managing websites, acquiring and managing media,
managing our third-party publishers, and the matching of
Internet visitors to our marketing clients. We have invested
significantly in these technologies and plan to continue to do
so to meet the demands of our clients and Internet visitors, to
increase the scalability of our operations, and enhance
management information systems and analytics in our operations.
Our development teams work closely with our marketing and
operating teams to develop applications and systems that can be
used across our business. For the fiscal years 2007, 2008 and
2009 and the three months ended September 30, 2009, we
spent $14.1 million, $14.1 million, $14.9 million
and $4.5 million, respectively, on product development.
Our primary data center is at a third-party co-location center
in San Francisco, California. All of the critical
components of the system are redundant and we have a backup data
center in Las Vegas, Nevada. We have implemented these backup
systems and redundancies to minimize the risk associated with
earthquakes, fire, power loss, telecommunications failure, and
other events beyond our control.
Intellectual
Property
We rely on a combination of trade secret, trademark, copyright
and patent laws in the United States and other jurisdictions
together with confidentiality agreements and technical measures
to protect the confidentiality of our proprietary rights. We
currently have one patent application pending in the United
States and no issued patents. We rely much more heavily on trade
secret protection than patent protection. To protect our trade
secrets, we control access to our proprietary systems and
technology and enter into confidentiality and invention
assignment agreements with our employees and consultants and
confidentiality agreements with other third parties. QuinStreet
is a registered trademark in the United States and other
jurisdictions. We also have registered and unregistered
trademarks for the names of many of our websites and we own the
domain registrations for our many website domains.
We cannot guarantee that our intellectual property rights will
provide competitive advantages to us; our ability to assert our
intellectual property rights against potential competitors or to
settle current or future disputes will not be limited by our
agreements with third parties; our intellectual property rights
will be enforced in jurisdictions where competition may be
intense or where legal protection may be weak; any of the trade
secrets, trademarks, copyrights, patents or other intellectual
property rights that we presently employ in our business will
not lapse or be invalidated, circumvented, challenged, or
abandoned; competitors will not
71
design around our protected systems and technology; or that we
will not lose the ability to assert our intellectual property
rights against others.
Our
Competitors
Our primary competition falls into two categories: advertising
and direct marketing services agencies and online marketing and
media companies. We compete for business on the basis of a
number of factors including return on marketing expenditures,
price, access to targeted media, ability to deliver large
volumes or precise types of customer prospects, and reliability.
Advertising
and direct marketing services agencies
Online and offline advertising and direct marketing services
agencies control the majority of the large client marketing
spending for which we primarily compete. So, while they are
sometimes our competitors, agencies are also often our clients.
We compete with agencies to attract marketing budget or spending
from offline forms to the Internet or, once designated to be
spent online, to be spent with us versus the agency or by the
agency with others. When spending online, agencies spend with
QuinStreet and with portals, other websites and ad networks.
Online
marketing and media companies
We compete with other Internet marketing and media companies, in
many forms, for online marketing budgets. Most of these
competitors compete with us in one vertical. Examples include
BankRate in the financial services vertical and Monster
Worldwide in the education vertical. Some of our competition
also comes from agencies or clients spending directly with
larger websites or portals, including Google, Yahoo!, MSN, and
AOL.
Government
Regulation
Advertising and promotional information presented to visitors on
our websites and our other marketing activities are subject to
federal and state consumer protection laws that regulate unfair
and deceptive practices. There are a variety of state and
federal restrictions on the marketing activities conducted by
telephone, the mail or by email, or over the internet, including
the Telemarketing Sales Rule, state telemarketing laws, federal
and state privacy laws, the CAN-SPAM Act, and the Federal Trade
Commission Act and its accompanying regulations and guidelines.
In addition, some of our clients operate in regulated
industries, particularly in our financial services, education
and medical verticals. For example, the U.S. Real Estate
Settlement Procedures Act, or RESPA, regulates the payments that
may be made to mortgage brokers. While we do not engage in the
activities of a traditional mortgage broker, we are licensed as
a mortgage broker in 25 states for our online marketing
activities. In our education vertical, our clients are subject
to the U.S. Higher Education Act, which, among other
things, prohibits incentive compensation in recruiting students.
The U.S. Department of Education is currently engaged in a
negotiated rulemaking process in which it has suggested
repealing all existing safe harbors regarding incentive
compensation in recruiting, including the Internet safe harbor.
While we believe that our fee per lead model does not constitute
incentive compensation for purposes of the Higher Education Act,
the results of the negotiated rulemaking could impact how we are
paid for leads by clients in our education vertical and could
also impact our education clients and their marketing practices.
In our medical vertical, our medical device and supplies clients
are subject to state and federal anti-kickback statutes that
prohibit payment for referrals. While we believe our matching of
prospective customers with our clients and the manner in which
we are paid for these activities complies with these and other
applicable regulations, these rules and regulations in many
cases were not developed with online marketing in mind and their
applicability is not always clear. The rules and regulations are
complex and may be subject to different interpretations by
courts or other governmental authorities. We might
unintentionally violate such laws, such laws may be modified and
new laws may be enacted in the future. Any such developments (or
developments stemming from enactment or modification of other
laws) or the failure to anticipate accurately the application or
interpretation of these laws could create liability to us,
result in adverse publicity and negatively affect our businesses.
72
Employees
As of December 31, 2009, we had 568 employees, which
included 162 employees in product development and
engineering, 80 in sales and marketing, 52 in general and
administration and 274 in operations. None of our employees is
represented by a labor union.
Facilities
Our principal executive offices are located in a leased facility
in Foster City, California, consisting of approximately
53,877 square feet of office space under a lease that
expires in October 2010. This facility accommodates our
principal engineering, sales, marketing, operations and finance
and administrative activities. As of December 31, 2009, we
also lease buildings in Arkansas, Colorado, Connecticut,
Massachusetts, Nevada, New Jersey, New York, North Carolina,
Oklahoma, Oregon, India, Singapore and the United Kingdom. These
facilities total approximately 56,587 square feet. We
believe that our current facilities are sufficient for our
current needs. We intend to add new facilities and expand our
existing facilities as we add employees and expand our markets,
and we believe that suitable additional or substitute space will
be available as needed to accommodate any such expansion of our
operations.
Legal
Proceedings
From time to time, we may become involved in legal proceedings
and claims arising in the ordinary course of our business. We
are not currently a party to any material litigation.
73
MANAGEMENT
Officers
and Directors
Our officers and directors and their respective ages and
positions as of December 31, 2009 were as follows:
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Name
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Age
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Position
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Douglas Valenti
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50
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Chief Executive Officer and Chairman
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Bronwyn Syiek
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45
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President and Chief Operating Officer
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Kenneth Hahn
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43
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Chief Financial Officer
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Tom Cheli
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38
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Executive Vice President
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Scott Mackley
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37
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Executive Vice President
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Nina Bhanap
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36
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Chief Technology Officer
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Daniel Caul
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44
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General Counsel
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Christopher Mancini
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37
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Senior Vice President
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Patrick Quigley
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34
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Senior Vice President
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Timothy Stevens
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43
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Senior Vice President
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William Bradley(1)
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66
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Director
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John G. McDonald(2)
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72
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Director
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Gregory Sands(1)(2)
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43
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Director
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James Simons(1)(3)
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46
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Director
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Glenn Solomon(3)
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40
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Director
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Dana Stalder(2)(3)
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41
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Director
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(1)
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Member of the nominating and corporate governance 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 audit committee.
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Officers
Douglas Valenti
has served as our Chief Executive Officer
since July 1999 and as our Chairman and Chief Executive Officer
since March 2004. Prior to QuinStreet, Mr. Valenti served
as a partner at Rosewood Capital, a venture capital firm, for
five years; at McKinsey & Company as a strategy
consultant and engagement manager for three years; at
Procter & Gamble in various management roles for three
years; and for the U.S. Navy as a nuclear submarine officer
for five years. He holds a Bachelors degree in Industrial
Engineering from the Georgia Institute of Technology, where he
graduated with highest honors and was named the Georgia Tech
Outstanding Senior in 1982, and an M.B.A. from the Stanford
Graduate School of Business, where he was an Arjay Miller
Scholar.
Bronwyn Syiek
has served as our President and Chief
Operating Officer since February 2007, as our Chief Operating
Officer from April 2004 to February 2007, as Senior Vice
President from September 2000 to April 2004, as Vice President
from her start date in March 2000 to September 2000 and as a
consultant to us from July 1999 to March 2000. Prior to joining
us, Ms. Syiek served as Director of Business Development
and member of the Executive Committee at De La Rue Plc, a
banknote printing and security product company, for three years.
She previously served as a strategy consultant and engagement
manager at McKinsey & Company for four years and held
various investment management and banking positions with Lloyds
Bank and Charterhouse Bank. She holds an M.A. in Natural
Sciences from Cambridge University in the United Kingdom.
Kenneth Hahn
has served as our Chief Financial Officer
since September 2006. Prior to joining us, Mr. Hahn served
as Chief Financial Officer of Borland Software Corporation, a
public software company,
74
from September 2002 to July 2006. Previously, Mr. Hahn
served in various roles, including Chief Financial Officer, of
Extensity, Inc., a public software company, for five years; as a
strategy consultant at the Boston Consulting Group for three
years; and as an audit manager at Price Waterhouse, a public
accounting firm, for five years. He holds a B.A. in Business
from California State University Fullerton, summa cum laude, and
an M.B.A. from the Stanford Graduate School of Business, where
he was an Arjay Miller Scholar. Mr. Hahn is also a
Certified Public Accountant (inactive), licensed in the state of
California.
Tom Cheli
has served as our Executive Vice President
since February 2007, as Senior Vice President from December 2004
to February 2007, as Vice President of Sales from January 2001
to December 2004 and as Director of Sales from February 2000 to
January 2001. Prior to joining us, Mr. Cheli served as
Director of Inside Sales and Sales Operations at Collagen
Aesthetics Corporation, an aesthetic biomedical device company,
and as Regional Sales Manager at Akorn Ophthalmics, Inc., a
specialty pharmaceutical company. He holds a B.A. in Sports
Medicine from the University of the Pacific.
Scott Mackley
has served as our Executive Vice President
since February 2007, as Senior Vice President from December 2004
to February 2007, as Vice President from June 2003 to December
2004, as Senior Director from February 2002 to June 2003, as
Director from October 2000 to February 2002 and as Senior
Manager, Network Management from May 2000 to October 2000. Prior
to joining us, Mr. Mackley served at Salomon Brothers and
Salomon Smith Barney, in various roles in their Equity Trading
unit and Investment Banking and Equity Capital Markets divisions
over four years. He holds a B.A. in Economics from Washington
and Lee University.
Nina Bhanap
has served as our Chief Technology Officer
since July 2009, as our Senior Vice President of Engineering
from November 2006 to July 2009, as Vice President of Product
Development from January 2004 to November 2006, as Senior
Director from January 2003 to January 2004 and as Director of
Product Management from October 2001 to January 2003. Prior to
joining us, Ms. Bhanap served as Head of Fixed Income Sales
Technology for Europe at Morgan Stanley for five years and as a
senior associate at Booz Allen Hamilton for one year. She holds
a B.S. in Computer Science with Honors from Imperial College,
University of London, and an M.B.A. from the London Business
School.
Daniel Caul
has served as our General Counsel since
January 2008. Prior to joining us, Mr. Caul served as
General Counsel for the Search and Media division of
IAC/InterActiveCorp, an Internet search and advertising company,
from September 2006 to January 2008, and prior to the
acquisition by IAC/InterActiveCorp, he was Assistant General
Counsel of Ask Jeeves, Inc. from February 2003 to September
2006. Previously, Mr. Caul was an attorney with Howard,
Rice, Nemerovsky, Canady, Falk and Rabkin, a corporate law firm,
for four years and served as a U.S. District Court clerk. He
holds a B.A. in Political Science from Vanderbilt University,
summa cum laude, and a J.D. from the Harvard Law School, magna
cum laude. Mr. Caul was also a Fulbright Scholar.
Christopher Mancini
has served as our Senior Vice
President since October 2007, as Vice President from January
2006 to October 2007, as Senior Director from July 2004 to
January 2006, as Director from December 2003 to July 2004 and as
Senior Sales Manager from November 2000 to February 2003. Prior
to joining us, Mr. Mancini served in various sales and
operational roles at Eli Lilly & Company, NeuroScience
Division, for six years. He holds a B.S. from the Duquesne
University School of Pharmacy.
Patrick Quigley
has served as our Senior Vice President
since November 2007. Prior to rejoining us, Mr. Quigley
served at BEA Systems, a software company, from June 2002 to
November 2007, as Vice President of Strategic Sales and
Operations from February 2007 to November 2007, Vice President
of Sales Operations from February 2005 to February 2007, and
Director of Solutions Marketing from October 2003 to February of
2005. Mr. Quigley initially joined QuinStreet in July 1999
and served in various positions for two years; previously, he
served as a consultant at McKinsey & Company for two
years. He holds a B.S. in Engineering, summa cum laude, from
Duke University. He holds an M.B.A. with Honors from The Wharton
School at the University of Pennsylvania.
Timothy Stevens
has served as our Senior Vice President
since October 2008. Prior to joining us, Mr. Stevens served
as President and CEO of Doppelganger, Inc., an online social
entertainment studio, from
75
January 2007 to October 2008. Prior to Doppelganger,
Mr. Stevens served as General Counsel for Borland Software
Corporation, a software company, from October 2003 to June 2006.
Previously, he served in various executive management roles,
including most recently as Senior Vice President of Corporate
Development, at Inktomi Corporation, an Internet infrastructure
company, during his six year tenure. Previously,
Mr. Stevens was an attorney with Wilson Sonsini
Goodrich & Rosati, a corporate law firm, for six
years. He holds a B.S. in both Finance and Management from the
University of Oregon, summa cum laude, and a J.D. from the
University of California at Davis, Order of the Coif.
Board
of Directors
William Bradley
has served as a member of our board of
directors since August 2004. Former Senator Bradley is a
Managing Director of Allen & Company LLC, an
investment bank, which he joined in November 2000. From
April 2001 to June 2004, Former Senator Bradley also served as
chief outside advisor to the nonprofit practice of
McKinsey & Company. Former Senator Bradley served in
the U.S. Senate from 1979 to 1997, representing the state
of New Jersey, and previously was a professional basketball
player with the New York Knicks from 1967 to 1977. Former
Senator Bradley also serves on the boards of directors of
Seagate Technology, Starbucks Coffee Company and Willis Group
Holdings. Former Senator Bradley received a B.A. in American
History from Princeton University and an M.A. in American
History from Oxford University, where he was a Rhodes Scholar.
John G. (Jack) McDonald
has served as a member of our
board of directors since September 2004. Professor McDonald is
the Stanford Investors Professor in the Stanford Graduate School
of Business, where he has been a faculty member since 1968,
specializing in investment management, entrepreneurial finance,
principal investing, venture capital, and private equity
investing. Professor McDonald also serves on the boards of
directors of Varian, Inc., Plum Creek Timber Company, Scholastic
Corporation, iStar Financial, Inc., and nine mutual funds
managed by Capital Research and Management Company. He holds a
B.A. in Engineering, an M.B.A., and a Ph.D. in Business and
Finance from Stanford University. He is a retired officer in the
U.S. Army and was a Fulbright Scholar.
Gregory Sands
has served as a member of our board of
directors since July 1999. Since September 1998, Mr. Sands
has been a Managing Director at Sutter Hill Ventures, a venture
capital firm. Previously, Mr. Sands held various
operational roles at Netscape Communications Corporation and was
a management consultant with Mercer Management Consulting.
Mr. Sands also serves on the boards of several
privately-held companies. He holds a B.A. in Government from
Harvard College and an M.B.A. from the Stanford Graduate School
of Business.
James Simons
has served as a member of our board of
directors since July 1999. Mr. Simons is a Managing
Director of Split Rock Partners, a venture capital firm, which
he founded in June 2004. Prior to founding Split Rock Partners,
Mr. Simons served as General Partner of St. Paul Venture
Capital, a venture capital firm, from November 1996 to June
2004. Previously, Mr. Simons was a partner at Marquette
Venture Partners and held banking positions at Trammell Crow
Company and First Boston Corporation. Mr. Simons also
serves on the boards of several privately-held companies. He
holds a B.A. in Economics and History from Stanford University
and an M.S. in Management from the J.L. Kellogg Graduate School
of Management, Northwestern University.
Glenn Solomon
has served as a member of our board of
directors since May 2007. Since March 2006, Mr. Solomon has
been a Managing Director of GGV Capital (formerly Granite Global
Ventures), a venture capital firm. Prior to joining GGV Capital,
Mr. Solomon served as a General Partner at Partech
International, a venture capital firm, from September 1997.
Previously, Mr. Solomon served in various financial roles
at Goldman Sachs and at SPO Partners. Mr. Solomon also
serves on the board of a privately-held company. He earned a
B.A. in Public Policy from Stanford University, where he
graduated with Distinction, and an M.B.A. from the Stanford
Graduate School of Business, where he was an Arjay Miller
Scholar.
Dana Stalder
has served as a member of our board of
directors since May 2003. Since August 2008, Mr. Stalder
has been a General Partner of Matrix Partners, a venture capital
firm. Prior to joining Matrix Partners, Mr. Stalder served
in various executive roles, including Senior Vice President at
eBay, Inc., an online
76
marketplace company, from December 2001 to August 2008.
Previously, he was the Chief Financial Officer and Vice
President of Business Development of Respond.com, Vice President
of Finance and Operations at Netscape Communication Corporation
and an associate and manager at Ernst & Young LLP.
Mr. Stalder also serves on the boards of several
privately-held companies. He holds a B.A. in Commerce from
Santa Clara University.
Board
Composition
Independent
Directors
Upon the completion of this offering, our board of directors
will consist of seven members. In November 2009, our board of
directors undertook a review of the independence of each
director and considered whether any director has a material
relationship with us that could compromise his ability to
exercise independent judgment in carrying out his
responsibilities. As a result of this review, our board of
directors determined that all of our directors, other than
Mr. Valenti, qualify as independent directors
in accordance with the listing requirements and rules and
regulations of The NASDAQ Global Market, constituting a majority
of independent directors of our board of directors.
Mr. Valenti is not considered independent because he is an
employee of QuinStreet.
Classified
Board
Immediately after this offering, our board of directors will be
divided into three classes with staggered three-year terms. At
each annual meeting of stockholders, the successors to directors
whose terms then expire will be elected to serve from the time
of election and qualification until the third annual meeting
following election. Our directors will be divided among the
three classes as follows:
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Class I directors will be Messrs. Simons and Stalder,
and their terms will expire at the annual general meeting of
stockholders to be held in 2011;
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Class II directors will be Professor McDonald and
Mr. Sands, and their terms will expire at the annual
general meeting of stockholders to be held in 2012; and
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Class III directors will be Former Senator Bradley and
Messrs. Solomon and Valenti, and their terms will expire at
the annual general meeting of stockholders to be held in 2013.
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The authorized number of directors may be changed only by
resolution of the board of directors. This classification of the
board of directors into three classes with staggered three-year
terms may have the effect of delaying or preventing changes in
our control or management.
Board
Committees
Our board of directors has established an audit committee, a
compensation committee and a nominating and corporate governance
committee. Our board of directors may establish other committees
to facilitate the management of our business. The composition
and functions of each committee are described below.
Audit
Committee
Our audit committee currently consists of Messrs. Simons,
Solomon and Stalder. Messrs. Solomon and Stalder each
satisfy the independence requirements under the NASDAQ listing
standards and
Rule 10A-3(b)(1)
of the Securities Exchange Act of 1934, or the Exchange Act. We
anticipate that, following the completion of this offering,
Mr. Simons will resign from our audit committee and
Professor McDonald will replace Mr. Simons on the
committee. The chair of our audit committee is Mr. Stalder,
whom our board of directors has determined is an audit
committee financial expert within the meaning of the
Securities and Exchange Commission, or SEC, regulations. Each
member of our audit committee can read and understand
fundamental financial statements in accordance with audit
committee requirements. In arriving at this determination, the
77
board has examined each audit committee members scope of
experience and the nature of their employment in the corporate
finance sector. The functions of this committee include:
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reviewing and pre-approving the engagement of our independent
registered public accounting firm to perform audit services and
any permissible non-audit services;
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evaluating the performance of our independent registered public
accounting firm and deciding whether to retain their services;
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reviewing our annual and quarterly financial statements and
reports and discussing the statements and reports with our
independent registered public accounting firm and management,
including a review of disclosures under Management
Discussion and Analysis of Financial Condition and Results of
Operations;
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providing oversight with respect to related party transactions;
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reviewing, with our independent registered public accounting
firm and management, significant issues that may arise regarding
accounting principles and financial statement presentation, as
well as matters concerning the scope, adequacy and effectiveness
of our financial controls;
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reviewing reports from management and auditors regarding our
procedures to monitor and ensure compliance with our legal and
regulatory responsibilities, our code of business conduct and
ethics and our compliance with legal and regulatory
requirements; and
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establishing procedures for the receipt, retention and treatment
of complaints received by us regarding financial controls,
accounting or auditing matters.
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Compensation
Committee
Our compensation committee consists of Professor McDonald and
Messrs. Sands and Stalder, each of whom our board of
directors has determined to be independent under the NASDAQ
listing standards, to be a non-employee director as
defined in
Rule 16b-3
promulgated under the Exchange Act and to be an outside
director as that term is defined in Section 162(m) of
the Internal Revenue Code of 1986, as amended, or
Section 162(m). The chair of our compensation committee is
Professor McDonald. The functions of this committee include:
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determining the compensation and other terms of employment of
our chief executive officer and our other executive officers and
reviewing and approving corporate performance goals and
objectives relevant to such compensation;
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reviewing and approving the compensation of our directors;
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evaluating and recommending to our board of directors the equity
incentive plans, compensation plans and similar programs
advisable for us, as well as modification or termination of
existing plans and programs;
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establishing policies with respect to equity compensation
arrangements; and
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reviewing with management our disclosures under the caption
Compensation Discussion and Analysis and
recommending to the full board its inclusion in our periodic
reports to be filed with the SEC.
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Nominating
and Corporate Governance Committee
Our nominating and corporate governance committee consists of
Former Senator Bradley and Messrs. Sands and Simons, each
of whom our board of directors has determined is independent
under the
78
NASDAQ listing standards. The chair of our nominating and
corporate governance committee is Former Senator Bradley. The
functions of this committee include:
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reviewing periodically director performance on our board of
directors and its committees and performance of management, and
recommending to our board of directors and management areas of
improvement;
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interviewing, evaluating, nominating and recommending
individuals for membership on our board of directors;
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evaluating nominations by stockholders of candidates for
election to our board of directors and establishing policies and
procedures for such nominations;
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reviewing with our chief executive officer plans for succession
to the offices of chief executive officer or any other executive
officer, as it sees fit; and
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reviewing and recommending to our board of directors changes
with respect to corporate governance practices and policies.
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Code of
Business Conduct and Ethics
Our board of directors has adopted a Code of Business Conduct
and Ethics. The Code of Business Conduct and Ethics applies to
all of our employees, officers (including our principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions), agents and representatives, including directors and
consultants. Upon the effectiveness of the registration
statement of which this prospectus forms a part, the full text
of our Code of Business Conduct and Ethics will be posted on our
website at www.quinstreet.com. We intend to disclose future
amendments to certain provisions of our Code of Business Conduct
and Ethics, or waivers of such provisions, applicable to any
principal executive officer, principal financial officer,
principal accounting officer or controller, or persons
performing similar functions or our directors on our website
identified above. The inclusion of our website address in this
prospectus does not include or incorporate by reference the
information on our website into this prospectus.
Compensation
Committee Interlocks and Insider Participation
None of the members of the compensation committee is currently
or has been at any time one of our officers or employees. None
of our executive officers currently serves, or has served during
the last completed fiscal year, as a member of the board of
directors or compensation committee of any entity that has one
or more executive officers serving as a member of our board of
directors or compensation committee.
Summary
of Non-Employee Director Compensation
In January 2010, our compensation committee adopted a
compensation policy that, effective upon the closing of this
offering, will be applicable to all of our non-employee
directors. This compensation policy provides that each such
non-employee director will receive the following compensation
for board services:
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$25,000 per year for service as a board member;
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$15,000 per year for service as a chairperson of the audit
committee, compensation committee or nominating and corporate
governance committee;
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$2,000 for each in-person board meeting and $1,000 for each
telephonic board meeting;
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$1,500 for each in-person committee meeting; and
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$1,000 for each telephonic committee meeting.
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In addition, the non-employee director compensation plan
provides that non-employee directors will be granted an option
to purchase 20,000 shares of our common stock under the
Non-Employee Directors Stock Award Plan in connection with
their initial election or appointment to our board of directors.
These initial
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grants will vest monthly over a period of four years. The plan
also provides that non-employee directors will receive an annual
grant of an option to purchase 20,000 shares of our common
stock. These grants will vest monthly over a period of one year.
We have reimbursed and will continue to reimburse our
non-employee directors for their travel, lodging and other
reasonable expenses incurred in attending meetings of our board
of directors and committees of the board of directors.
Additionally, certain of our non-employee directors were granted
an option to purchase 50,000 shares of our common stock
under our stock option plans in connection with their initial
election to serve on our board of directors. We have also
awarded certain existing non-employee directors an option to
purchase 25,000 shares of our common stock annually.
The following table sets forth information regarding
compensation earned by or paid to certain of our non-employee
directors during the fiscal year ended June 30, 2009.
Messrs. Sands, Simons and Solomon were not compensated for
their services as directors in the fiscal year ended
June 30, 2009.
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Fees Earned or
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Option
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Paid in
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Awards
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Total
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Name
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Cash
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($)(1)
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($)
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William Bradley
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$
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58,000
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$
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129,528
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$
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187,528
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John G. McDonald
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$
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58,000
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$
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129,528
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$
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187,528
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Dana Stalder
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$
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58,000
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$
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129,528
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$
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187,528
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(1)
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Amount reflects the total compensation expense for the fiscal
year ended June 30, 2009 calculated in accordance with
stock-based compensation expense guidance. The valuation
assumptions used in determining such amounts are described in
Note 10 to our consolidated financial statements included
in this prospectus.
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80
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
This section discusses the policies and decisions with respect
to the compensation of our executive officers who are named in
the Fiscal Year 2009 Summary Compensation Table and
the most important factors relevant to an analysis of these
policies and decisions. These named executive
officers for fiscal year 2009 are:
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Douglas Valenti, Chief Executive Officer, or CEO;
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Bronwyn Syiek, President and Chief Operating Officer;
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Kenneth Hahn, Chief Financial Officer, or CFO;
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Tom Cheli, Executive Vice President; and
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Scott Mackley, Executive Vice President.
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Overview
of Program Objectives
We recognize that our success is in large part dependent on our
ability to attract and retain talented employees. We endeavor to
create and maintain compensation programs based on performance,
teamwork and rapid progress and to align the interests of our
executives and stockholders. The principles and objectives of
our compensation and benefits programs for our employees
generally, and for our executive officers specifically, are to:
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attract, motivate and retain highly-talented individuals who are
incented to achieve our strategic goals;
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closely align compensation with our business and financial
objectives and the long-term interests of our stockholders;
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motivate and reward individuals whose skills and performance
promote our continued success; and
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offer total compensation that is competitive and fair.
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The compensation of our executives consists of the following
principal components:
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base salary;
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performance-based cash bonuses;
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equity incentive awards;
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employee benefits and perquisites; and
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change in control benefits.
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Each component has a role in meeting the above objectives. While
we offer competitive base salaries and performance-based cash
bonuses, we believe that equity incentive awards are a critical
compensation component for Internet and other emerging
companies. We believe that stock options and other stock-based
compensation provide long-term incentives that align the
interests of employees and executives alike with the long-term
interests of stockholders.
We strive to achieve an appropriate mix between cash
compensation and equity incentive awards to meet our objectives.
We do not apply any formal or informal policies or guidelines
for allocating compensation between current and long-term
compensation, between cash and equity compensation or among
different forms of equity compensation. As a result, the
allocation between cash and equity varies between executive
officers and does not control compensation decisions. The mix of
compensation components is designed to reward short-term results
and motivate long-term performance through a combination of cash
and awards. We believe the most important indicator of whether
our compensation objectives are being met is our ability to
motivate
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our executive officers to deliver superior performance and
retain them to continue their careers with us on a
cost-effective basis.
The compensation levels of the executive officers reflect to a
significant degree the varying roles and responsibilities of
such executives, as well as the length of time those executives
have been with us.
Our compensation committee determines the appropriate level for
overall executive officer compensation and the separate
components based on (i) a review of publicly available
compensation data at a limited number of publicly-traded
companies in the Internet marketing and media sector,
(ii) compensation survey data for Internet companies with
comparable revenues, (iii) our understanding of the market
based on the experience of our executives and members of our
compensation committee and (iv) internal equity, length of
service, skill level and other factors we may deem appropriate.
Our compensation-setting process and each of the principal
components of our executive compensation program is discussed in
more detail below.
Compensation-Setting
Process
Historically, the compensation of our executive officers was
largely determined on an individual basis, as the result of
arms-length negotiations between the company and an
individual upon joining us and has been based on a variety of
factors including, in addition to the factors described above,
our financial condition and available resources, our need for
that particular position to be filled, our CEOs and the
compensation committees evaluation of the competitive
market based on the experience of the members of our
compensation committee with other companies, the length of
service of an individual and the compensation levels of our
other executive officers, each as of the time of the applicable
compensation decision. In subsequent years, our CEO, and, with
respect to our CEO, our compensation committee, reviewed the
performance of each executive officer, on an annual basis, and
based on this review and the factors described above, set the
executive compensation package for him or her for the coming
year. This review has generally occurred near the end of each of
our fiscal years.
Role
of Compensation Committee and CEO
The compensation committee of our board of directors is
responsible for the executive compensation programs for our
executive officers and reports to the full board of directors on
its discussions, decisions and other actions. Our CEO makes
recommendations to the compensation committee, attends committee
meetings (except for sessions discussing his compensation) and
has been and will continue to be heavily involved in the
determination of compensation for our executive officers.
Typically, our CEO makes recommendations to the compensation
committee regarding short- and long-term compensation for our
executives based on company results, an individual
executives contribution toward these results, performance
toward goal achievement, a review of market data as described
below and input from our Employee Benefits and Compliance
department. Our CEO does not make a recommendation as to his
short- and long-term compensation.
The compensation committee then reviews the CEOs
recommendations and other data and approves each executive
officers total compensation, as well as each individual
compensation component. The compensation committees
decisions regarding executive compensation are based on the
compensation committees assessment of the performance of
our company and each individual executive, a review of market
data as described below and other factors, such as prevailing
industry trends.
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Competitive
Positioning
We believe it is important when making compensation-related
decisions to be informed as to current practices of similarly
situated companies. Our CEO, with assistance from our CFO, has
historically selected a group of companies that provide Internet
media and marketing services that are broadly similar to our
company, or peer group, as a reference point for market practice
with respect to executive base salary and bonuses in formulating
his recommendation and to assist the compensation committee in
its consideration of executive compensation. The companies
included in this reference group for fiscal year 2009 were
TechTarget, Bankrate, Internet Brands, TheStreet.com, ValueClick
and Marchex.
In addition, in fiscal year 2009 the CEO and the compensation
committee reviewed summary cash compensation data from
Salary.com for positions comparable to those of the executive
officers at Internet companies with revenues between
$200,000,000 and $500,000,000 in the San Francisco Bay Area
because such companies are in our industry, in our geographic
location and have comparable revenues.
While the compensation committee does not believe that
compensation peer group benchmarking is appropriate as a
stand-alone tool for setting compensation due to the unique
aspects of our business, the compensation committee finds that
evaluating this information is an important part of its
decision-making process and exercises its discretion in
determining the nature and extent of its use.
Compensation
Advisors
In November 2009, we engaged Compensia, a national consulting
firm providing executive compensation advisory services, as a
compensation consultant to help evaluate our compensation
philosophy and provide guidance in administering our executive
compensation program in the future. We expect that Compensia
will assist our compensation committee in developing a revised
peer group to reference for compensation purposes, though it has
not yet done so. Our compensation committee plans to direct
Compensia to provide market data on a peer group of companies in
the Internet marketing and media sector and other sectors, as
appropriate, on an annual basis, and management and the
compensation committee intends to review this information and
other information obtained by the members of our compensation
committee in light of the compensation we offer to help ensure
that our compensation program is competitive and fair. The
compensation committee will conduct an annual review process of
all compensation components to ensure consistency with
compensation philosophy and as part of its responsibilities in
administering our executive compensation program.
The compensation committee is authorized to retain the services
of third-party executive compensation specialists from time to
time, as the committee sees fit, in connection with the
establishment of cash and equity compensation and related
policies.
Compensation
Components
Base
Salaries
In general, base salaries for our executive officers are
initially established through arms-length negotiation at
the time of hire, taking into account such executives
qualifications, experience and prior salary and prevailing
market compensation for similar roles in comparable companies.
The initial base salaries of our executive officers have then
been reviewed annually by our compensation committee, with
significant input from our CEO, to determine whether any
adjustment is warranted. Base salaries are also reviewed in the
case of promotions or other significant changes in
responsibility.
In considering a base salary adjustment, the compensation
committee considers the companys overall performance, the
scope of an executives sustained performance, individual
contribution, responsibilities and prior experience. The
compensation committee may also take into account the executive
officers current salary, equity ownership and the amounts
paid to an executive officers peers inside our company. In
the past, we have also drawn upon the experience of members of
our compensation committee with other companies and a review of
the competitive market.
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In May 2008, the compensation committee reviewed the base
salaries of our executives, including our named executive
officers, for fiscal year 2009. Consistent with its prior
practice, the committee reviewed salary data for a reference
group of publicly-traded vertical Internet marketing and media
companies. The reference group consisted of TechTarget,
Bankrate, Internet Brands, TheStreet.com, ValueClick, CNET and
Marchex. In addition, the compensation committee reviewed
summary cash compensation data from Salary.com for positions
comparable to those of the executive officers at Internet
companies with revenues between $200,000,000 and $500,000,000 in
the San Francisco Bay Area. The committee determined, based
upon our CEOs recommendation, that although the analysis
supported an average increase of eight percent in base salaries
that base salaries for our named executive officers be increased
by five percent (with the exception of Mr. Hahn whose base
salary increased by 4.8%) in an effort to shift more cash
compensation to bonus, and that base salaries for our other
executive officers be increased by five percent, on average.
In May 2009, the compensation committee reviewed the base
salaries of our executive officers, including our named
executive officers, for fiscal year 2010. Consistent with its
prior practice, the committee reviewed salary data for a
reference group of publicly-traded vertical Internet marketing
and media companies. The reference group consisted of
TechTarget, eHealth, Bankrate, Omniture, WebMD, ValueClick and
comScore. In addition, the compensation committee reviewed
summary cash compensation data from Salary.com for positions
comparable to those of the executive officers at Internet
companies with revenues between $200,000,000 and $500,000,000 in
the San Francisco Bay Area. The committee determined, based
upon our CEOs recommendation, that although the analysis
supported an average increase of eight percent in base salaries
that base salaries for our named executive officers be increased
by five percent in a continued effort to shift a larger
percentage of cash compensation to bonus, and that base salaries
for our other executive officers be increased by five percent,
on average.
The actual base salaries paid to our named executive officers in
fiscal year 2009 are set forth in the Fiscal Year 2009
Summary Compensation Table.
Performance-Based
Cash Bonuses
Annual performance-based cash bonuses are intended to motivate
our executives, including our named executive officers, to
achieve short-term goals while making rapid progress towards our
longer-term objectives. These bonuses are designed to reward
both company and individual performance. In July 2008, the
compensation committee approved our 2009 Bonus Plan, including
target bonus opportunities, performance criteria and target
goals. The compensation committee determined the actual bonus
awards for fiscal year 2009 performance in July 2009.
Each executive officers target bonus opportunity under the
2009 Bonus Plan was expressed as a percentage of his or her base
salary, with individual target award opportunities ranging from
29% to 67% of base salary. The revenue targets for payout under
the 2009 Bonus Plan were 21% higher than fiscal year 2008 and
were set at an amount the compensation committee reasonably
believed to be attainable. An actual bonus award could be less
than or greater than the target bonus opportunity, depending on
an individual executive officers actual performance, as
determined through performance reviews and approved by the
compensation committee.
To determine actual bonus awards under the 2009 Bonus Plan, the
compensation committee first reviewed overall company financial
results for fiscal year 2009 and our CEOs recommendations
for bonuses based on both company and individual performance. In
the case of the CEOs bonus award, the compensation
committee evaluated CEO performance and determined his bonus.
Payout of the bonuses was dependent on achievement against our
plan for revenue growth and Adjusted EBITDA, which we define as
net income less interest income plus interest expense, provision
for taxes, depreciation expense, amortization expense,
stock-based compensation expense and foreign-exchange (loss)
gain, and, where applicable, the individual executives
achievement against that plan for revenue growth and Adjusted
EBITDA and against strategic objectives. Those strategic
objectives were (i) revenue growth, (ii) Adjusted
EBIDTA margin, (iii) the assessed sustainability of the
revenue growth, and (iv) developing future growth potential
and diversification of our revenue streams. Our named executive
officers were paid the following amounts pursuant to the 2009
Bonus
84
Plan: Mr. Valenti, $248,340; Ms. Syiek, $181,840; Mr. Cheli,
$131,040; Mr. Mackley, $187,200; and Mr. Hahn, $113,000.
In addition to the 2009 Bonus Plan, in July 2008 the
compensation committee also approved the 2009 Incremental Bonus
Plan for our executive officers, including our named executive
officers. According to the 2009 Incremental Bonus Plan, the
target is a dollar amount based on 20% Adjusted EBITDA based on
our revenue projections. The 2009 Incremental Bonus Plan paid
out to the senior management team 15% of any Adjusted EBITDA in
excess of our target, which represented 20% Adjusted EBITDA
margin for the year based on projections reviewed by our board
of directors in July 2008. The 2009 Incremental Bonus Plan
allocated the following amounts to executive officers based on
their role and tenure at the company: Mr. Valenti: 2.25%; Ms.
Syiek: 2.25%; Mr. Cheli: 1.75%; Mr. Mackley: 1.75%; and Mr.
Hahn: 1.00%. As we exceeded our Adjusted EBITDA margin target,
the compensation committee approved the payout of incremental
bonuses for fiscal year 2009 consistent with these criteria. The
total bonus payout under the 2009 Incremental Bonus Plan was
$919,350. Our named executive officers were paid the following
amounts pursuant to the 2009 Incremental Bonus Plan:
Mr. Valenti, $137,903; Ms. Syiek, $137,903;
Mr. Cheli, $107,258; Mr. Mackley, $107,258; and
Mr. Hahn, $61,290.
The actual cash bonuses paid to our named executive officers in
fiscal year 2009 are set forth in the Fiscal Year 2009
Summary Compensation Table.
In July 2009, the compensation committee approved the 2010 Bonus
Plan. Under the plan, each executive officers target bonus
for 2010 is expressed as a percentage of his or her base salary,
with individual target award opportunities ranging from 32% to
72% of base salary. Payout of regular bonuses for 2010 will be
dependent on achievement against our plan for revenue growth and
Adjusted EBITDA and, where applicable, the individual
executives achievement against that plan for revenue
growth and Adjusted EBITDA and against strategic objectives.
Those strategic objectives are (i) revenue growth,
(ii) Adjusted EBIDTA margin, (iii) the assessed
sustainability of the revenue growth, and (iv) developing
future growth potential and diversification of our revenue
streams.
In July 2009, the compensation committee also approved the 2010
Incremental Bonus Plan with modifications from prior years. The
2010 Incremental Bonus Plan will pay out to the senior
management team 15% of any Adjusted EBITDA in excess of our
target, which represents 20% Adjusted EBITDA margin performance
for fiscal year 2010 on 20% revenue growth over fiscal year
2009 net revenue. The incremental bonus plan allocates
differing amounts to executives based on their role and tenure
at the company and range between 1% of any Adjusted EBITDA over
the 20% margin target and 2.15% of such excess. In the event we
achieve the targeted Adjusted EBITDA in actual dollar amount but
such amount is less than 20% of net revenue, the compensation
committee retains the discretion to award a bonus to our CEO,
and our CEO retains the discretion to award bonuses to other
officers, based on the amount by which Adjusted EBITDA exceeded
the target in absolute dollars.
In January 2010, the compensation committee approved our Annual
Incentive Plan, which will first become effective for fiscal
year 2011. Under the Annual Incentive Plan, the compensation
committee may award bonuses to our employees, including our
executive offices, according to bonus targets and criteria set
by the compensation committee in accordance with the Annual
Incentive Plan. No bonus targets or criteria for bonuses for
fiscal year 2011 have been set. The Annual Incentive Plan is
designed to provide incentive compensation that is not subject
to the deductibility limitation of Section 162(m) of the
Internal Revenue Code of 1986.
Long-Term
Equity Incentive Awards
The objective of our long-term, equity-based incentive awards is
to align the interests of our executives, including our named
executive officers, with the interests of our stockholders.
Because vesting is based on continued employment, our
equity-based incentive awards also encourage the retention of
our executive officers through the vesting period of the awards.
To reward and retain our executive officers in a manner that
best aligns employees interests with stockholders
interests, we use stock options as the primary incentive
vehicles for long-term compensation. We believe that stock
options are an effective tool for meeting our
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compensation goal of increasing long-term stockholder value
because the value of stock options is closely tied to our future
performance. Because our executive officers are able to profit
from stock options only if our stock price increases relative to
the stock options exercise price, we believe stock options
provide meaningful incentives to them to achieve increases in
the value of our stock over time. Following the completion of
this offering, we expect our compensation committee to continue
to oversee our long-term equity incentive program.
We grant stock options both at the time of initial hire and then
through annual additional or refresher grants for
key employees and employees approaching full vesting of prior
grants. To date, there has been no set program for the award of
refresher grants, and our board of directors retains discretion
to make stock option awards to employees at any time, including
in connection with the promotion of an employee, to reward an
employee, for retention purposes or for other circumstances
recommended by management. Refresher grants have generally been
made shortly after the end of the fiscal year.
In determining the size of the long-term equity incentive awards
to be granted to our executive officers, management and our
board of directors take into account a number of factors, such
as an executive officers relative job scope, the value of
existing long-term equity incentive awards, individual
performance history, prior contributions to us and the size of
prior awards. Based upon these factors, our board of directors
determines the size of the long-term equity incentive awards at
levels it considers appropriate to create a meaningful
opportunity for reward predicated on the creation of long-term
stockholder value.
The exercise price of each stock option grant is the fair market
value of our common stock on the grant date. For fiscal year
2009, the determination of the appropriate fair market value was
made by the board of directors. Our board of directors approves
option grants at its regular quarterly meetings and determines
the fair market value of our common stock at each of these
meetings. In the absence of a public trading market, the board
considered numerous objective and subjective factors to
determine its best estimate of the fair market value of our
common stock as of the date of each option grant, including but,
not limited to, the following: (i) our performance our
growth rate and financial condition at the approximate time of
the option grant; (ii) the stock price performance of a
peer group; (iii) future financial projections;
(iv) third party valuations of our common stock; and
(v) the likelihood of achieving a liquidity event for the
shares of common stock underlying these stock options, such as
an initial public offering or sale of our company, given
prevailing market conditions. We do not have any security
ownership requirements for our executive officers. We believe
these vesting schedules appropriately encourage long-term
employment with our company while allowing our executives to
realize compensation in line with the value they have created
for our stockholders.
As a privately-held company, there has been no market for our
common stock. Accordingly, in fiscal year 2009, 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. The compensation committee
intends to adopt a formal policy regarding the timing of grants
in connection with this offering.
Consistent with the above criteria, in July 2008, our board
approved the grants of equity incentive awards to our executive
officers for our fiscal year 2009. With the exception of the
award to our CEO, these awards were recommended to the
compensation committee by our CEO. In the case of our CEO, the
equity incentive award was determined by the compensation
committee. In all cases, our CEO and compensation committee
considered each executive officers relative job scope, the
value of existing long-term equity incentive awards, individual
performance history, prior contributions to us and the size of
prior grants in determining the size of the award. The awards
were approved by the board of directors in July 2008.
For fiscal year 2010, the same procedure was followed. With the
exception of the award to our CEO, executive officers
equity incentive awards were recommended to the compensation
committee by our CEO. In the case of our CEO, the equity
incentive award was determined by the compensation committee. In
all cases, our CEO and compensation committee considered the
executives relative job scope, the value of existing
long-term equity incentive awards, individual performance
history, prior contributions to us and the size of prior grants
in determining the size of the award. The awards were approved
by the compensation committee and the board of directors at
their respective July 2009 meetings.
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The actual equity awards granted to our named executive officers
in fiscal year 2009 are set forth in the Fiscal Year 2009
Summary Compensation Table.
Change in
Control Benefits
Our equity incentive plan typically provides for full
acceleration of vesting of outstanding stock options in the
event of a change in control of our company, if the options are
not assumed or substituted for by a successor. In the event
stock options are assumed or substituted for, then 25% of the
unvested shares subject to each option vest if the executive
officer is terminated under circumstances described under
Potential Payments Upon Termination Following
Change in Control following the change in control.
Perquisites
and Other Personal Benefits
We do not view perquisites as a significant element of our
executive compensation program currently, but do believe that
they can be useful in attracting, motivating and retaining the
executive talent for which we compete, and we may consider
providing additional perquisites in the future. All future
practices regarding perquisites will be approved and subject to
periodic review by our compensation committee.
We provide the following benefits to our executive officers,
generally on the same basis provided to all of our salaried
employees:
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health, dental insurance and vision coverage;
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life insurance;
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an employee stock purchase plan;
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a medical and dependent care flexible spending account;
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short- and long-term disability, accidental death and
dismemberment insurance; and
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a Section 401(k) plan.
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We believe these benefits are consistent with those of companies
with which we compete for executive talent.
Tax
Considerations
We anticipate that our compensation committee will consider the
potential future effects of Section 162(m) of the Internal
Revenue Code on the compensation paid to our executive officers.
Section 162(m) disallows a tax deduction for any publicly
held corporation for individual compensation exceeding
$1.0 million in any taxable year for our CEO and each of
the other named executive officers (other than our chief
financial officer), unless compensation is performance based. As
our common stock is not currently publicly-traded, our
compensation committee has not previously taken the
deductibility limit imposed by Section 162(m) into
consideration in setting compensation. However, we expect that
our compensation committee will adopt a policy that, where
reasonably practicable, would qualify the variable compensation
paid to our executive officers for an exemption from the
deductibility limitations of Section 162(m). For example,
our Annual Incentive Plan, which will first take effect for
fiscal year 2011, is designed to provide incentive compensation
that is not subject to the limits of Section 162(m). In
approving the amount and form of compensation for our executive
officers in the future, our compensation committee will consider
all elements of the cost to our company of providing such
compensation, including the potential impact of
Section 162(m). However, our compensation committee may, in
its judgment, authorize compensation payments that do not comply
with the exemptions in Section 162(m) when it believes that
such payments are appropriate to attract and retain executive
talent.
87
Fiscal
Year 2009 Summary Compensation Table
The following table summarizes information regarding the
compensation awarded to, earned by or paid to our chief
executive officer, our chief financial officer and our other
three most highly compensated executive officers during the
fiscal year ended June 30, 2009. We refer to these
individuals as our named executive officers.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
|
Name and Principal
|
|
Fiscal
|
|
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Total
|
Position
|
|
Year
|
|
Salary ($)
|
|
($)(1)
|
|
($)
|
|
($)(2)
|
|
($)
|
|
Douglas Valenti
|
|
|
2009
|
|
|
$
|
451,500
|
|
|
$
|
299,356
|
|
|
$
|
386,243
|
|
|
$
|
243
|
|
|
$
|
1,137,342
|
|
Chief Executive Officer and Chairman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bronwyn Syiek
|
|
|
2009
|
|
|
$
|
394,000
|
|
|
$
|
268,883
|
|
|
$
|
319,743
|
|
|
$
|
239
|
|
|
$
|
982,865
|
|
President and Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tom Cheli
|
|
|
2009
|
|
|
$
|
315,000
|
|
|
$
|
150,059
|
|
|
$
|
238,298
|
|
|
$
|
196
|
|
|
$
|
703,553
|
|
Executive Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Mackley
|
|
|
2009
|
|
|
$
|
315,000
|
|
|
$
|
150,059
|
|
|
$
|
294,458
|
|
|
$
|
196
|
|
|
$
|
759,713
|
|
Executive Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth Hahn
|
|
|
2009
|
|
|
$
|
330,000
|
|
|
$
|
62,478
|
|
|
$
|
174,290
|
|
|
$
|
204
|
|
|
$
|
566,972
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts shown in this column do not reflect dollar amounts
actually received by our named executive officers. Instead,
these amounts reflect the dollar amount recognized for financial
statement reporting purposes for the referenced fiscal year, in
accordance with the provisions of SFAS No. 123(R).
Assumptions used in the calculation of these amounts are
included in Note 10 to our consolidated financial
statements included in this prospectus. As required by SEC
rules, the amounts shown exclude the impact of estimated
forfeitures related to service-based vesting conditions. Our
named executive officers will only realize compensation to the
extent the trading price of our common stock is greater than the
exercise price of such stock options.
|
|
(2)
|
|
All other compensation represents amounts we pay towards
employee life insurance.
|
Grant of
Plan-Based Awards
The following table provides information regarding all grants of
plan-based awards that were made to or earned by our named
executive officers during fiscal year 2009. Disclosure on a
separate line item is provided for each grant of an award made
to a named executive officer. The information in this table
supplements the dollar value of stock options and other awards
set forth in the Fiscal Year 2009 Summary Compensation
Table by providing additional details about the awards.
The option grants to purchase our common stock set forth in the
following table were made under our 2008 Equity Incentive Plan.
The exercise price of options granted under the 2008 Equity
Incentive Plan is equal to the fair market value of one share of
our common stock on the date of grant, except that certain
grants made to our CEO were granted with an exercise price equal
to 110% of the fair market value of one share of our common
stock on the date of grant. Under the 2008 Equity Incentive
Plan, the exercise price may be paid in cash or, after the
completion of this offering, in our common stock valued at fair
market value on the exercise date or through a cashless exercise
procedure involving a
same-day
sale of the purchased shares.
88
|
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|
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|
|
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|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
Future
|
|
All Other
|
|
|
|
|
|
|
|
|
Payouts
|
|
Option
|
|
|
|
|
|
|
|
|
Under Non-
|
|
Awards:
|
|
Exercise or
|
|
Grant Date
|
|
|
|
|
Equity
|
|
Number of
|
|
Base Price of
|
|
Fair Value of
|
|
|
|
|
Incentive
|
|
Securities
|
|
Option
|
|
Stock and
|
|
|
|
|
Plan Awards
|
|
Underlying
|
|
Awards
|
|
Option
|
Name
|
|
Grant Date
|
|
Target ($)
|
|
Options (#)
|
|
($/Sh)
|
|
Awards ($)(1)
|
|
Douglas Valenti
|
|
July 25, 2008
|
|
|
|
|
|
|
85,000
|
|
|
$
|
10.28
|
|
|
$
|
375,258
|
|
|
|
May 30, 2008
|
|
$
|
304,500
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 30, 2008
|
|
$
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Bronwyn Syiek
|
|
July 25, 2008
|
|
|
|
|
|
|
125,000
|
|
|
$
|
10.28
|
|
|
$
|
578,163
|
|
|
|
May 30, 2008
|
|
$
|
238,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 30, 2008
|
|
$
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Tom Cheli
|
|
July 25, 2008
|
|
|
|
|
|
|
75,000
|
|
|
$
|
10.28
|
|
|
$
|
346,898
|
|
|
|
May 30, 2008
|
|
$
|
187,200
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 30, 2008
|
|
$
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Mackley
|
|
July 25, 2008
|
|
|
|
|
|
|
75,000
|
|
|
$
|
10.28
|
|
|
$
|
346,898
|
|
|
|
May 30, 2008
|
|
$
|
187,200
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 30, 2008
|
|
$
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth Hahn
|
|
July 25, 2008
|
|
|
|
|
|
|
50,000
|
|
|
$
|
10.28
|
|
|
$
|
231,563
|
|
|
|
May 30, 2008
|
|
$
|
113,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 30, 2008
|
|
$
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts represent the total fair value of stock options granted
in fiscal year 2009, calculated in accordance with stock-based
compensation expense guidance. See Note 10 to our
consolidated financial statements included in this prospectus
for a discussion of assumptions made in determining the grant
date fair value and compensation expense of our stock options.
|
|
|
|
(2)
|
|
Represents the executives target bonus under our 2009
Bonus Plan as of the date of grant. The plan provides for
individual bonus targets ranging from 29% of base salary to 67%
of base salary. Payout of the bonuses was dependent on
achievement against our plan for revenue growth and Adjusted
EBITDA and, where applicable, the individual executives
business units achievement against that units plan
for revenue growth and Adjusted EBITDA, as further described in
Compensation Discussion and Analysis. Actual
payments for fiscal year 2009 are set forth in the Fiscal
Year 2009 Summary Compensation Table above.
|
|
|
|
(3)
|
|
Represents the executives target bonus under our 2009
Incremental Bonus Plan as of the date of grant. The 2009
Incremental Bonus Plan paid out to the senior management team
15% of any Adjusted EBITDA in excess of our target of 20%
Adjusted EBITDA margin for the year. The incremental bonus plan
allocated differing amounts to executives based on their role
and tenure at the company and ranged between 1% of any Adjusted
EBITDA over the 20% margin target and 2.25% of such excess.
|
89
Outstanding
Equity Awards at June 30, 2009
The following table presents information regarding outstanding
equity awards held by our named executive officers as of
June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
Number of
|
|
|
|
|
|
|
|
|
Underlying
|
|
Securities
|
|
|
|
|
|
|
|
|
Unexercised
|
|
Underlying
|
|
|
|
|
|
|
|
|
Options
|
|
Unexercised
|
|
Option
|
|
|
|
|
|
|
Exercisable
|
|
Options
|
|
Exercise
|
|
Option Expiration
|
Name
|
|
Grant Date
|
|
(#)
|
|
Unexercisable (#)(1)
|
|
Price ($)
|
|
Date(2)
|
|
Douglas Valenti
|
|
July 25, 2008
|
|
|
|
|
|
|
85,000
|
|
|
$
|
10.28
|
|
|
July 24, 2015
|
|
|
January 31, 2007
|
|
|
99,687
|
|
|
|
65,313
|
|
|
$
|
10.34
|
|
|
January 30, 2017
|
Bronwyn Syiek
|
|
July 25, 2008
|
|
|
|
|
|
|
125,000
|
|
|
$
|
10.28
|
|
|
July 24, 2015
|
|
|
May 31, 2007
|
|
|
52,083
|
|
|
|
47,917
|
|
|
$
|
10.28
|
|
|
May 30, 2014
|
|
|
May 17, 2006
|
|
|
77,083
|
|
|
|
22,917
|
|
|
$
|
9.01
|
|
|
May 16, 2016
|
|
|
September 23, 2005
|
|
|
93,750
|
|
|
|
6,250
|
|
|
$
|
7.74
|
|
|
September 22, 2015
|
|
|
May 20, 2005
|
|
|
185,000
|
|
|
|
|
|
|
$
|
6.38
|
|
|
May 19, 2015
|
|
|
July 28, 2004
|
|
|
150,000
|
|
|
|
|
|
|
$
|
4.60
|
|
|
July 27, 2014
|
|
|
November 19, 2003
|
|
|
100,000
|
|
|
|
|
|
|
$
|
4.60
|
|
|
November 18, 2013
|
|
|
September 11, 2001
|
|
|
150,000
|
|
|
|
|
|
|
$
|
0.59
|
|
|
September 10, 2011
|
|
|
June 28, 2000
|
|
|
45,000
|
|
|
|
|
|
|
$
|
0.59
|
|
|
June 27, 2010
|
Tom Cheli
|
|
July 25, 2008
|
|
|
|
|
|
|
75,000
|
|
|
$
|
10.28
|
|
|
July 24, 2015
|
|
|
May 31, 2007
|
|
|
26,041
|
|
|
|
23,959
|
|
|
$
|
10.28
|
|
|
May 30, 2014
|
|
|
May 17, 2006
|
|
|
38,540
|
|
|
|
11,460
|
|
|
$
|
9.01
|
|
|
May 16, 2016
|
|
|
September 23, 2005
|
|
|
93,750
|
|
|
|
6,250
|
|
|
$
|
7.74
|
|
|
September 22, 2015
|
|
|
May 20, 2005
|
|
|
80,000
|
|
|
|
|
|
|
$
|
6.38
|
|
|
May 19, 2015
|
|
|
July 28, 2004
|
|
|
100,000
|
|
|
|
|
|
|
$
|
4.60
|
|
|
July 27, 2014
|
|
|
September 26, 2002
|
|
|
150,000
|
|
|
|
|
|
|
$
|
1.50
|
|
|
September 25, 2012
|
|
|
September 19, 2000
|
|
|
1,905
|
|
|
|
|
|
|
$
|
0.59
|
|
|
September 18, 2010
|
Scott Mackley
|
|
July 25, 2008
|
|
|
|
|
|
|
75,000
|
|
|
$
|
10.28
|
|
|
July 24, 2015
|
|
|
May 31, 2007
|
|
|
26,041
|
|
|
|
23,959
|
|
|
$
|
10.28
|
|
|
May 30, 2014
|
|
|
May 17, 2006
|
|
|
38,540
|
|
|
|
11,460
|
|
|
$
|
9.01
|
|
|
May 16, 2016
|
|
|
September 23, 2005
|
|
|
93,750
|
|
|
|
6,250
|
|
|
$
|
7.74
|
|
|
September 22, 2015
|
|
|
May 20, 2005
|
|
|
80,000
|
|
|
|
|
|
|
$
|
6.38
|
|
|
May 19, 2015
|
|
|
July 28, 2004
|
|
|
120,000
|
|
|
|
|
|
|
$
|
4.60
|
|
|
July 27, 2014
|
|
|
July 22, 2003
|
|
|
100,000
|
|
|
|
|
|
|
$
|
2.00
|
|
|
July 21, 2013
|
|
|
April 4, 2002
|
|
|
42,292
|
|
|
|
|
|
|
$
|
0.59
|
|
|
April 3, 2012
|
|
|
March 15, 2001
|
|
|
6,667
|
|
|
|
|
|
|
$
|
0.59
|
|
|
March 14, 2011
|
|
|
June 28, 2000
|
|
|
8,334
|
|
|
|
|
|
|
$
|
0.59
|
|
|
June 27, 2010
|
Kenneth Hahn
|
|
July 25, 2008
|
|
|
|
|
|
|
50,000
|
|
|
$
|
10.28
|
|
|
July 24, 2015
|
|
|
May 17, 2006
|
|
|
289,062
|
|
|
|
85,938
|
|
|
$
|
9.01
|
|
|
May 16, 2016
|
|
|
|
(1)
|
|
Each stock option to our executive officers vests over a
four-year period as follows: 25% of the shares underlying the
option vest on the first anniversary of the date of the vesting
commencement date, which is the date of grant, and the remainder
of the shares underlying the option vest in equal monthly
installments over the remaining 36 months thereafter. Each
option also provides that 25% of the unvested shares subject to
such option will vest if the executive is terminated without
cause following a change in control.
|
|
(2)
|
|
In fiscal year 2007, our board of directors changed the default
term of option grants to seven years.
|
90
Stock
Option Exercises During Fiscal Year 2009
The following table shows information regarding option exercises
by our named executive officers during fiscal year 2009.
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number of
|
|
Value
|
|
|
Shares
|
|
Realized on
|
|
|
Acquired on
|
|
Exercise
|
Name
|
|
Exercise (#)
|
|
($)(1)
|
|
Tom Cheli
|
|
|
3,095
|
|
|
$
|
29,991
|
|
|
|
|
(1)
|
|
The aggregate dollar value realized upon exercise of an option
represents the difference between the aggregate fair market
value of our common stock underlying the option on the date of
exercise, which was determined by our board of directors to be
approximately $10.28 per share, and the aggregate exercise price
of the option.
|
Pension
Benefits
We do not maintain any defined benefit pension plans.
Nonqualified
Deferred Compensation
We do not maintain any nonqualified deferred compensation plans.
Potential
Payments Upon Termination Following Change in Control
The following table sets forth quantitative estimates of the
option acceleration benefits (25% of the unvested portion) that
would have been received by the named executive officers
pursuant to their option agreements if, within six months
following a change in control, their employment had been
terminated by us without cause or resigns for good reason (which
includes actions by us to materially reduce the officers
duties, salary or benefits, or relocate the officers
business office to more than 50 miles away). These
estimates assume the change in control transaction and
termination both occurred on June 30, 2009.
|
|
|
|
|
|
|
Value of
|
|
|
Accelerated
|
|
|
Equity
|
|
|
Awards ($)
|
Name
|
|
(1)
|
|
Douglas Valenti
|
|
$
|
|
|
Bronwyn Syiek
|
|
$
|
1,984
|
|
Tom Cheli
|
|
$
|
1,984
|
|
Scott Mackley
|
|
$
|
1,984
|
|
Kenneth Hahn
|
|
$
|
|
|
|
|
|
(1)
|
|
The aggregate dollar value realized in connection the
acceleration of the equity awards represents the difference
between the aggregate fair market value of our common stock
underlying the accelerated options as of June 30, 2009,
which was determined by our board of directors to be
approximately $9.01 per share, and the aggregate exercise price
of the accelerated options.
|
Offer
Letter Agreements
We have also entered into offer letter agreements with each of
our named executive officers, other than our CEO, in connection
with their commencement of employment with us. These offer
letter agreements typically include the executive officers
initial base salary and stock option grant along with vesting
provisions with respect to that initial stock option grant. The
offer letters do not provide for severance. The offer letters
require arbitration of certain disputes between the executive
and us. With the exception of the arbitration provisions, we
have no outstanding obligations under these agreements.
91
Proprietary
Information and Inventions Agreements
Each of our named executive officers has entered into a standard
form agreement with respect to proprietary information and
inventions. Among other things, this agreement obligates each
named executive officer to refrain from disclosing any of our
proprietary information received during the course of employment
and, with some exceptions, to assign to us any inventions
conceived or developed during the course of employment.
Employee
Benefit Plans
2008
Equity Incentive Plan
Our board of directors adopted and our stockholders approved the
2008 Equity Incentive Plan, as amended, or 2008 Plan, in January
2008, as a restatement and replacement of our prior 1999 Equity
Incentive Plan originally adopted on July 1, 1999. The 2008
Plan provides for the grant of incentive stock options,
nonstatutory stock options and restricted stock purchase awards.
As of December 31, 2009, 3,382,316 shares of common
stock had been issued upon the exercise of options granted under
the 2008 Plan, options to purchase 11,504,767 shares of
common stock were outstanding at a weighted average exercise
price of $9.3429 per share and 587,717 shares remained
available for future grant under the 2008 Plan. Upon the
execution and delivery of the underwriting agreement for this
offering, no further option or other stock award grants will be
made under the 2008 Plan.
Administration.
Our board of directors
administers the 2008 Plan. Our board of directors, however, may
delegate this authority to a committee of two or more board
members. The board of directors or a committee of the board of
directors has the authority to construe, interpret, amend and
modify the 2008 Plan, as well as to determine the terms of an
option and a restricted stock purchase award. Our board of
directors may amend or modify the 2008 Plan at any time.
However, no amendment or modification shall adversely affect the
rights and obligations with respect to outstanding stock awards
unless the holder consents to that amendment or modification.
Eligibility.
The 2008 Plan permits us to grant
stock options and restricted stock purchase awards to our
employees, directors and consultants. A stock option may be an
incentive stock option within the meaning of Section 422 of
the Code or a nonstatutory stock option.
Stock Option Provisions Generally.
In general,
the duration of a stock option granted under the 2008 Plan
cannot exceed 10 years. The exercise price of an incentive
stock option cannot be less than 100% of the fair market value
of the common stock on the date of grant. The exercise price of
a nonstatutory stock option cannot be less than 85% of the fair
market value of the common stock on the date of grant. An
incentive stock option may be transferred only on death, but a
nonstatutory stock option may be transferred as permitted in an
individual stock option agreement. Stock option agreements may
provide that the stock options may be early exercised subject to
our right of repurchase of unvested shares. In addition, our
board of directors may reprice any outstanding option or, with
the permission of the optionholder, may cancel any outstanding
option and grant a substitute option.
Incentive stock options may be granted only to our employees.
The aggregate fair market value, determined at the time of
grant, of shares of our common stock with respect to which
incentive stock options are exercisable for the first time by an
optionholder during any calendar year under all of our stock
plans may not exceed $100,000. An incentive stock option granted
to a person who at the time of grant owns or is deemed to own
more than 10% of the total combined voting power of all classes
of our outstanding stock or any of our affiliates must have a
term of no more than five years and an exercise price that is at
least 110% of fair market value at the time of grant.
Restricted Stock Purchase Awards
Generally.
Restricted stock purchase awards may
be granted in consideration for cash, check or past or future
services actually rendered to us or our affiliates. Common stock
acquired under such awards may, but need not, be subject to
forfeiture in accordance with a vesting schedule. The purchase
price for restricted stock purchase awards may not be less than
110% of the fair market value in the case of awards granted to
any person who, at the time of the grant, owns or is deemed to
own stock
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possessing more than 10% of the total combined voting power of
all classes of our outstanding stock or any of our affiliates.
Effect on Stock Awards of Certain Corporate
Transactions.
If we dissolve or liquidate, then
outstanding stock options and restricted stock purchase awards
under the 2008 Plan will terminate immediately prior to such
dissolution or liquidation. In the event of an asset sale or
merger, the surviving or acquiring corporation may assume
outstanding stock awards, or may substitute substantially
equivalent awards that preserve the spread existing at the time
of the transaction for outstanding stock options. If the
surviving or acquiring corporation elects not to assume or
substitute for outstanding stock awards, then the stock awards
will terminate upon the consummation of the transaction. The
plan administrator may provide for additional vesting of
outstanding awards, either at the time of grant or at any time
while the award remains outstanding.
Other Provisions.
If there is a transaction or
event which changes our stock that does not involve our receipt
of consideration, such as a merger, consolidation,
reorganization, stock dividend or stock split, our board of
directors will appropriately adjust the class and the maximum
number of shares subject to the 2008 Plan and to outstanding
stock awards to prevent the dilution or endangerment of benefits
thereunder.
2010
Equity Incentive Plan
Our board of directors adopted the 2010 Equity Incentive Plan,
or 2010 Incentive Plan, in November 2009 and we expect our
stockholders will approve the 2010 Incentive Plan prior to the
closing of this offering. The 2010 Incentive Plan will become
effective immediately upon the execution and delivery of the
underwriting agreement for this offering. The 2010 Incentive
Plan will terminate on November 16, 2019, unless sooner
terminated by our board of directors.
Stock Awards.
The 2010 Incentive Plan provides
for the grant of incentive stock options, nonstatutory stock
options, restricted stock awards, restricted stock unit awards,
stock appreciation rights, performance-based stock awards, and
other forms of equity compensation, or collectively, stock
awards, all of which may be granted to employees, including
officers, non-employee directors and consultants. In addition,
the 2010 Incentive Plan provides for the grant of performance
cash awards. Incentive stock options may be granted only to
employees. All other awards may be granted to employees,
including officers, non-employee directors and consultants.
Share Reserve.
Following this offering, the
aggregate number of shares of our common stock that may be
issued initially pursuant to stock awards under the 2010
Incentive Plan is the number of shares reserved for future
issuance under the 2008 Plan at the time of the execution and
delivery of the underwriting agreement for this offering, plus
any shares subject to outstanding stock awards granted under the
2008 Plan that expire or terminate for any reason prior to their
exercise or settlement. The number of shares of our common stock
reserved for issuance will automatically increase on
July 1st of each year, from July 1, 2010 through
July 1, 2019, by five percent of the total number of shares
of our common stock outstanding on the last day of the preceding
fiscal year, unless our board of directors determines that the
share increase shall be a lesser number. The maximum number of
shares that may be issued pursuant to the exercise of incentive
stock options under the 2010 Incentive Plan is 30,000,000.
If a stock award granted under the 2010 Incentive Plan expires
or otherwise terminates without being exercised in full, or is
settled in cash, the shares of our common stock not acquired
pursuant to the stock award again become available for
subsequent issuance under the 2010 Incentive Plan. In addition,
the following types of shares under the 2010 Incentive Plan may
become available for the grant of new stock awards under the
2010 Incentive Plan (a) shares that are forfeited to or
repurchased by us prior to becoming fully vested,
(b) shares withheld to satisfy income or employment
withholding taxes, (c) shares used to pay the exercise
price of an option in a net exercise arrangement and
(d) shares tendered to us to pay the exercise price of an
option. Shares issued under the 2010 Incentive Plan may be
previously unissued shares or reacquired shares bought on the
open market. As of the date hereof, none of our common stock
have been issued under the 2010 Incentive Plan.
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Administration.
Our board of directors has
delegated its authority to administer the 2010 Incentive Plan to
our compensation committee. Subject to the terms of the 2010
Incentive Plan, our board of directors or an authorized
committee, referred to as the plan administrator, determines
recipients, dates of grant, the numbers and types of stock
awards to be granted and the terms and conditions of the stock
awards, including the period of their exercisability and vesting
and the fair market value applicable to a stock award. Subject
to the limitations set forth below, the plan administrator will
also determine the exercise price of options granted, the
consideration to be paid for restricted stock awards and the
strike price of stock appreciation rights.
The compensation committee has the authority to reprice any
outstanding stock award under the 2010 Incentive Plan. The
compensation committee may also cancel and re-grant any
outstanding stock award with the consent of any affected
participant.
Stock Options.
Incentive and nonstatutory
stock options are granted pursuant to incentive and nonstatutory
stock option agreements adopted by the plan administrator. The
plan administrator determines the exercise price for a stock
option, within the terms and conditions of the 2010 Incentive
Plan, provided that the exercise price of a stock option
generally cannot be less than 100% of the fair market value of
our common stock on the date of grant. Options granted under the
2010 Incentive Plan vest at the rate specified by the plan
administrator.
The plan administrator determines the term of stock options
granted under the 2010 Incentive Plan, up to a maximum of
10 years, except in the case of certain incentive stock
options, as described below. Unless the terms of an
optionees stock option agreement provide otherwise, if an
optionees relationship with us, or any of our affiliates,
ceases for any reason other than disability or death, the
optionee may exercise any vested options for a period of three
months following the cessation of service. If an optionees
service relationship with us, or any of our affiliates, ceases
due to disability or death, or an optionee dies within a certain
period following cessation of service, the optionee or a
beneficiary may generally exercise any vested options for a
period of 12 months in the event of disability and
18 months in the event of death. The option term may be
extended in the event that exercise of the option following
termination of service is prohibited by applicable securities
laws. In no event, however, may an option be exercised beyond
the expiration of its term.
Acceptable consideration for the purchase of common stock issued
upon the exercise of a stock option will be determined by the
plan administrator and may include (a) cash, check, bank
draft or money order, (b) a broker-assisted cashless
exercise, (c) the tender of shares of common stock
previously owned by the optionee, (d) a net exercise of the
option and (e) other legal consideration approved by the
plan administrator.
Unless the plan administrator provides otherwise, options
generally are not transferable except by will, the laws of
descent and distribution, or pursuant to a domestic relations
order. An optionee may designate a beneficiary, however, who may
exercise the option following the optionees death.
Tax Limitations on Incentive Stock
Options.
Incentive stock options may be granted
only to our employees. The aggregate fair market value,
determined at the time of grant, of our common stock with
respect to incentive stock options that are exercisable for the
first time by an optionee during any calendar year under all of
our stock plans may not exceed $100,000. No incentive stock
option may be granted to any person who, at the time of the
grant, owns or is deemed to own stock possessing more than 10%
of our total combined voting power or that of any of our
affiliates unless (a) the option exercise price is at least
110% of the fair market value of the stock subject to the option
on the date of grant, and (b) the term of the incentive
stock option does not exceed five years from the date of grant.
Restricted Stock Awards.
Restricted stock
awards are granted pursuant to restricted stock award agreements
adopted by the plan administrator. Restricted stock awards may
be granted in consideration for (a) cash, check, bank draft
or money order, (b) past or future services rendered to us
or our affiliates, or (c) any other form of legal
consideration. Common stock acquired under a restricted stock
award may, but need not, be subject to a share repurchase option
in our favor in accordance with a vesting schedule to be
determined by the plan administrator. Rights to acquire shares
under a restricted stock award may be transferred only upon such
terms and conditions as set by the plan administrator.
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Restricted Stock Unit Awards.
Restricted stock
unit awards are granted pursuant to restricted stock unit award
agreements adopted by the plan administrator. Restricted stock
unit awards may be granted in consideration for any form of
legal consideration. A restricted stock unit award may be
settled by cash, delivery of stock, a combination of cash and
stock as deemed appropriate by the plan administrator, or in any
other form of consideration set forth in the restricted stock
unit award agreement. Additionally, dividend equivalents may be
credited in respect of shares covered by a restricted stock unit
award. Except as otherwise provided in the applicable award
agreement, restricted stock units that have not vested will be
forfeited upon the participants cessation of continuous
service for any reason.
Stock Appreciation Rights.
Stock appreciation
rights are granted pursuant to stock appreciation rights
agreements adopted by the plan administrator. The plan
administrator determines the strike price for a stock
appreciation right which generally cannot be less than 100% of
the fair market value of our common stock on the date of grant.
Upon the exercise of a stock appreciation right, we will pay the
participant an amount equal to the product of (a) the
excess of the per share fair market value of our common stock on
the date of exercise over the strike price, multiplied by
(b) the number of common stock with respect to which the
stock appreciation right is exercised. A stock appreciation
right granted under the 2010 Incentive Plan vests at the rate
specified in the stock appreciation right agreement as
determined by the plan administrator.
The plan administrator determines the term of stock appreciation
rights granted under the 2010 Incentive Plan, up to a maximum of
10 years. If a participants service relationship
ceases with us, or any of our affiliates, then the participant,
or the participants beneficiary, may exercise any vested
stock appreciation right for three months (or such longer or
shorter period specified in the stock appreciation right
agreement) after the date such service relationship ends or the
expiration of the term set forth in the award agreement. In no
event, however, may a stock appreciation right be exercised
beyond the expiration of its term.
Performance Awards.
The 2010 Incentive Plan
permits the grant of performance-based stock and cash awards
that may qualify as performance-based compensation that is not
subject to the $1,000,000 limitation on the income tax
deductibility of compensation paid per covered executive officer
imposed by Section 162(m). To assure that the compensation
attributable to performance-based stock awards will so qualify,
our compensation committee can structure such awards so that
stock will be issued or paid pursuant to such award only upon
the achievement of certain pre-established performance goals
during a designated performance period.
Other Stock Awards.
The plan administrator may
grant other awards based in whole or in part by reference to our
common stock. The plan administrator will set the number of
shares under the award and all other terms and conditions of
such awards.
Grants to Non-Employee Directors.
Under the
2010 Incentive Plan, our compensation committee may grant
nonstatutory stock options to non-employee members of our board
of directors over their period of service on our board of
directors.
Changes to Capital Structure.
In the event
that there is a specified type of change in our capital
structure, such as a stock split, appropriate adjustments will
be made to (a) the number of shares reserved under the 2010
Incentive Plan, (b) the maximum number of shares by which
the share reserve may increase automatically each year,
(c) the class and maximum number of shares that may be
issued upon the exercise of incentive stock options and
(d) the number of shares and exercise price or strike
price, if applicable, of all outstanding stock awards.
Corporate Transactions.
In the event of
certain significant corporate transactions, then our board of
directors has the discretion to take any of the following
actions with respect to stock awards:
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arrange for the assumption, continuation, or substitution of a
stock award by a surviving or acquiring entity or parent company;
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arrange for the assignment of any reacquisition right held by us
to the surviving or acquiring entity;
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accelerate the vesting of a stock award and provide for its
termination prior to the effective time of the corporate
transaction;
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arrange for the lapse of any reacquisition or repurchase rights
held by us;
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cancel or arrange for the cancellation of the stock award in
exchange for such cash consideration, if any, as our board may
deem appropriate; or
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provide for the surrender of a stock award in exchange for a
payment equal to the excess of (a) the value of the
property that the optionee would have received upon exercise of
the stock award over (b) the exercise price otherwise
payable in connection with the stock award.
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Our board of directors is not obligated to treat all stock
awards, even those that are of the same type, in the same manner.
Changes in Control.
Our board of directors has
the discretion to provide that a stock award under the 2010
Incentive Plan will immediately vest as to all or any portion of
the shares subject to the stock award (a) immediately upon
the occurrence of certain specified change in control
transactions, whether or not such stock award is assumed,
continued or substituted by a surviving or acquiring entity in
the transaction or (b) in the event a participants
service with us or a successor entity is terminated actually or
constructively within a designated period following the
occurrence of certain specified change in control transactions.
Stock awards held by participants under the 2010 Incentive Plan
will not vest automatically on such an accelerated basis unless
specifically provided by the participants applicable award
agreement.
2010
Non-Employee Directors Stock Award Plan
Our board of directors adopted the Non-Employee Directors
Stock Award Plan, or Directors Plan, in November 2009 and
we expect our stockholders will approve our Directors Plan
prior to the completion of this offering. The Directors
Plan will become effective immediately upon the execution and
delivery of the underwriting agreement for this offering. The
Directors Plan will terminate at the discretion of our
board of directors. The Directors Plan provides for the
automatic grant of nonstatutory stock options to purchase shares
of our common stock to our non-employee directors. The
Directors Plan also provides for the discretionary grant
of restricted stock units.
Share Reserve.
An aggregate of
300,000 shares of our common stock are reserved for
issuance under the Directors Plan. This amount will be
increased annually on July 1, from 2010 until 2019, by the
sum of 200,000 shares and the aggregate number of shares of our
common stock subject to awards granted under the Directors
Plan during the immediately preceding fiscal year. However, our
board of directors will have the authority to designate a lesser
number of shares by which the share reserve will be increased.
Shares of our common stock subject to stock awards that have
expired or otherwise terminated under the Directors Plan
without having been exercised in full shall again become
available for grant under the Directors Plan. Shares of
our common stock issued under the Directors Plan may be
previously unissued shares or reacquired shares bought on the
market or otherwise. If the exercise of any stock option granted
under the Directors Plan is satisfied by tendering shares
of our common stock held by the participant, then the number of
shares tendered shall again become available for the grant of
awards under the Directors Plan. In addition, any shares
reacquired to satisfy income or employment withholding taxes
shall again become available for the grant of awards under the
Directors Plan.
Administration.
Our board of directors has
delegated its authority to administer the Directors Plan
to our compensation committee.
Stock Options.
Stock options will be granted
pursuant to stock option agreements. The exercise price of the
options granted under the Directors Plan will be equal to
100% of the fair market value of our common stock on the date of
grant. Initial grants vest in equal monthly installments over
three years after the date of grant and annual grants vest in
equal monthly installments over 12 months after the date of
grant.
In general, the term of stock options granted under the
Directors Plan may not exceed seven years. Unless the
terms of an option holders stock option agreement provides
otherwise, if an optionholders service relationship with
us, or any affiliate of ours, ceases due to death or disability,
then the optionholder or his or her beneficiary may exercise any
vested options for a period of 12 months in the event of
disability and
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18 months in the event of death. If an optionholders
service with us, or any affiliate, ceases for any other reason,
the optionholder may exercise the vested options for up to six
months following cessation of service.
Acceptable consideration for the purchase of our common stock
issued under the Directors Plan may include cash, a
net exercise, common stock previously owned by the
optionholder or a program developed under Regulation T as
promulgated by the Federal Reserve Board.
Generally, an optionholder may not transfer a stock option other
than by will or the laws of descent and distribution. However,
an optionholder may transfer an option under certain
circumstances with our written consent if a
Form S-8
registration statement is available for the exercise of the
option and the subsequent resale of the shares. In addition, an
optionholder may designate a beneficiary who may exercise the
option following the optionholders death.
Non-discretionary
Grants
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Initial Grant.
Any person who becomes a
non-employee director after the completion of this offering will
automatically receive an initial grant of an option to purchase
20,000 shares of our common stock upon his or her election
or appointment, subject to adjustment by our board of directors
from time to time. These options will vest in equal monthly
installments over four years. These initial grants may also
be issued in the form of restricted stock awards if so
determined by our board of directors.
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Annual Grant.
In addition, any person who is a
non-employee director on the date of each annual meeting of our
stockholders automatically will be granted, on the annual
meeting date, beginning with our 2010 annual meeting, an option
to purchase 20,000 shares of our common stock, or the
annual grant, subject to adjustment by our board of directors
from time to time. These options will vest in equal monthly
installments over 12 months. These annual grants may also
be issued in the form of restricted stock unit awards if so
determined by our board of directors.
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Discretionary
Grants
In addition to the non-discretionary grants noted above, our
board of directors may grant stock awards to one or more
non-employee directors in such numbers and subject to such other
provisions as it shall determine. These awards may be in the
form of stock options or restricted stock awards and shall vest
pursuant to vesting schedules to be determined by our board of
directors in its sole discretion.
Changes to Capital Structure.
In the event
there is a specified type of change in our capital structure not
involving the receipt of consideration by us, such as a stock
split or stock dividend, the number of shares reserved under the
Directors Plan, the maximum number of shares by which the
share reserve may increase automatically each year, the number
of shares subject to the initial and annual grants and the
number of shares and exercise price of all outstanding stock
options will be appropriately adjusted.
Change in Control Transactions.
In the event
of certain change in control transactions, the vesting of
options held by non-employee directors whose service is
terminated generally will be accelerated in full.
Plan Amendments.
Our board of directors will
have the authority to amend or terminate the Directors
Plan. However, no amendment or termination of the
directors plan will adversely affect any rights under
awards already granted to a participant unless agreed to by the
affected participant. We will obtain stockholder approval of any
amendment to the Directors Plan that is required by
applicable law.
401(k)
Plan
We maintain a defined contribution employee retirement plan, or
401(k) plan, for our employees. Our executive officers are also
eligible to participate in the 401(k) plan on the same basis as
our other employees. The 401(k) plan is intended to qualify as a
tax-qualified plan under Section 401(k) of the Code. The
plan provides that each participant may contribute up to the
statutory limit, which is $16,500 for calendar year 2009.
Participants that are 50 years or older can also make
catch-up
contributions, which in calendar year 2009 may be up to an
additional $5,500 above the statutory limit. The plan permits us
to make discretionary contributions and matching contributions,
subject to established limits and a vesting schedule. In fiscal
year 2009, we did not make any discretionary or matching
contributions on behalf of our named executive officers.
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Limitation
of Liability and Indemnification
Our amended and restated certificate of incorporation, which
will be in effect upon the completion of this offering, contains
provisions that limit the liability of our directors for
monetary damages to the fullest extent permitted by the Delaware
General Corporation Law. Consequently, our directors will not be
personally liable to us or our stockholders for monetary damages
for any breach of fiduciary duties as directors, except
liability for:
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any breach of the directors duty of loyalty to us or our
stockholders;
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any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
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unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
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any transaction from which the director derived an improper
personal benefit.
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Our amended and restated bylaws to be in effect upon completion
of this offering require us to indemnify our directors and
executive officers to the maximum extent not prohibited by the
Delaware General Corporation Law or any other applicable law and
allow us to indemnify other officers, employees and other agents
as set forth in the Delaware General Corporation Law or any
other applicable law.
We have entered, and intend to continue to enter, into separate
indemnification agreements with our directors and executive
officers, in addition to the indemnification provided for in our
amended and restated bylaws. These agreements, among other
things, require us to indemnify our directors and executive
officers for certain expenses, including attorneys fees,
judgments, penalties fines and settlement amounts actually and
reasonably incurred by a director or executive officer in any
action or proceeding arising out of their services as one of our
directors or executive officers, or any of our subsidiaries or
any other company or enterprise to which the person provides
services at our request, including liability arising out of
negligence or active or passive wrongdoing by the officer or
director. We believe that these charter provisions and
indemnification agreements are necessary to attract and retain
qualified persons as directors and officers. We also maintain
directors and officers liability insurance.
The limitation of liability and indemnification provisions in
our amended and restated certificate of incorporation and
amended and restated bylaws may discourage stockholders from
bringing a lawsuit against our directors and officers for breach
of their fiduciary duty. They may also reduce the likelihood of
derivative litigation against our directors and officers, even
though an action, if successful, might benefit us and other
stockholders. Further, a stockholders investment may be
adversely affected to the extent that we pay the costs of
settlement and damage awards against directors and officers as
required by these indemnification provisions.
At present, there is no pending litigation or proceeding
involving any of our directors or executive officers as to which
indemnification is required or permitted, and we are not aware
of any threatened litigation or proceeding that may result in a
claim for indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, executive officers
or persons controlling us, we have been informed that in the
opinion of the SEC such indemnification is against public policy
as expressed in the Securities Act and is therefore
unenforceable.
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a summary of transactions, during our last
three fiscal years, to which we have been a party in which the
amount involved exceeded $120,000 and in which any of our
executive officers, directors or beneficial holders of more than
5% of our capital stock had or will have a direct or indirect
material interest, other than compensation arrangements which
are described under the section of this prospectus entitled
Management Compensation Discussion and
Analysis.
Repurchases
of Securities
The following table summarizes shares of our common stock we
repurchased from certain of our executive officers since
July 1, 2006. We have not repurchased shares of common
stock from any of our directors or holders of more than 5% of
our capital stock since July 1, 2006.
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Executive Officers
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Shares Repurchased
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Bronwyn Syiek
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198,480
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Tom Cheli
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150,000
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Scott Mackley
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50,000
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Price per share
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$
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10.28
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Date of repurchase
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10/18/07
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We believe the terms obtained or consideration that we paid or
received, as applicable, in connection with the transactions
were comparable to terms available or the amounts that would be
paid or received, as applicable, in arms-length
transactions.
Second
Amended and Restated Investor Rights Agreement
We have entered into an investor rights agreement with the
purchasers of our outstanding convertible preferred stock,
including entities with which certain of our directors are
affiliated. As of December 31, 2009, the holders of
21,176,533 shares of our common stock, including the common
stock issuable upon the conversion of our preferred stock, are
entitled to rights with respect to the registration of their
shares following this offering under the Securities Act. For a
description of these registration rights, see Description
of Capital Stock Registration Rights.
In addition, the election of the members of our board of
directors is governed by certain provisions contained in our
investor rights agreement. The holders of a majority of our
Series A preferred stock, voting as a separate series, have
designated Gregory Sands and James Simons for election to our
board of directors. The holders of a majority of our
Series B preferred stock, voting as a separate series, have
designated Glenn Solomon for election to our board of directors.
The holders of a majority of our common stock and preferred
stock, voting together as a class on as-converted basis, have
designated Douglas Valenti, William Bradley, John McDonald and
Dana Stalder. Upon the closing of this offering, the board
election voting provisions contained in the investor rights
agreement will terminate and none of our stockholders will have
any special rights regarding the election or designation of
members of our board of directors.
Offer
Letters and Proprietary Information and Inventions
Agreements
We have entered into at-will offer letters and proprietary
information and inventions agreements with our executive
officers. For more information regarding these agreements, see
Executive Compensation Offer Letter
Agreements and Executive Compensation
Proprietary Information and Inventions Agreements.
Other
Transactions
Katrina Boydon serves as our Vice President of Content and
Compliance and is the sister of Bronwyn Syiek, our President and
Chief Operating Officer. Ms. Boydons fiscal year 2010
base salary is $192,938 per year, and she has a fiscal year 2010
target bonus of $67,170. In fiscal years 2007, 2008 and 2009,
Ms. Boydon received a base salary of $149,000 (later
increased to $158,000), $169,000 (later increased to $175,000)
and
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$183,750 per year, respectively, and a bonus payout of $46,000,
$45,000 and $51,381, respectively. In fiscal years 2007, 2008,
2009 and 2010, Ms. Boydon was granted options to purchase
an aggregate of 64,000, 20,000, 30,000 and 45,000 shares of
our common stock, respectively.
Rian Valenti serves as a client sales and development associate
and is the son of Douglas Valenti, our Chief Executive Officer
and Chairman. Mr. Rian Valentis fiscal year 2010 base
salary is $54,000 per year, and he has a fiscal year 2010
commission opportunity of $45,000. Mr. Rian Valenti joined
us in fiscal year 2009 with a base salary of $52,000. In fiscal
year 2009, Mr. Rian Valenti received an aggregate of $2,000
in commissions. In fiscal year 2009, Mr. Rian Valenti was
granted an option to purchase an aggregate of 1,500 shares
of our common stock.
We had a preferred publisher agreement with Remilon LLC, an
online publishing entity, one of whose primary owners is Ben
Wilson, the
brother-in-law
of Tom Cheli, our Executive Vice President. We have been advised
that Mr. Wilson owns one third of the equity interests of
Remilon. Under the preferred publisher agreement, we paid
commissions for qualified leads generated from links on
Remilons website. We paid commissions to Remilon for
fiscal years 2007, 2008 and 2009 and the three months ended
September 30, 2009 of $3,109,000, $3,070,000, $4,204,000
and $1,366,000, respectively. Based solely on our understanding
of Mr. Wilsons ownership interest in Remilon, and without
regard to the amount of profit or loss and any contractual
arrangements among the owners of Remilon, Mr. Wilsons
interest in the commissions paid to Remilon for fiscal years
2007, 2008 and 2009 and the three months ended
September 30, 2009 was approximately $1,036,333,
$1,023,333, $1,401,333 and $455,333, respectively. We believe
these commissions were comparable to those that would be payable
in arms-length dealings with an unrelated third party. This
contract expired in October 2009.
We have granted stock options to our executive officers and
certain of our directors. For a description of these options,
see Executive Compensation Outstanding Equity
Awards at June 30, 2009. Each stock option issued to
our executive officers provides that 25% of the unvested shares
subject to such option will vest if the executive is terminated
without cause following a change in control.
We have entered into indemnification agreements with each of our
directors and executive officers. These indemnification
agreements require us to indemnify each of our directors and
executive officers to the fullest extent permitted by Delaware
law. See Management Limitation of Liability
and Indemnification.
Policies
and Procedures for Transactions with Related Persons
Our board of directors has adopted a written related person
transaction policy, which sets forth the policies and procedures
for the review and approval or ratification of related person
transactions. This policy covers any transaction, arrangement or
relationship, or any series of similar transactions,
arrangements or relationships, in which we were or are to be a
participant, the amount involved exceeds $60,000 and a related
person had or will have a direct or indirect material interest.
While the policy covers related party transactions in which the
amount involved exceeds $60,000, only related party transactions
in which the amount involved exceeds $120,000 will be required
to be disclosed in applicable filings as required by the
Securities Act, Exchange Act and related rules. Our board of
directors intends to set the $60,000 threshold for approval of
related party transactions in the policy at an amount lower than
that which is required to be disclosed under the Securities Act,
Exchange Act and related rules because we believe it is
appropriate for our audit committee to review transactions or
potential transactions in which the amount involved exceeds
$60,000, as opposed to $120,000. Pursuant to this policy, our
audit committee will (i) review the relevant facts and
circumstances of each related party transaction, including if
the transaction is on terms comparable to those that could be
obtained in arms-length dealings with an unrelated
third-party and the extent of the related partys interest
in the transaction and (ii) take into account the conflicts
of interest and corporate opportunity provisions of our code of
business conduct and ethics. Management will present to our
audit committee each proposed related party transaction,
including all relevant facts and circumstances relating thereto,
and will update the audit committee as to any material changes
to any related party transaction.
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All related party transactions may only be consummated if our
audit committee has approved or ratified such transaction in
accordance with the guidelines set forth in the policy. Certain
types of transactions are not subject to the policy, including:
(i) compensation arrangements approved by our Compensation
Committee; (ii) transactions in the ordinary course of
business where the related partys interest arises only
(a) from his or her position as an employee (other than a
position as an executive officer, partner, principal or similar
control position) of another entity that is party to the
transaction or (b) from an equity interest of less than 5%
in another entity that is party to the transaction; and
(iii) transactions in the ordinary course of business where
the interest of the related party arises solely from the
ownership of a class of equity securities in our company where
all holders of such class of equity securities will receive the
same benefit on a pro rata basis. No director may participate in
the approval of a related party transaction for which he or she
is a related party.
101
PRINCIPAL
STOCKHOLDERS
The following table sets forth information regarding the
beneficial ownership of our common stock as of December 31,
2009, and as adjusted to reflect the sale of
10,000,000 shares of common stock in this offering, for:
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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 current officers and directors as a group; and
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each person, or group of affiliated persons, known by us to
beneficially own more than 5% of our common stock.
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The percentage ownership information shown in the table is based
upon 34,912,597 shares of common stock outstanding as of
December 31, 2009 and assuming the conversion of all
outstanding shares of our preferred stock as of
December 31, 2009. The table shows the percentage
ownership following the issuance of 10,000,000 shares of
common stock in this offering. The percentage ownership
information assumes no exercise of the underwriters
over-allotment option.
We have determined beneficial ownership in accordance with the
rules of the Securities and Exchange Commission. These rules
generally attribute beneficial ownership of securities to
persons who possess sole or shared voting power or investment
power with respect to those securities. In addition, the rules
include common stock issuable pursuant to the exercise of stock
options that are either immediately exercisable or exercisable
on or before March 1, 2010, which is 60 days after
December 31, 2009. These shares are deemed to be
outstanding and beneficially owned by the person holding those
options for the purpose of computing the percentage ownership of
that person, but they are not treated as outstanding for the
purpose of computing the percentage ownership of any other
person. Unless otherwise indicated, the persons or entities
identified in this table have sole voting and investment power
with respect to all shares shown as beneficially owned by them,
subject to applicable community property laws.
102
Unless otherwise indicated, the address of each beneficial owner
listed in the table below is
c/o QuinStreet,
Inc., 1051 East Hillsdale Blvd., Foster City, California 94404.
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Percentage of Outstanding
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Shares Beneficially Owned
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Number of Shares
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Before the
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After the
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Name of Beneficial Owner
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Beneficially Owned
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Offering
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Offering
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5% Stockholders:
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Douglas Valenti(1)
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6,393,475
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18.2
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%
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14.2
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%
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Entities affiliated with Split Rock Partners(2)
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5,682,951
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16.3
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%
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12.7
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%
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10400 Viking Drive. Suite 550
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Minneapolis, MN 55344
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Entities affiliated with Sutter Hill Ventures(3)
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3,655,681
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10.5
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%
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8.1
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%
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755 Page Mill Road,
Suite A-200
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Palo Alto, CA
94304-1005
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Entities affiliated with GGV Capital(4)
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2,666,975
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7.6
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%
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5.9
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%
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2494 Sand Hill Road, Suite 100
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Menlo Park, CA 94025
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W Capital Partners II, L.P.(5).
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2,376,228
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6.8
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%
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5.3
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%
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One East 52nd Street, 5th Floor
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New York, NY 10022
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Entities affiliated with Catterton Partners(6)
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2,033,899
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5.8
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%
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4.5
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%
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599 West Putnam Avenue
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Greenwich, CT 06830
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Entities affiliated with Partech International(7)
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1,913,620
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5.5
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%
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4.3
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%
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50 California Street, #3200
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San Francisco, CA 94111
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Directors and Named Executive Officers:
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Douglas Valenti(1)
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6,393,475
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18.2
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%
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14.2
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%
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Bronwyn Syiek(8)
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858,502
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2.4
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%
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1.9
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%
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Kenneth Hahn(9)
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321,353
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*
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*
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Tom Cheli(10)
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479,269
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1.4
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%
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1.1
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%
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Scott Mackley(11)
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610,935
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1.7
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%
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1.3
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%
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William Bradley(12)
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204,000
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*
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*
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John McDonald(13)
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214,000
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*
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*
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Gregory Sands(14)
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3,779,990
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10.8
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%
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8.4
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%
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James Simons(15)
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5,707,951
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16.3
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%
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12.7
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Glenn Solomon(16)
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2,691,975
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7.7
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%
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6.0
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%
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Dana Stalder(17)
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228,900
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*
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All officers and directors as a group
(16 persons)(18)
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22,279,444
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57.6
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%
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45.8
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%
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*
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Represents beneficial ownership of less than one percent (1%) of
the outstanding common stock.
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(1)
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Includes 3,985,738 shares held by The Valenti Living Trust
of which Mr. Valenti and his wife, Terri Valenti, are
co-trustees, 2,240,000 shares held by DJ & TL
Valenti Investments, LP, of which The Valenti Living Trust is
the general partner, and 6,905 shares held by
Mr. Valenti and his immediate family members. Each of Mr.
Valenti and Terri Valenti have voting and investment power with
respect to the shares held by The Valenti Living Trust and share
beneficial ownership in such shares. Each of Mr. Valenti and
Terri Valenti also have voting and investment power with respect
to the shares held by DJ and TL Valenti Investments, LP, through
their control as co-trustees of the general partner, The Valenti
Living Trust. Also includes stock options exercisable for
160,832 shares of our common stock within 60 days of
December 31, 2009.
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(2)
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Consists of 5,561,627 shares held by SPVC V, LLC and
121,324 shares held by SPVC Affiliates Fund I, LLC.
Split Rock Partners, LLC, together with Vestbridge Partners,
LLC, is the manager of SPVC V, LLC and SPVC Affiliates
Fund I, LLC, however, voting and investment power are
delegated solely to Split Rock Partners, LLC. Michael Gorman,
James Simons, David Stassen and Allan Will, as managing
directors of Split Rock Partners, LLC, share voting and
investment power with respect to the shares held
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by SPVC V, LLC and SPVC Affiliates Fund I, LLC and
disclaim beneficial ownership of such shares except to the
extent of any pecuniary interest therein.
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(3)
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Consists of 3,509,543 shares held by Sutter Hill Ventures,
LP, 104,764 shares held by Sutter Hill Entrepreneurs Fund
(QP), LP and 41,374 shares held by Sutter Hill
Entrepreneurs Fund (AI), LP. Gregory Sands, David L. Anderson,
G. Leonard Baker, Jr., Jeffrey W. Bird, Tench Coxe,
James C. Gaither, Andrew T. Sheehan, Michael L. Speiser, David
E. Sweet, James N. White and William H. Younger, Jr. share
voting and investment power over these shares and disclaim
beneficial ownership of such shares except to the extent of any
pecuniary interest therein.
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(4)
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Consists of 1,493,068 shares held by Granite Global
Ventures III L.P., 1,114,187 shares held by Granite
Global Ventures II L.P., 36,401 shares held by
GGV III Entrepreneurs Fund L.P. and 23,319 shares held
by GGV II Entrepreneurs Fund L.P. Granite Global
Ventures III L.L.C. is the General Partner of Granite
Global Ventures III L.P. and GGV III Entrepreneurs
Fund L.P. Mr. Solomon, Mr. Ng, Mr. Nada,
Mr. Bonham, Mr. Foo, Ms. Lee, Mr. Zhan and
Ms. Jin share voting and investment authority over the
shares held by Granite Global Ventures III L.P. and GGV III
Entrepreneurs Fund L.P., and disclaim beneficial ownership
of such shares except to the extent of any pecuniary interest
therein. Granite Global Ventures II L.L.C. is the General
Partner of Granite Global Ventures II L.P. and GGV II
Entrepreneurs Fund L.P. Mr. Solomon, Mr. Ng, Mr.
Nada, Mr. Bonham, Mr. Foo and Ms. Lee share
voting and investement power over the shares held by Granite
Global Ventures II L.P. and GGV Entrepreneurs
Fund L.P., and disclaim beneficial ownership of such shares
except to the extent of any pecuniary interest therein.
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(5)
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The sole general partner of W Capital Partners II, L.P. is WCP
GP II, L.P. and the sole general partner of WCP GP II, L.P. is
WCP GP II, LLC. The managing members of WCP GP II, LLC exercise
voting and investment power over securities held by W Capital
Partners II, L.P. The managing members of WCP GP II, LLC are
Stephen Wertheimer, David Wachter and Robert Migliorino, each of
whom disclaims beneficial ownership of the securities held by W
Capital Partners II, L.P., except to the extent of any pecuniary
interest therein.
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(6)
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Consists of 904,937 shares held by Catterton Partners IV,
L.P., 762,885 shares held by Catterton Partners IV
Offshore, L.P., 317,263 shares held by Catterton Partners
IV-A, L.P., 26,695 shares held by Catterton
Partners IV Special Purpose, L.P. and 22,119 shares
held by Catterton Partners IV-B, L.P. Catterton Managing Partner
IV, L.L.C. is the general partner of Catterton Partners IV,
L.P., Catterton Partners IV-A, L.P. and Catterton Partners IV-B,
L.P. and the managing general partner of Catterton Partners IV
Special Purpose, L.P. and Catterton Partners IV Offshore, L.P.
CP4 Principals, L.L.C. is the Managing Member of Catterton
Managing Partner IV, L.L.C. CP4 Principals is managed by a
managing board. The members of the managing board are J. Michael
Chu and Scott A. Dahnke. These individuals disclaim beneficial
ownership of such shares except to the extent of any pecuniary
interest therein.
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(7)
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Consists of 642,226 shares held by Partech International
Growth II LLC, 513,783 shares held by Partech
International Growth III LLC, 385,866 shares held by
Partech U.S. Partners IV LLC, 128,446 shares held by
Partech International Growth I LLC, 205,513 shares
held by AXA Growth Capital II L.P., 25,689 shares held
by Double Black Diamond II LLC and 12,097 shares held
by PAR SF II LLC. Vincent Worms has sole voting and
investment authority over all such shares. Mr. Worms
disclaims beneficial ownership of all such shares except to the
extent of any pecuniary interest therein.
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(8)
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Includes 4,760 shares held in a trust for the benefit of
Ms. Syieks stepdaughter for which Ms. Syiek is
the custodian. Also includes stock options exercisable for
817,976 shares of our common stock within 60 days of
December 31, 2009.
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(9)
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Represents stock options exercisable for shares of our common
stock within 60 days of December 31, 2009.
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(10)
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Includes stock options exercisable for 472,279 shares of
our common stock within 60 days of December 31, 2009.
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(11)
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Includes stock options exercisable for 568,228 shares of
our common stock within 60 days of December 31, 2009.
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(12)
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Includes stock options exercisable for 200,000 shares of
our common stock within 60 days of December 31, 2009.
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(13)
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Includes 14,000 shares held in a family trust of which
Mr. McDonald is a trustee. Also, includes stock options
exercisable for 200,000 shares of our common stock within
60 days of December 31, 2009.
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(14)
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Includes 77,612 shares held in family trusts for which
Mr. Sands and his spouse are trustees, 6,785 shares
held in a charitable remainder unitrust for which Mr. Sands
is the trustee and 14,912 shares held in irrevocable trusts for
the benefit of Mr. Sands minor children. Also
includes 3,509,543 shares held by Sutter Hill Ventures, LP,
104,764 shares held by Sutter Hill Entrepreneurs Fund (QP),
LP and 41,374 shares held by Sutter Hill Entrepreneurs Fund
(AI), LP. Mr. Sands is a Managing Director of Sutter Hill
Ventures. Mr. Sands disclaims beneficial ownership of the
shares held by Sutter Hill Ventures except to the extent of his
proportionate pecuniary interest therein. Also includes stock
options exercisable for 25,000 shares of our common stock
within 60 days of December 31, 2009.
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(15)
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Includes 5,561,627 shares held by SPVC V, LLC and
121,324 shares held by SPVC Affiliates Fund I, LLC.
Mr. Simons is a Managing Director of Split Rock Partners
LLC, the manager of SPVC V, LLC and SPVC Affiliates
Fund I, LLC. Mr. Simons, together with
Mr. Gorman, Mr. Stassen and Mr. Will share voting
and investment power with respect to the shares held by
SPVC V, LLC and SPVC Affiliates Fund I, LLC.
Mr. Simons disclaims beneficial ownership of these shares
except to the extent of his proportionate pecuniary interest
therein. Also includes stock options exercisable for
25,000 shares of our common stock within 60 days of
December 31, 2009.
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(16)
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Includes 1,493,068 shares held by Granite Global
Ventures III L.P., 1,114,187 shares held by Granite
Global Ventures II L.P., 36,401 shares held by
GGV III Entrepreneurs Fund L.P. and 23,319 shares held
by GGV II Entrepreneurs Fund L.P. Mr. Solomon is a
Managing Director of Granite Global Ventures III L.L.C., the
General Partner of Granite Global Ventures III L.P. and GGV
III Entrepreneurs Fund L.P. He is also a Managing Director of
Granite Global Ventures II, L.L.C., the General Partner of
Granite Global Ventures II L.P. and GGV II Entrepreneurs Fund
L.P. Mr. Solomon, Mr. Ng, Mr. Nada,
Mr. Bonham, Mr. Foo, Ms. Lee, Mr. Zhuo and
Ms. Jin share voting and investment authority over the
shares held by Granite Global Ventures III L.P. and GGV III
Entrepreneurs Fund L.P. Mr. Solomon, Mr. Ng,
Mr. Nada, Mr. Bonham, Mr. Foo and Ms. Lee
share voting and investment authority over the shares held by
Granite Global Ventures II L.P. and GGV II Entrepreneurs Fund
L.P. Mr. Solomon disclaims beneficial ownership of these
shares except to the extent of his proportionate pecuniary
interest therein. Does not include a maximum of 34,257 shares
held by entities affiliated with Partech International.
Mr. Solomon was associated with Partech International prior
to joining GGV Capital. These shares represent Mr.
Solomons maximum pecuniary interest in the shares held by
entities affiliated with Partech International. Mr. Solomon
has no voting or investment authority over these shares. Also
includes stock options exercisable for 25,000 shares of our
common stock within 60 days of December 31, 2009.
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(17)
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Includes 3,900 shares held in a family trust for which
Mr. Stalder is the trustee. Also includes stock options
exercisable for 225,000 shares of our common stock within
60 days of December 31, 2009.
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(18)
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Includes stock options exercisable for an aggregate of 3,753,768
shares of our common stock within 60 days of
December 31, 2009 that are held by our directors and
officers as a group.
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105
DESCRIPTION
OF CAPITAL STOCK
General
Upon the completion of this offering, our amended and restated
certificate of incorporation will authorize us to issue up to
100,000,000 shares of common stock, $0.001 par value
per share, and 5,000,000 shares of preferred stock,
$0.001 par value per share. The following information
reflects the filing of our amended and restated certificate of
incorporation and the conversion of all outstanding shares of
our preferred stock into shares of common stock immediately
prior to the completion of this offering.
As of December 31, 2009, there were outstanding:
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34,912,597 shares of common stock held by approximately 304
stockholders of record; and
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11,504,767 shares of common stock issuable upon the
exercise of outstanding stock options pursuant to our 2008
Equity Incentive Plan and having a weighted average exercise
price of $9.3429 per share.
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All of our issued and outstanding shares of common stock and
convertible preferred stock are duly authorized, validly issued,
fully paid and non-assessable. Our shares of common stock are
not redeemable and, following the closing of this offering, will
not have preemptive rights.
The following description of our capital stock and provisions of
our amended and restated certificate of incorporation and
amended and restated bylaws are summaries and are qualified by
reference to the amended and restated certificate of
incorporation and the amended and restated bylaws that will be
in effect upon the completion of this offering. Copies of these
documents will be filed with the SEC as exhibits to our
registration statement, of which this prospectus forms a part.
The descriptions of the common stock and preferred stock reflect
changes to our capital structure that will occur upon the
closing of this offering.
Common
Stock
Dividend Rights.
Subject to preferences that
may be applicable to any then outstanding preferred stock,
holders of our common stock are entitled to receive dividends,
if any, as may be declared from time to time by our board of
directors out of legally available funds.
Voting Rights.
Each holder of our common stock
is entitled to one vote for each share on all matters submitted
to a vote of the stockholders, including the election of
directors. Our stockholders do not have cumulative voting rights
in the election of directors. Accordingly, holders of a majority
of the voting shares are able to elect all of the directors.
Liquidation.
In the event of our liquidation,
dissolution or winding up, holders of our common stock will be
entitled to share ratably in the net assets legally available
for distribution to stockholders after the payment of all of our
debts and other liabilities and the satisfaction of any
liquidation preference granted to the holders of any then
outstanding shares of preferred stock.
Rights and Preferences.
Holders of our common
stock have no preemptive, conversion, subscription or other
rights, and there are no redemption or sinking fund provisions
applicable to our common stock. The rights, preferences and
privileges of the holders of our common stock are subject to and
may be adversely affected by, the rights of the holders of
shares of any series of our preferred stock that we may
designate in the future.
Preferred
Stock
Upon the completion of this offering, our board of directors
will have the authority, without further action by our
stockholders, to issue up to 5,000,000 shares of preferred
stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof. These rights, preferences
and privileges could include dividend rights, conversion rights,
voting rights, terms of redemption, liquidation preferences,
sinking fund terms and the number of shares constituting any
series or the designation of such series, any or all of which
may be greater than the rights of common stock. The issuance of
our preferred stock could adversely affect
106
the voting power of holders of common stock and the likelihood
that such holders will receive dividend payments and payments
upon liquidation. In addition, the issuance of preferred stock
could have the effect of delaying, deferring or preventing a
change of control of our company or other corporate action. Upon
the completion of this offering, no shares of preferred stock
will be outstanding, and we have no present plan to issue any
shares of preferred stock.
Registration
Rights
Demand Registration Rights.
After
180 days following the completion of this offering (subject
to extension under certain circumstances), the holders of
approximately 21,176,533 shares of our common stock will be
entitled to certain demand registration rights. At any time, the
holders of a majority of such shares can, on not more than one
occasion in any
12-month
period, request that we register all or a portion of their
shares. If we are eligible to register such demand registration
on
Form S-3,
the request for registration must cover that at least that
number of shares with an anticipated gross aggregate offering
price of at least $1,000,000. If we are able to register the
sale of shares pursuant to these demand rights on
Form S-1
but not
Form S-3,
the request for registration must either cover at least 20% of
the unregistered common shares issued upon conversion of or
otherwise in exchange for former preferred shares or cover at
least that number of shares with an anticipated gross aggregate
offering price of at least $5,000,000. If we determine that it
would be seriously detrimental to our stockholders to effect
such a demand registration and it is essential to defer such
registration, we have the right to defer such registration, not
more than once in any one-year period, for a period of up to
120 days.
Piggyback Registration Rights.
After the
completion of this offering, in the event that we propose to
register any of our securities under the Securities Act, either
for our own account or for the account of other security
holders, the holders of approximately 21,176,533 shares of
our common stock will be entitled to certain
piggyback registration rights allowing the holder to
include their shares in such registration, subject to certain
marketing and other limitations. As a result, whenever we
propose to file a registration statement under the Securities
Act, other than with respect to a registration related to
employee benefit plans or corporate reorganizations, the holders
of these shares are entitled to notice of the registration and
have the right, subject to limitations that the underwriters may
impose on the number of shares included in the registration, to
include their shares in the registration.
Other Terms.
We will pay the registration
expenses of the holders of the shares registered pursuant to the
demand and piggyback registrations described above. In an
underwritten offering, the managing underwriter, if any, has the
right, subject to specified conditions, to limit the number of
shares such holders may include.
The demand and piggyback registration rights described above
will expire, with respect to any particular stockholder, the
earlier of three years after our initial public offering or when
that stockholder can sell all of its shares under Rule 144
of the Securities Act during any three-month period and such
stockholder owns less than two percent of our outstanding stock.
None of the demand or piggyback registration rights described
above are applicable to this offering.
Anti-Takeover
Provisions
Certificate of Incorporation and Bylaws to be in Effect Upon
the Completion of this Offering.
Our amended and
restated certificate of incorporation to be in effect upon the
completion of this offering will provide for our board of
directors to be divided into three classes with staggered
three-year terms. Only one class of directors will be elected at
each annual meeting of our stockholders, with the other classes
continuing for the remainder of their respective three-year
terms. Because our stockholders do not have cumulative voting
rights, stockholders holding a majority of the shares of common
stock outstanding will be able to elect all of our directors.
Our amended and restated certificate of incorporation and
amended and restated bylaws to be effective upon the completion
of this offering will also provide that all stockholder actions
must be effected at a duly called meeting of stockholders and
not by a consent in writing, and that only our board of
directors,
107
chairman of the board, chief executive officer or the board of
directors pursuant to a resolution adopted by a majority of the
total number of authorized directors may call a special meeting
of stockholders.
The foregoing provisions will make it more difficult for our
existing stockholders to replace our board of directors, as well
as for another party to obtain control of us by replacing our
board of directors. Since our board of directors has the power
to retain and discharge our officers, these provisions could
also make it more difficult for existing stockholders or another
party to effect a change in management. In addition, the
authorization of undesignated preferred stock makes it possible
for our board of directors to issue preferred stock with voting
or other rights or preferences that could impede the success of
any attempt to change our control.
These provisions are intended to enhance the likelihood of
continued stability in the composition of our board of directors
and its policies and to discourage certain types of transactions
that may involve an actual or threatened acquisition of us.
These provisions are also designed to reduce our vulnerability
to an unsolicited acquisition proposal and to discourage certain
tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from
making tender offers for our shares and may have the effect of
deterring hostile takeovers or delaying changes in our control
or management. As a consequence, these provisions also may
inhibit fluctuations in the market price of our stock that could
result from actual or rumored takeover attempts.
Section 203 of the Delaware General Corporation
Law.
Upon the completion of this offering, we
will be subject to Section 203 of the Delaware General
Corporation Law, which prohibits a Delaware corporation from
engaging in any business combination with any interested
stockholder for a period of three years after the date that such
stockholder became an interested stockholder, with the following
exceptions:
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before such date, the board of directors of the corporation
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
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upon completion of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction began,
excluding for purposes of determining the voting stock
outstanding (but not the outstanding voting stock owned by the
interested stockholder) those shares owned (i) by persons
who are directors and also officers and (ii) employee stock
plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
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on or after such date, the business combination is approved by
the board of directors and authorized at an annual or special
meeting of the stockholders, and not by written consent, by the
affirmative vote of at least
66
2
/
3
%
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 or 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
loss, advances, guarantees, pledges or other financial benefits
by or through the corporation.
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In general, Section 203 defines an interested
stockholder as an entity or person who, together with the
persons affiliates and associates, beneficially owns, or
within three years prior to the time of determination of
interested stockholder status did own, 15% or more of the
outstanding voting stock of the corporation.
108
Contractual
Obligations
Under our credit facility, most change of control transactions
will require repayment of all indebtedness under the credit
facility.
Limitations
of Liability and Indemnification
See Executive Compensation Limitation of
Liability and Indemnification.
NASDAQ
Global Market Listing
We have applied to have our common stock approved for listing on
The NASDAQ Global Market under the symbol QNST.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
expected to be BNY Mellon Shareowner Services after the
completion of this offering.
109
SHARES ELIGIBLE
FOR FUTURE SALE
Immediately prior to this offering, there has been no public
market for our common stock. Future sales of substantial amounts
of shares of our common stock in the public market could
adversely affect prevailing market prices. Furthermore, since
only a limited number of shares will be available for sale
shortly after this offering because of contractual and legal
restrictions on resale described below, sales of substantial
amounts of common stock in the public market after the
restrictions lapse could adversely affect the prevailing market
price for our common stock, as well as our ability to raise
equity capital in the future.
Based on the number of shares of common stock outstanding as of
December 31, 2009, upon the completion of this offering,
44,912,597 shares of our common stock will be outstanding,
assuming no exercise of the underwriters over-allotment
option and no exercise of options. All 10,000,000 shares of
common stock sold in this offering will be freely tradable
unless held by one of our affiliates, as that term is defined in
Rule 144 under the Securities Act.
The remaining 34,912,597 shares of our common stock
outstanding after this offering are restricted securities as
such term is defined in Rule 144 under the Securities Act
or are subject to
lock-up
agreements as described below. Following the expiration of the
lock-up
period, restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from
registration under Rule 144 or 701 promulgated under the
Securities Act, described in greater detail below. The
34,912,597 shares will generally become available for sale
in the public market as follows:
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substantially all of such shares will be subject to lock-up
agreements and will not be eligible for immediate sale upon the
completion of this offering;
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all such restricted shares will be eligible for sale under
Rule 144 or Rule 701 upon expiration of
lock-up
agreements at least 180 days after the date of this
offering, provided that certain shares held by affiliates will
be subject to the volume limitations described below.
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Rule 144
In general, a person who has beneficially owned restricted
shares of our common stock for at least six months would be
entitled to sell their securities provided that (i) such
person is not deemed to have been one of our affiliates at the
time of, or at any time during the three months preceding, a
sale and (ii) we are subject to and compliant with the
Exchange Act periodic reporting requirements for at least
90 days before the sale. In addition, under Rule 144,
any person who is not an affiliate of ours, has not been an
affiliate of ours during the preceding three months and has held
their shares for at least one year, including the holding period
of any prior owner other than one of our affiliates, would be
entitled to sell an unlimited number of shares immediately upon
the closing of this offering without regard to whether current
public information about us is available. Persons who have
beneficially owned restricted shares of our common stock for at
least six months but who are our affiliates at the time of, or
any time during the 90 days preceding, a sale, would be
subject to additional restrictions, by which such person would
be entitled to sell within any three-month period only a number
of securities that does not exceed the greater of either of the
following:
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1% of the number of shares of our common stock then outstanding,
which will equal approximately 449,125 shares immediately
after this offering, assuming no exercise of the
underwriters over-allotment option, based on the number of
shares of common stock outstanding as of December 31,
2009; or
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the average weekly trading volume of our common stock on The
NASDAQ Global Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to the sale;
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provided
, in each case, that we are subject to the
Exchange Act periodic reporting requirements for at least
90 days before the sale. Such sales both by affiliates and
by non-affiliates must also comply with the manner of sale,
current public information and notice provisions of
Rule 144.
110
Rule 701
Rule 701 under the Securities Act, as in effect on the date
of this prospectus, permits resales of shares in reliance upon
Rule 144 but without compliance with certain restrictions
of Rule 144, including the holding period requirement. Most
of our employees, executive officers, directors or consultants
who purchased shares under a written compensatory plan or
contract may be entitled to rely on the resale provisions of
Rule 701, but all holders of Rule 701 shares are
required to wait until 90 days after the date of this
prospectus before selling their shares. However, substantially
all Rule 701 shares are subject to
lock-up
agreements as described below and under Underwriting
and will become eligible for sale at the expiration of those
agreements.
Lock-Up
Agreements
We, along with our officers and directors and most of our other
stockholders and optionholders, have agreed that, subject to
certain exceptions we and they will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly,
any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock,
enter into a transaction that would have the same effect, or
enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of
ownership of our common stock, whether any of these transactions
are to be settled by delivery of our common stock or other
securities, in cash or otherwise, or publicly disclose the
intention to make any offer, sale, pledge or disposition, or to
enter into any transaction, swap, hedge or other arrangement,
without, in each case, the prior written consent of each of
Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and J.P. Morgan
Securities Inc., for a period of 180 days after the date of
this prospectus. However, in the event that either
(1) during the last 17 days of the
lock-up
period, we release earnings results or announce material news or
a material event relating to us or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the
16-day
period beginning on the last day of the
lock-up
period, then, in either case, the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the announcement of the material news or event, as
applicable, unless each of Credit Suisse Securities (USA) LLC,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and
J.P. Morgan Securities Inc. waives, in writing, such an
extension.
Registration
Rights
After 180 days following the completion of this offering
(subject to extension in certain circumstances), the holders of
21,176,533 shares of common stock will be entitled to
rights with respect to the registration of their shares under
the Securities Act, subject to the
lock-up
arrangement described above. Registration of these shares under
the Securities Act would result in the shares becoming freely
tradable without restriction under the Securities Act (except
for shares held by affiliates) immediately upon the
effectiveness of this registration. Any sales of securities by
these stockholders could have a material adverse effect on the
trading price of our common stock. See Description of
Capital Stock Registration Rights. None of the
registration rights described above are applicable to this
offering.
Equity
Incentive Plans
We intend to file with the SEC a registration statement under
the Securities Act covering the shares of our common stock
reserved for issuance under our 2008 Equity Incentive Plan, our
2010 Equity Incentive Plan and our 2010 Non-Employee
Directors Stock Award Plan. The registration statement is
expected to be filed and become effective as soon as practicable
after the completion of this offering. Accordingly, shares
registered under the registration statement will be available
for sale in the open market following its effective date,
subject to the
180-day
lock-up
arrangement described above, if applicable.
111
MATERIAL
U.S. FEDERAL INCOME TAX CONSIDERATIONS
FOR
NON-U.S.
HOLDERS
The following is a general discussion of the material
U.S. federal income tax consequences of the ownership and
disposition of our common stock to a
non-U.S. holder
that acquires our common stock pursuant to this offering. For
the purpose of this discussion, a
non-U.S. holder
is any beneficial owner of our common stock that, for
U.S. federal income tax purposes, is not a partnership or
U.S. person. For purposes of this discussion, the term
U.S. person means:
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an individual who is a citizen or resident of the U.S.;
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a corporation or other entity taxable as a corporation created
or organized under the laws of the U.S. or any political
subdivision thereof;
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an estate whose income is subject to U.S. federal income
tax regardless of its source; or
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a trust (x) whose administration is subject to the primary
supervision of a U.S. court and which has one or more
U.S. persons who have the authority to control all
substantial decisions of the trust or (y) which has in
effect a valid election to be treated a U.S. person.
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If a partnership (or an entity or arrangement treated as a
partnership for U.S. federal income tax purposes) holds our
common stock, the tax treatment of a partner will generally
depend on the status of the partner and upon the activities of
the partnership. Accordingly, we urge partnerships that hold our
common stock and partners in such partnerships to consult their
tax advisors.
This discussion assumes that a
non-U.S. holder
will hold our common stock issued pursuant to this offering as a
capital asset (generally, property held for investment). This
discussion does not address all aspects of U.S. federal
income taxation that may be relevant in light of a
non-U.S. holders
special tax status or special tax situations. Certain former
citizens or residents of the U.S., life insurance companies,
tax-exempt organizations, dealers in securities or currency,
banks or other financial institutions and investors that hold
common stock as part of a hedge, straddle, conversion
transaction, synthetic security or other integrated investment
are among those categories of potential investors that are
subject to special rules not covered in this discussion. This
discussion does not address any tax consequences arising under
the laws of any state, local or
non-U.S. taxing
jurisdiction. Furthermore, the following discussion is based on
current provisions of the Code and Treasury Regulations and
administrative and judicial interpretations thereof, all as in
effect on the date hereof, and all of which are subject to
change, possibly with retroactive effect. Accordingly, we urge
each
non-U.S. holder
to consult a tax advisor regarding the U.S. federal, state,
local and
non-U.S. income
and other tax consequences of acquiring, holding and disposing
of shares of our common stock.
Dividends
We have not paid any dividends on our common stock and we do not
plan to pay any dividends in the foreseeable future. However, if
we do pay dividends on our common stock, those payments will
constitute dividends for U.S. tax purposes to the extent
paid from our current or accumulated earnings and profits, as
determined under U.S. federal income tax principles. To the
extent those dividends exceed our current and accumulated
earnings and profits, the dividends will constitute a return of
capital and will first reduce a holders adjusted tax basis
in the common stock, but not below zero, and then will be
treated as gain from the sale of the common stock.
Dividends paid (out of earnings and profits) to a
non-U.S. holder
of common stock generally will be subject to
U.S. withholding tax either at a rate of 30% of the gross
amount of the dividend or such lower rate as may be specified by
an applicable tax treaty. To receive a reduced rate of
withholding under a tax treaty, a
non-U.S. holder
must provide us with an IRS
Form W-8BEN
or other appropriate version of
Form W-8
certifying qualification for the reduced rate.
112
Dividends received by a
non-U.S. holder
that are effectively connected with a U.S. trade or
business conducted by the
non-U.S. holder
(and, if required by an applicable tax treaty, that are
attributable to a U.S. permanent establishment) generally
are not subject to withholding tax, provided certain
certifications are met. Such effectively connected dividends,
net of certain deductions and credits, are taxed at the
graduated U.S. federal income tax rates applicable to
U.S. persons. To claim an exemption from withholding
because the dividends are effectively connected within a
U.S. trade or business of the
non-U.S. holder,
the
non-U.S. holder
must provide a properly executed IRS
Form W-8ECI,
or such successor form as the IRS designates prior to the
payment of dividends. In addition to the graduated tax described
above, dividends that are effectively connected with a
U.S. trade or business of a corporate
non-U.S. holder
may also be subject to a branch profits tax at a rate of 30% or
such lower rate as may be specified by an applicable tax treaty.
A
non-U.S. holder
of common stock may obtain a refund or credit of any excess
amounts withheld if an appropriate claim for refund is timely
filed with the IRS.
Gain on
Disposition of Common Stock
Subject to the discussion below under Backup Withholding
and Information Reporting, a
non-U.S. holder
generally will not be subject to U.S. federal income tax or
withholding tax on any gain realized upon the sale or other
disposition of our common stock unless:
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the gain is effectively connected with a U.S. trade or
business of the
non-U.S. holder,
and, if an applicable tax treaty so requires, is attributable to
a U.S. permanent establishment maintained by such
non-U.S. holder;
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the
non-U.S. holder
is an individual who is present in the U.S. for a period or
periods aggregating 183 days or more during the calendar
year in which the sale or disposition occurs and certain other
conditions are met; or
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our common stock constitutes a U.S. real property interest
by reason of our status as a U.S. real property
holding corporation for U.S. federal income tax
purposes at any time within the shorter of the five-year period
preceding the disposition or the holders holding period
for our common stock. We believe that we are not currently, and
that we will not become, a U.S. real property holding
corporation for U.S. federal income tax purposes.
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Unless an applicable tax treaty provides otherwise, gain
described in the first bullet point above will be subject to
U.S. federal income tax on a net basis at the graduated
U.S. federal income tax rate applicable to
U.S. persons and, in the case of
non-U.S. corporate
holders, a branch profits tax may also apply. Gain
described in the second bullet point above (which may be offset
by certain U.S. source capital losses) will be subject to a
flat 30% U.S. federal income tax or such lower rate as may
be specified by an applicable tax treaty.
If we were to become a U.S. real property holding
corporation at any time during the applicable period described
in the third bullet point above, any gain recognized on a
disposition of our common stock by a
non-U.S. holder
would be subject to U.S. federal income tax at the
graduated U.S. federal income tax rates applicable to
U.S. persons if either (i) the
non-U.S. holder
owned (directly, indirectly or constructively) more than 5% of
our common stock during such applicable period or (ii) our
common stock were not regularly traded on an established
securities market (within the meaning of
Section 897(c)(3) of the Code) at any time during the
calendar year of the disposition. We believe that our stock will
be treated as so traded.
Backup
Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of
dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. A similar report is sent to the
non-U.S. holder.
Pursuant to
113
tax treaties or other agreements, the IRS may make its reports
available to tax authorities in the recipients country of
residence.
Payments of dividends made to a
non-U.S. holder
may be subject to backup withholding (currently at a rate of
28%), and the proceeds from the disposition of our common stock
may be subject to backup withholding and information reporting,
unless the
non-U.S. holder
establishes an exemption, for example, by properly certifying
its
non-U.S. status
on a
Form W-8BEN
or another appropriate version of
Form W-8.
Notwithstanding the foregoing, backup withholding may apply if
either we or our paying agent has actual knowledge, or reason to
know, that the beneficial owner is a U.S. person.
Backup withholding is not an additional tax. Rather, the
U.S. income tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is timely
furnished to the IRS.
114
UNDERWRITERS
Under the terms and subject to the conditions contained in an
underwriting agreement
dated ,
2010, we have agreed to sell to the underwriters named below,
for whom Credit Suisse Securities (USA) LLC, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and
J.P. Morgan Securities Inc. are acting as representatives,
the following respective numbers of shares of common stock:
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Number of Shares
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Credit Suisse Securities (USA) LLC
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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J.P. Morgan Securities Inc.
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Total
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10,000,000
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The underwriting agreement provides that the underwriters are
obligated to purchase all the shares of common stock in the
offering if any are purchased, other than those shares covered
by the over-allotment option described below. The underwriting
agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be
increased or the offering may be terminated.
We have granted to the underwriters a
30-day
option to purchase up to 1,500,000 additional shares at the
initial public offering price less the underwriting discounts
and commissions. The option may be exercised only to cover any
over-allotments of common stock. If any shares are purchased
pursuant to this option, the underwriters will purchase such
shares in approximately the same proportion as set forth in the
table above.
The underwriters propose to offer the shares of common stock
initially at the public offering price on the cover page of this
prospectus and to selling group members at that price less a
selling concession of $ per share.
The underwriters and selling group members may allow a discount
of $ per share on sales to other
broker/dealers. After the initial public offering, the
representatives may change the public offering price and
concession and discount to broker/dealers.
The following table summarizes the compensation and estimated
expenses we will pay:
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Per Share
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Total
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Without
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With
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Without
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With
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Over-Allotment
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Over-Allotment
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Over-Allotment
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Over-Allotment
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Underwriting discounts and commissions payable by us
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$
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$
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$
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$
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Expenses payable by us
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$
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$
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$
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$
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Qatalyst Partners LP is acting as our financial advisor in
connection with the offering. Qatalysts services consist
of (i) analyzing our business, condition and financial
position, (ii) preparing and implementing a plan for
identifying and selecting appropriate participants in the
underwriting syndicate, (iii) evaluating proposals that
were received from potential underwriters, (iv) negotiating
on our behalf the key terms of any contractual arrangements with
members of the underwriting syndicate, and (v) determining
various offering logistics. Qatalyst is not acting as an
underwriter and will not sell or offer to sell any securities
and will not identify, solicit or engage directly with potential
investors. In addition, Qatalyst will not underwrite or purchase
any of the offered securities or otherwise participate in any
such undertaking.
The underwriters have agreed to reimburse us for a portion of
our out-of-pocket expenses in connection with the offering in
the amount of
$ ,
representing the fees we have agreed to pay Qatalyst for acting
as our financial advisor. In addition, we have agreed to
reimburse Qatalyst for its out of pocket expenses in an amount
not to exceed $50,000.
The underwriters have informed us that they do not expect sales
to accounts over which the underwriters have discretionary
authority to exceed 5% of the shares of common stock being
offered.
115
We, along with our officers and directors and most of our other
stockholders and optionholders, have agreed that, subject to
certain exceptions we and they will not offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly,
any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock,
enter into a transaction that would have the same effect, or
enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of
ownership of our common stock, whether any of these transactions
are to be settled by delivery of our common stock or other
securities, in cash or otherwise, or publicly disclose the
intention to make any offer, sale, pledge or disposition, or to
enter into any transaction, swap, hedge or other arrangement,
without, in each case, the prior written consent of each of the
representatives for a period of 180 days after the date of
this prospectus. However, in the event that either
(1) during the last 17 days of the
lock-up
period, we release earnings results or announce material news or
a material event relating to us or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the
16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the announcement of the material news or event, as
applicable, unless each of the representatives waives, in
writing, such an extension.
We have agreed to indemnify the underwriters against liabilities
under the Securities Act, or contribute to payments that the
underwriters may be required to make in that respect.
We have applied to list the shares of common stock on The NASDAQ
Global Market under the symbol QNST.
Certain of the underwriters and their respective affiliates may
have from time to time performed and may in the future perform
various financial advisory, commercial banking and investment
banking services for us in the ordinary course of business, for
which they received or will receive customary fees. In addition,
affiliates of the representatives are lenders under our bank
credit facility.
Prior to the offering, there has been no market for our common
stock. The initial public offering price will be determined by
negotiation between us and the underwriters and will not
necessarily reflect the market price of the common stock
following the offering. The principal factors that will be
considered in determining the initial public offering price will
include:
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the information presented in this prospectus and otherwise
available to the underwriters;
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the history of and the prospects for the industry in which we
compete;
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the ability of our management;
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the prospects for our future earnings;
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the present state of our development and our current financial
condition;
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the recent market prices of, and the demand for, publicly-traded
common stock of generally comparable companies; and
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the general condition of the securities markets at the time of
the offering.
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We offer no assurances that the initial public offering price
will correspond to the price at which our common stock will
trade in the public market subsequent to the offering or that an
active trading market for the common stock will develop and
continue after the offering.
In connection with the offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Exchange Act.
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
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Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase
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116
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in the over-allotment option. In a naked short position, the
number of shares involved is greater than the number of shares
in the over-allotment option. The underwriters may close out any
covered short position by either exercising their over-allotment
option
and/or
purchasing shares in the open market.
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Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the 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 shares through
the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there could
be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who
purchase in the offering.
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Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
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In passive market making, market makers in the common stock who
are underwriters or prospective underwriters may, subject to
limitations, make bids for or purchases of our common stock
until the time, if any, at which a stabilizing bid is made.
|
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result
the price of our common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on The NASDAQ Global Market or otherwise and, if
commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters, or
selling group members, if any, participating in this offering,
and one or more of the underwriters participating in this
offering may distribute prospectuses electronically. The
representatives may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the underwriters and selling group members that
will make Internet distributions on the same basis as other
allocations.
Selling
Restrictions
Notice
to Prospective Investors in the European Economic Area / United
Kingdom
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive, each referred to
as a Relevant Member State, from and including the date on which
the Prospectus Directive is implemented in that Relevant Member
State (the Relevant Implementation Date), an offer to the public
of any shares which are the subject of the offering contemplated
by this prospectus may not be made in that Relevant Member
State, except that an offer to the public in that Relevant
Member State of any shares may be made at any time under the
following exemptions under the Prospectus Directive, if they
have been implemented in that Relevant Member State with effect
from and including the Relevant Implementation Date:
(a) to legal entities which are authorised or regulated to
operate in the financial markets or, if not so authorised 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) by the underwriters 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 underwriter representatives for any such
offer; or
117
(d) in any other circumstances falling within
Article 3(2) of the Prospectus Directive, provided that no
such offer of shares shall result in a requirement for the
publication by us or any underwriter of a prospectus pursuant to
Article 3 of the Prospectus Directive.
Any person making or intending to make any offer within the
European Economic Area of the shares which are the subject of
the offering contemplated in this prospectus should only do so
in circumstances in which no obligation arises for us or any of
the book-running managers to produce a prospectus for such
offer. Neither we nor the book-running managers have authorised,
nor do we or they authorize, the making of any offer of shares
through any financial intermediary, other than offers made by
the underwriters which constitute the final offering of shares
contemplated in this prospectus.
For the purposes of this provision, and the buyers
representation below, the expression an offer 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 any shares
to be offered so as to enable an investor to decide to purchase
any 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.
Buyers
Representation
Each person in a Relevant Member State who receives any
communication in respect of, or who acquires any shares which
are the subject of the offering contemplated by this prospectus
under, the offers contemplated in this prospectus will be deemed
to have represented, warranted and agreed to and with each
underwriter and us that:
(a) it is a qualified investor within the meaning of the
law in that Relevant Member State implementing
Article 2(1)(e) of the Prospectus Directive; and
(b) in the case of any shares acquired by it as a financial
intermediary, as that term is used in Article 3(2) of the
Prospectus Directive, (i) the shares acquired by it in the
offering have not been acquired on behalf of, nor have they been
acquired with a view to their offer or resale to, persons in any
Relevant Member State other than qualified investors
as defined in the Prospectus Directive, or in circumstances in
which the prior consent of the underwriter representatives has
been given to the offer or resale; or (ii) where shares
have been acquired by it on behalf of persons in any Relevant
Member State other than qualified investors, the offer of those
shares to it is not treated under the Prospectus Directive as
having been made to such persons.
Notice
to Prospective Investors in Switzerland
This document, as well as any other material relating to the
shares which are the subject of the offering contemplated by
this prospectus, do not constitute an issue prospectus pursuant
to Article 652a
and/or
1156
of the Swiss Code of Obligations. The shares will not be listed
on the SIX Swiss Exchange and, therefore, the documents relating
to the shares, including, but not limited to, this document, do
not claim to comply with the disclosure standards of the listing
rules of SIX Swiss Exchange and corresponding prospectus schemes
annexed to the listing rules of the SIX Swiss Exchange.
The shares are being offered in Switzerland by way of a private
placement, i.e., to a small number of selected investors only,
without any public offer and only to investors who do not
purchase shares with the intention to distribute them to the
public. The investors will be individually approached by us from
time to time. This document, as well as any other material
relating to the shares, is personal and confidential and does
not constitute an offer to any other person. This document may
only be used by those investors to whom it has been handed out
in connection with the offering described herein and may neither
directly nor indirectly be distributed or made available to
other persons without our express consent. It may not be used in
connection with any other offer and shall in particular not be
copied
and/or
distributed to the public in (or from) Switzerland.
118
Notice
to Prospective Investors in the Dubai International Financial
Centre
This document relates to an exempt offer in accordance with the
Offered Securities Rules of the Dubai Financial Services
Authority. This document is intended for distribution only to
persons of a type specified in those rules. It must not be
delivered to, or relied on by, any other person. The Dubai
Financial Services Authority has no responsibility for reviewing
or verifying any documents in connection with exempt offers. The
Dubai Financial Services Authority has not approved this
document nor taken steps to verify the information set out in
it, and has no responsibility for it. The shares which are the
subject of the offering contemplated by this prospectus may be
illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the shares offered should conduct their own due diligence on
the shares. If you do not understand the contents of this
document, you should consult an authorised financial adviser.
119
LEGAL
MATTERS
Certain legal matters with respect to the legality of the
issuance of the shares of common stock offered by us by this
prospectus will be passed upon for us by Cooley Godward Kronish
LLP, San Francisco, California. GC&H Investments LLC,
an investment fund affiliated with Cooley Godward Kronish LLP,
owns shares of our convertible preferred stock, which will
convert into an aggregate of 36,671 shares of our common
stock upon the completion of this offering. The underwriters are
being represented by Davis Polk & Wardwell LLP, Menlo
Park, California, in connection with the offering.
EXPERTS
The consolidated financial statements as of June 30, 2008
and 2009, and for each of the three years in the period ended
June 30, 2009, included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
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 on
Form S-1
under the Securities Act of 1933, as amended, with respect to
this offering of our common stock. This prospectus, which
constitutes a part of the registration statement, does not
contain all of the information set forth in the registration
statement, some items of which are contained in exhibits to the
registration statement as permitted by the rules and regulations
of the SEC. For further information with respect to us and our
common stock offered by this prospectus, we refer you to the
registration statement, including the exhibits and the
consolidated financial statements and notes filed as a part of
the registration statement. Statements contained in this
prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and in each
instance, we refer you to the copy of the contract or other
document filed as an exhibit to the registration statement. Each
of these statements is qualified in all respects by this
reference.
The exhibits to the registration statement should be referenced
for the complete contents of these contracts and documents. You
may obtain copies of this information by mail from the Public
Reference Section of the SEC, 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549, at prescribed
rates. You may obtain information on the operation of the public
reference rooms by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet website that contains
reports, proxy statements and other information about issuers,
like us, that file electronically with the SEC. The address of
that website is www.sec.gov.
Upon the closing of this offering, we will be subject to the
information reporting requirements of the Securities Act and we
will file reports, proxy statements and other information with
the SEC. These reports, proxy statements and other information
will be available for inspection and copying at the public
reference room and website of the SEC referred to above. We also
maintain a website at www.quinstreet.com, at which you may
access these materials free of charge as soon as reasonably
practicable after they are electronically filed with, or
furnished to, the SEC. The information contained in, or that can
be accessed through, our website is not part of this prospectus.
120
QUINSTREET,
INC.
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Page
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F-1
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F-2
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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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121
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
of QuinStreet, Inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of
convertible preferred stock, stockholders equity and
comprehensive income, and of cash flows present fairly, in all
material respects, the financial position of QuinStreet, Inc.
and its subsidiaries at June 30, 2008 and 2009, and the
results of their operations and their cash flows for each of the
three years in the period ended June 30, 2009 in conformity
with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the accompanying
financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related financial statements. These
financial statements and financial statements schedule are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements 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 and financial statement schedule are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 2 of the consolidated financial
statements, the Company changed the manner in which it accounts
for uncertainty in income taxes in 2007.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
November 19, 2009, except for Note 14
to the financial statements,
as to which the date is
January 14, 2010
F-1
QUINSTREET,
INC.
(In
thousands, except share and per share data)
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Pro Forma
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Stockholders
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Equity at
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June 30,
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September 30,
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September 30,
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2008
|
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2009
|
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2009
|
|
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2009
|
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(Unaudited)
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Assets
|
|
|
|
|
|
|
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|
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Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash and cash equivalents
|
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$
|
24,953
|
|
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$
|
25,182
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|
|
$
|
28,095
|
|
|
|
|
|
Marketable securities
|
|
|
2,302
|
|
|
|
|
|
|
|
|
|
|
|
|
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Accounts receivable, net
|
|
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25,281
|
|
|
|
33,283
|
|
|
|
39,015
|
|
|
|
|
|
Deferred tax assets
|
|
|
2,738
|
|
|
|
5,543
|
|
|
|
5,542
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
1,713
|
|
|
|
1,228
|
|
|
|
1,471
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|
|
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|
|
|
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|
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|
|
|
|
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|
|
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Total current assets
|
|
|
56,987
|
|
|
|
65,236
|
|
|
|
74,123
|
|
|
|
|
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Property and equipment, net
|
|
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5,725
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|
|
|
4,741
|
|
|
|
4,666
|
|
|
|
|
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Goodwill
|
|
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80,468
|
|
|
|
106,744
|
|
|
|
119,455
|
|
|
|
|
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Other intangible assets, net
|
|
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34,826
|
|
|
|
33,990
|
|
|
|
36,571
|
|
|
|
|
|
Deferred tax assets, noncurrent
|
|
|
247
|
|
|
|
1,525
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|
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|
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Other assets, noncurrent
|
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1,493
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|
|
|
642
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|
|
595
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Total assets
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$
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179,746
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$
|
212,878
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|
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$
|
235,410
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Liabilities, Convertible Preferred Stock and
Stockholders Equity
|
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Current liabilities
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|
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Accounts payable
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$
|
10,042
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|
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$
|
13,408
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|
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$
|
14,252
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|
|
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Accrued liabilities
|
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19,571
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|
|
|
21,794
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|
|
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26,024
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|
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Deferred revenue
|
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863
|
|
|
|
718
|
|
|
|
723
|
|
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Debt
|
|
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9,489
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|
|
|
12,890
|
|
|
|
13,182
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Total current liabilities
|
|
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39,965
|
|
|
|
48,810
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|
|
|
54,181
|
|
|
|
|
|
Deferred revenue, noncurrent
|
|
|
1,394
|
|
|
|
820
|
|
|
|
721
|
|
|
|
|
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Debt, noncurrent
|
|
|
42,165
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|
|
|
44,350
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|
|
|
52,995
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|
|
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Other liabilities, noncurrent
|
|
|
2,508
|
|
|
|
2,309
|
|
|
|
2,387
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|
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|
|
|
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|
|
|
|
|
|
|
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Total liabilities
|
|
|
86,032
|
|
|
|
96,289
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|
|
|
110,284
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|
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|
|
|
|
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|
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Commitments and contingencies (See Note 12)
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Convertible preferred stock: $0.001 par value;
35,500,000 shares authorized; 21,176,533 shares issued
and outstanding at June 30, 2008 and 2009 and
September 30, 2009; liquidation value of $69,564 and
$70,333 at June 30, 2009 and September 30, 2009,
respectively; no shares issued and outstanding pro forma
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|
43,403
|
|
|
|
43,403
|
|
|
|
43,403
|
|
|
$
|
|
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|
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|
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Stockholders equity:
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Common stock: $0.001 par value; 50,500,000 shares authorized;
15,243,284, 15,413,000 and 15,624,890 shares issued, and
13,308,907, 13,315,348 and 13,455,343 shares outstanding at
June 30, 2008 and 2009 and September 30, 2009,
respectively; 36,801,423 shares issued pro forma and
34,631,876 shares outstanding pro forma
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15
|
|
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|
15
|
|
|
|
16
|
|
|
|
37
|
|
Additional paid-in capital
|
|
|
13,683
|
|
|
|
20,634
|
|
|
|
23,252
|
|
|
|
66,634
|
|
Treasury stock, at cost (1,934,377, 2,097,652, 2,169,547 shares
at June 30, 2008 and 2009 and September 30, 2009,
respectively)
|
|
|
(5,727
|
)
|
|
|
(7,064
|
)
|
|
|
(7,641
|
)
|
|
|
(7,641
|
)
|
Accumulated other comprehensive income
|
|
|
34
|
|
|
|
21
|
|
|
|
3
|
|
|
|
3
|
|
Retained earnings
|
|
|
42,306
|
|
|
|
59,580
|
|
|
|
66,093
|
|
|
|
66,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
50,311
|
|
|
|
73,186
|
|
|
|
81,723
|
|
|
$
|
125,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, convertible preferred stock and
stockholders equity
|
|
$
|
179,746
|
|
|
$
|
212,878
|
|
|
$
|
235,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
QUINSTREET,
INC.
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Net revenue
|
|
$
|
167,370
|
|
|
$
|
192,030
|
|
|
$
|
260,527
|
|
|
$
|
63,678
|
|
|
$
|
78,552
|
|
Cost of revenue(1)
|
|
|
108,945
|
|
|
|
130,869
|
|
|
|
181,593
|
|
|
|
45,281
|
|
|
|
55,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
58,425
|
|
|
|
61,161
|
|
|
|
78,934
|
|
|
|
18,397
|
|
|
|
23,505
|
|
Operating expenses:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
14,094
|
|
|
|
14,051
|
|
|
|
14,887
|
|
|
|
3,757
|
|
|
|
4,470
|
|
Sales and marketing
|
|
|
8,487
|
|
|
|
12,409
|
|
|
|
16,154
|
|
|
|
4,259
|
|
|
|
3,625
|
|
General and administrative
|
|
|
11,440
|
|
|
|
13,371
|
|
|
|
13,172
|
|
|
|
3,736
|
|
|
|
3,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
24,404
|
|
|
|
21,330
|
|
|
|
34,721
|
|
|
|
6,645
|
|
|
|
11,969
|
|
Interest income
|
|
|
1,905
|
|
|
|
1,482
|
|
|
|
245
|
|
|
|
90
|
|
|
|
9
|
|
Interest expense
|
|
|
(732
|
)
|
|
|
(1,214
|
)
|
|
|
(3,544
|
)
|
|
|
(763
|
)
|
|
|
(748
|
)
|
Other income (expense), net
|
|
|
(139
|
)
|
|
|
145
|
|
|
|
(239
|
)
|
|
|
51
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
25,438
|
|
|
|
21,743
|
|
|
|
31,183
|
|
|
|
6,023
|
|
|
|
11,350
|
|
Provision for taxes
|
|
|
(9,828
|
)
|
|
|
(8,876
|
)
|
|
|
(13,909
|
)
|
|
|
(2,719
|
)
|
|
|
(4,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,610
|
|
|
$
|
12,867
|
|
|
$
|
17,274
|
|
|
$
|
3,304
|
|
|
$
|
6,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4,644
|
|
|
$
|
3,666
|
|
|
$
|
5,399
|
|
|
$
|
958
|
|
|
$
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
5,166
|
|
|
$
|
4,026
|
|
|
$
|
5,798
|
|
|
$
|
1,035
|
|
|
$
|
2,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
|
$
|
0.28
|
|
|
$
|
0.41
|
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
0.26
|
|
|
$
|
0.39
|
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net income per share
attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,789
|
|
|
|
13,104
|
|
|
|
13,294
|
|
|
|
13,279
|
|
|
|
13,405
|
|
Diluted
|
|
|
15,263
|
|
|
|
15,325
|
|
|
|
14,971
|
|
|
|
15,131
|
|
|
|
15,381
|
|
Pro forma net income per share attributable to common
stockholders (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.50
|
|
|
|
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.48
|
|
|
|
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares used in computing net income
per share attributable to common stockholders (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
34,471
|
|
|
|
|
|
|
|
34,582
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
36,148
|
|
|
|
|
|
|
|
36,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Cost of revenue and operating expenses for the
years ended June 30, 2007, 2008 and 2009, and for the three
months ended September 30, 2008 and 2009 (unaudited),
include stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
416
|
|
|
$
|
1,112
|
|
|
$
|
1,916
|
|
|
$
|
470
|
|
|
$
|
728
|
|
Product development
|
|
|
75
|
|
|
|
443
|
|
|
|
669
|
|
|
|
161
|
|
|
|
253
|
|
Sales and marketing
|
|
|
226
|
|
|
|
581
|
|
|
|
1,761
|
|
|
|
416
|
|
|
|
507
|
|
General and administrative
|
|
|
1,354
|
|
|
|
1,086
|
|
|
|
1,827
|
|
|
|
351
|
|
|
|
741
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
QUINSTREET,
INC.
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Shares
|
|
|
|
Shares
|
|
|
Treasury Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Equity
|
|
|
Income
|
|
Balance at June 30, 2006
|
|
|
21,176,533
|
|
|
$
|
43,286
|
|
|
|
|
13,969,057
|
|
|
$
|
14
|
|
|
|
(1,375,647
|
)
|
|
$
|
(121
|
)
|
|
$
|
2,855
|
|
|
$
|
(49
|
)
|
|
$
|
15,651
|
|
|
$
|
18,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
381,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
714
|
|
|
|
|
|
|
|
|
|
|
|
714
|
|
|
|
|
|
Stock options issued in connection with business combination
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
125
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,071
|
|
|
|
|
|
|
|
|
|
|
|
2,071
|
|
|
|
|
|
Excess tax benefits from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
415
|
|
|
|
|
|
Accretion of convertible preferred stock
|
|
|
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117
|
)
|
|
|
(117
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,610
|
|
|
|
15,610
|
|
|
$
|
15,610
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
|
|
|
|
|
|
143
|
|
|
|
143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007
|
|
|
21,176,533
|
|
|
$
|
43,403
|
|
|
|
|
14,350,087
|
|
|
$
|
14
|
|
|
|
(1,375,647
|
)
|
|
$
|
(121
|
)
|
|
$
|
6,180
|
|
|
$
|
95
|
|
|
$
|
31,144
|
|
|
$
|
37,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
893,197
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
2,575
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,222
|
|
|
|
|
|
|
|
|
|
|
|
3,222
|
|
|
|
|
|
Excess tax benefits from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,707
|
|
|
|
|
|
|
|
|
|
|
|
1,707
|
|
|
|
|
|
Repurchase of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(558,730
|
)
|
|
|
(5,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,606
|
)
|
|
|
|
|
Cumulative effect of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,705
|
)
|
|
|
(1,705
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,867
|
|
|
|
12,867
|
|
|
$
|
12,867
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
|
|
10
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
(71
|
)
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
21,176,533
|
|
|
$
|
43,403
|
|
|
|
|
15,243,284
|
|
|
$
|
15
|
|
|
|
(1,934,377
|
)
|
|
$
|
(5,727
|
)
|
|
$
|
13,683
|
|
|
$
|
34
|
|
|
$
|
42,306
|
|
|
$
|
50,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
169,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,173
|
|
|
|
|
|
|
|
|
|
|
|
6,173
|
|
|
|
|
|
Excess tax benefits from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
474
|
|
|
|
|
|
Repurchase of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163,275
|
)
|
|
|
(1,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,337
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,274
|
|
|
|
17,274
|
|
|
$
|
17,274
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
(10
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
|
21,176,533
|
|
|
$
|
43,403
|
|
|
|
|
15,413,000
|
|
|
$
|
15
|
|
|
|
(2,097,652
|
)
|
|
$
|
(7,064
|
)
|
|
$
|
20,634
|
|
|
$
|
21
|
|
|
$
|
59,580
|
|
|
$
|
73,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares upon exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
211,890
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
296
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,229
|
|
|
|
|
|
|
|
|
|
|
|
2,229
|
|
|
|
|
|
Excess tax benefits from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
Repurchase of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(71,895
|
)
|
|
|
(577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(577
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,513
|
|
|
|
6,513
|
|
|
$
|
6,513
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
(18
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 (unaudited)
|
|
|
21,176,533
|
|
|
$
|
43,403
|
|
|
|
|
15,624,890
|
|
|
$
|
16
|
|
|
|
(2,169,547
|
)
|
|
$
|
(7,641
|
)
|
|
$
|
23,252
|
|
|
$
|
3
|
|
|
$
|
66,093
|
|
|
$
|
81,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
QUINSTREET,
INC.
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Fiscal Years Ended June 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,610
|
|
|
$
|
12,867
|
|
|
$
|
17,274
|
|
|
$
|
3,304
|
|
|
$
|
6,513
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,637
|
|
|
|
11,727
|
|
|
|
15,978
|
|
|
|
4,114
|
|
|
|
3,952
|
|
Net realized (gain) loss on disposal of property and equipment
|
|
|
8
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
(81
|
)
|
|
|
(5
|
)
|
Provision for doubtful accounts receivable
|
|
|
426
|
|
|
|
106
|
|
|
|
10
|
|
|
|
22
|
|
|
|
(36
|
)
|
Provision for sales returns
|
|
|
356
|
|
|
|
1,040
|
|
|
|
1,463
|
|
|
|
953
|
|
|
|
252
|
|
Stock-based compensation
|
|
|
2,071
|
|
|
|
3,222
|
|
|
|
6,173
|
|
|
|
1,398
|
|
|
|
2,229
|
|
Excess tax benefits from exercise of stock options
|
|
|
(415
|
)
|
|
|
(1,707
|
)
|
|
|
(474
|
)
|
|
|
(559
|
)
|
|
|
(94
|
)
|
Accretion of acquisition-related notes payable
|
|
|
421
|
|
|
|
404
|
|
|
|
563
|
|
|
|
154
|
|
|
|
107
|
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(472
|
)
|
|
|
(921
|
)
|
|
|
(9,042
|
)
|
|
|
(8,577
|
)
|
|
|
(5,849
|
)
|
Prepaid expenses and other assets
|
|
|
(656
|
)
|
|
|
(228
|
)
|
|
|
485
|
|
|
|
(925
|
)
|
|
|
(236
|
)
|
Other assets, noncurrent
|
|
|
17
|
|
|
|
(555
|
)
|
|
|
(710
|
)
|
|
|
99
|
|
|
|
44
|
|
Deferred tax assets
|
|
|
82
|
|
|
|
(3,772
|
)
|
|
|
(4,081
|
)
|
|
|
6
|
|
|
|
|
|
Accounts payable
|
|
|
3,440
|
|
|
|
(4,977
|
)
|
|
|
3,359
|
|
|
|
1,905
|
|
|
|
843
|
|
Accrued liabilities
|
|
|
(831
|
)
|
|
|
8,020
|
|
|
|
2,491
|
|
|
|
(1,864
|
)
|
|
|
4,229
|
|
Deferred revenue
|
|
|
(2,893
|
)
|
|
|
(954
|
)
|
|
|
(720
|
)
|
|
|
(135
|
)
|
|
|
(116
|
)
|
Deferred tax liabilities
|
|
|
(1,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities, noncurrent
|
|
|
(107
|
)
|
|
|
514
|
|
|
|
(199
|
)
|
|
|
(75
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
25,197
|
|
|
|
24,751
|
|
|
|
32,570
|
|
|
|
(261
|
)
|
|
|
11,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(33
|
)
|
|
|
(23
|
)
|
|
|
711
|
|
|
|
715
|
|
|
|
3
|
|
Proceeds from sales of property and equipment
|
|
|
2
|
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
Capital expenditures
|
|
|
(2,030
|
)
|
|
|
(2,177
|
)
|
|
|
(1,347
|
)
|
|
|
(504
|
)
|
|
|
(443
|
)
|
Business acquisitions, net of notes payable and cash acquired
|
|
|
(11,856
|
)
|
|
|
(63,244
|
)
|
|
|
(27,932
|
)
|
|
|
(12,430
|
)
|
|
|
(11,763
|
)
|
Internal software development costs
|
|
|
(1,493
|
)
|
|
|
(1,378
|
)
|
|
|
(1,060
|
)
|
|
|
(346
|
)
|
|
|
(316
|
)
|
Purchases of marketable securities
|
|
|
(40,860
|
)
|
|
|
(11,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of marketable securities
|
|
|
29,905
|
|
|
|
29,172
|
|
|
|
2,302
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(26,365
|
)
|
|
|
(49,248
|
)
|
|
|
(27,326
|
)
|
|
|
(11,182
|
)
|
|
|
(12,475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bank debt
|
|
|
|
|
|
|
29,000
|
|
|
|
8,607
|
|
|
|
8,500
|
|
|
|
6,500
|
|
Principal payments on bank debt
|
|
|
|
|
|
|
|
|
|
|
(3,500
|
)
|
|
|
|
|
|
|
(750
|
)
|
Principal payments on acquisition-related notes payable
|
|
|
(3,932
|
)
|
|
|
(4,920
|
)
|
|
|
(9,560
|
)
|
|
|
(1,362
|
)
|
|
|
(1,963
|
)
|
Excess tax benefits from exercise of stock options
|
|
|
415
|
|
|
|
1,707
|
|
|
|
474
|
|
|
|
559
|
|
|
|
94
|
|
Repurchases of common stock
|
|
|
|
|
|
|
(5,606
|
)
|
|
|
(1,337
|
)
|
|
|
(982
|
)
|
|
|
(577
|
)
|
Proceeds from exercise of common stock options
|
|
|
714
|
|
|
|
2,575
|
|
|
|
304
|
|
|
|
173
|
|
|
|
296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,803
|
)
|
|
|
22,756
|
|
|
|
(5,012
|
)
|
|
|
6,888
|
|
|
|
3,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
143
|
|
|
|
(71
|
)
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(20
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(3,828
|
)
|
|
|
(1,812
|
)
|
|
|
229
|
|
|
|
(4,554
|
)
|
|
|
2,913
|
|
Cash and cash equivalents at beginning of period
|
|
|
30,593
|
|
|
|
26,765
|
|
|
|
24,953
|
|
|
|
24,953
|
|
|
|
25,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
26,765
|
|
|
$
|
24,953
|
|
|
$
|
25,182
|
|
|
$
|
20,399
|
|
|
$
|
28,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
348
|
|
|
|
1,193
|
|
|
|
2,269
|
|
|
|
282
|
|
|
|
770
|
|
Cash paid for taxes
|
|
|
10,376
|
|
|
|
8,473
|
|
|
|
20,354
|
|
|
|
2,873
|
|
|
|
814
|
|
Supplemental disclosure of noncash investing and financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of convertible preferred stock
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options issued in connection with business acquisitions
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable issued in connection with business acquisitions
|
|
|
4,047
|
|
|
|
16,910
|
|
|
|
8,151
|
|
|
|
4,705
|
|
|
|
6,347
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
QUINSTREET,
INC.
(In
thousands, except share and per share data)
QuinStreet, Inc. (the Company) is an online media
and marketing company incorporated in California on
April 16, 1999. The Company provides vertically oriented
customer acquisition programs for its clients. The Company also
provides hosted solutions for direct selling companies. The
corporate headquarters are located in Foster City, California,
with offices in Arkansas, Colorado, Massachusetts, Nevada, New
Jersey, North Carolina, Oklahoma, Oregon, India and the United
Kingdom.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Consolidation
The consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Unaudited
Interim Financial Information
The accompanying consolidated balance sheet as of
September 30, 2009, the consolidated statements of
operations and of cash flows for the three months ended
September 30, 2008 and 2009 and of convertible preferred
stock, stockholders equity and comprehensive income for
the three months ended September 30, 2009 are unaudited.
The unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include
only normal recurring adjustments, necessary to present fairly
the Companys financial condition and results of operations
and cash flows for the three months ended September 30,
2008 and 2009. The financial data and other information
disclosed in these notes to the consolidated financial
statements related to the three months ended September 30,
2008 and 2009 are unaudited. The results of operations for the
three months ended September 30, 2009 are not necessarily
indicative of the results to be expected for fiscal year 2010 or
for any other interim period or for any other future year.
Pro
Forma Statement of Stockholders Equity
(unaudited)
Upon the consummation of a qualifying initial public offering,
all of the outstanding shares of convertible preferred stock
automatically convert into common stock. The September 30,
2009 unaudited pro forma balance sheet data has been prepared
assuming the conversion of the convertible preferred stock
outstanding into 21,176,533 shares of common stock.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and
expenses during the reporting period. Actual results could
differ from those estimates.
Revenue
Recognition
The Company derives its revenue from two sources: Direct
Marketing Services (DMS) and Direct Selling Services
(DSS). DMS revenue, which constituted 95%, 98% and
99% of fiscal years 2007, 2008 and 2009 respectively, is derived
primarily from fees which are earned through the delivery of
qualified leads or clicks. The Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable and collectability is
reasonably assured. Delivery is deemed to have
F-6
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
occurred at the time a qualified lead or click is delivered to
the customer provided that no significant obligations remain.
From time to time, the Company may agree to credit certain leads
or clicks if they fail to meet the contractual or other
guidelines of a particular client. The Company has established a
sales reserve based on historical experience. To date, such
credits have been immaterial and within managements
expectations.
For a portion of its revenue, the Company has agreements with
providers of online media or traffic (Publishers)
used in the generation of leads or clicks. The Company receives
a fee from its clients and pays a fee to Publishers either on a
cost per lead, cost per click or cost per thousand impressions
basis. The Company is the primary obligor in the transaction. As
a result, the fees paid by the Companys clients are
recognized as revenue and the fees paid to its Publishers are
included in cost of revenue.
DSS revenue, which constituted 5%, 2% and 1% of fiscal years
2007, 2008 and 2009 revenue, respectively, is comprised of
(i) set-up
and professional services fees and (ii) usage and hosting
fees.
Set-up
and professional service fees that do not provide stand-alone
value to a client are recognized over the contractual term of
the agreement or the expected client relationship period,
whichever is longer, effective when the application reaches the
go-live date. The Company defines the
go-live date as the date when the application enters
into a production environment or all essential functionalities
have been delivered. Usage and hosting fees are recognized on a
monthly basis as earned.
Deferred revenue consists of billings or payments received in
advance of reaching all the above revenue recognition criteria.
Concentrations
of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash and cash equivalents and accounts receivable. Cash and cash
equivalents are deposited with financial institutions that
management believes are creditworthy. The deposits exceed
federally insured amounts. To date, the Company has not
experienced any losses of its deposits of cash and cash
equivalents.
The Companys accounts receivable are derived from clients
located principally in the United States, and to a lesser
extent, Europe and Canada. The Company performs ongoing credit
evaluation of its clients, does not require collateral, and
maintains allowances for potential credit losses on client
accounts when deemed necessary. To date, such losses have been
within managements expectations.
Clients over 10% of total revenue, all of which were from our
DMS segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Fiscal Year Ended June 30,
|
|
September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Client A
|
|
|
22
|
%
|
|
|
23
|
%
|
|
|
19
|
%
|
|
|
20
|
%
|
|
|
13
|
%
|
Client B
|
|
|
15
|
%
|
|
|
12
|
%
|
|
|
6
|
%
|
|
|
8
|
%
|
|
|
6
|
%
|
Client C
|
|
|
13
|
%
|
|
|
11
|
%
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
6
|
%
|
Fair
Value of Financial Instruments
The Companys financial instruments consist principally of
cash and cash equivalents, accounts receivable, accounts
payable, acquisition-related notes payable, term loan and
revolving credit facility. The fair value of the Companys
cash equivalents is determined based on quoted prices in active
markets for identical assets. The recorded values of the
Companys accounts receivable and accounts payable
approximate their
F-7
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
current fair values due to the relatively short-term nature of
these accounts. The fair value of acquisition-related notes
payable approximates their recorded amounts at June 30,
2009 as the interest rates on similar financing arrangements
available to the Company at June 30, 2009 approximates the
interest rates implied when these acquisition-related notes
payable were originally issued and recorded. The Company
believes that the fair values of the term loan and revolving
credit facility, as of June 30, 2009, approximate their
recorded amounts as the interest rates on these instruments are
variable and are primarily based on market rate interest.
Cash
and Cash Equivalents
All highly liquid investments with maturities of three months or
less at the date of purchase are classified as cash equivalents.
Cash equivalents consist primarily of money market funds and
time deposits with original maturities of three months or less.
Cash equivalents amounted to $9,395 and $17,091 at June 30,
2008 and 2009, respectively, and $8,813 at September 30,
2009 (unaudited).
Marketable
Securities
Highly liquid investments with maturities greater than three
months at the date of purchase are classified as marketable
securities. The Companys marketable securities have been
classified and accounted for as
available-for-sale.
Management determines the appropriate classification of its
investments at the time of purchase and reevaluates the
available-for-sale
designation as of each balance sheet date. These investments are
carried at fair value, with unrealized gains and losses, net of
tax, and are reported as a component of stockholders
equity. The cost of securities sold is based upon the specific
identification method. The Company did not have any marketable
securities at June 30, 2009 and at September 30, 2009
(unaudited). At June 30, 2008, marketable securities
consisted of corporate bonds from three issuers with a fair
value of $2,302.
Restricted
Cash
At June 30, 2008 and 2009, the Company had $731 and $20,
respectively, of cash restricted from withdrawal and held by a
bank in certificate of deposits as collateral for a credit
facility.
Property
and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization, and are depreciated on a
straight-line basis over the estimated useful lives of the
assets.
|
|
|
Computer equipment
|
|
3 years
|
Software
|
|
3 years
|
Furniture and fixtures
|
|
3 to 5 years
|
Leasehold improvements
|
|
the shorter of the lease term or the estimated useful lives of
the improvements
|
Internal
Software Development Costs
The Company incurs costs to develop software for internal use.
The Company expenses all costs that relate to the planning and
post-implementation phases of development as product development
expense. Costs incurred in the development phase are capitalized
and amortized over the products estimated useful life if
the product is expected to have a useful life beyond six months.
Costs associated with repair or maintenance of existing sites or
the developments of website content are included in cost of
revenue in the accompanying statements of operations. The
Companys policy is to amortize capitalized internal
software development costs on a product-by-product basis using
the straight-line method over the estimated economic life of the
application, which is generally two years. The Company
capitalized $1,493, $1,378 and $1,060 in fiscal years
F-8
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
2007, 2008 and 2009, respectively. Amortization of internal
software development costs is reflected in cost of revenue.
Goodwill
Goodwill is tested for impairment at the reporting unit level on
an annual basis and whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable.
Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assigning
assets and liabilities to reporting units, assigning goodwill to
reporting units, and determining the fair value of each
reporting unit. Significant judgments required to estimate the
fair value of reporting units include estimating future cash
flows, and determining appropriate discount rates, growth rates
and other assumptions. Changes in these estimates and
assumptions could materially affect the determination of fair
value for each reporting unit which could trigger impairment.
The Company determined that DMS and DSS constitute two separate
reporting units. The Company completed its annual goodwill
impairment reviews at June 30, 2007, 2008 and 2009 and
concluded that goodwill was not impaired.
Long-Lived
Assets
The Company evaluates long-lived assets, such as property and
equipment and purchased intangible assets with finite lives, for
impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. The
Company assesses the fair value of the assets based on the
undiscounted future cash flow the assets are expected to
generate and recognizes an impairment loss when estimated
undiscounted future cash flows expected to result from the use
of the asset plus net proceeds expected from disposition of the
asset, if any, are less than the carrying value of the asset.
When the Company identifies an impairment, it reduces the
carrying amount of the asset to its estimated fair value based
on a discounted cash flow approach or, when available and
appropriate, to comparable market values. There were no
impairments recorded in fiscal years 2007, 2008 and 2009 related
to the Companys long-lived assets.
Advertising
Costs
The Company expenses advertising costs as they are incurred.
Advertising expenses for fiscal years 2007, 2008 and 2009 were
$54, $67 and $185, respectively.
Income
Taxes
The Company accounts for income taxes using an asset and
liability approach to record deferred taxes. The Companys
deferred income tax assets represent temporary differences
between the financial statement carrying amount and the tax
basis of existing assets and liabilities that will result in
deductible amounts in future years, including net operating loss
carry forwards. Based on estimates, the carrying value of the
Companys net deferred tax assets assumes that it is more
likely than not that the Company will be able to generate
sufficient future taxable income in certain tax jurisdictions.
The Companys judgments regarding future profitability may
change due to future market conditions, changes in U.S. or
international tax laws and other factors.
On July 1, 2007, the Company adopted the authoritative
accounting guidance prescribing a threshold and measurement
attribute for the financial recognition and measurement of a tax
position taken or expected to be taken in a tax return. The
guidance also provides for de-recognition of tax benefits,
classification on the balance sheet, interest and penalties,
accounting in interim periods, disclosure and transition. The
guidance utilizes a two-step approach for evaluating uncertain
tax positions. Step one, Recognition, requires a company
F-9
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
to determine if the weight of available evidence indicates that
a tax position is more likely than not to be sustained upon
audit, including resolution of related appeals or litigation
processes, if any. If a tax position is not considered
more likely than not to be sustained then no
benefits of the position are to be recognized. Step two,
Measurement, is based on the largest amount of benefit, which is
more likely than not to be realized on ultimate settlement.
Foreign
Currency Translation
The functional currency for the majority of the Companys
foreign subsidiaries is the U.S. dollar. For those
subsidiaries, assets and liabilities denominated in foreign
currency are remeasured into U.S. dollars at current
exchange rates for monetary assets and liabilities and
historical exchange rates for nonmonetary assets and
liabilities. Net revenue, cost of revenue and expenses are
generally remeasured at average exchange rates in effect during
each period. Gains and losses from foreign currency
remeasurement are included in net earnings. Certain foreign
subsidiaries designate the local currency as their functional
currency. For those subsidiaries, the assets and liabilities are
translated into U.S. dollars at exchange rates in effect at
the balance sheet date. Income and expense items are translated
at average exchange rates for the period. The foreign currency
translation adjustments are included in accumulated other
comprehensive income (loss) as a separate component of
stockholders equity.
Foreign currency transaction gains or losses are recorded in
other income (expense), net. Foreign currency transaction losses
were $97 for fiscal year 2007. Foreign currency transaction
gains were $101 for fiscal year 2008. Foreign currency
transaction losses were $254 for fiscal year 2009.
Comprehensive
Income
Comprehensive income consists of two components, net income and
other comprehensive income (loss). Other comprehensive income
(loss) refers to revenue, expenses, gains, and losses that under
U.S. generally accepted accounting principles are recorded
as an element of stockholders equity but are excluded from
net income. The Companys other comprehensive income (loss)
consists of foreign currency translation adjustments from those
subsidiaries not using the U.S. dollar as their functional
currency and unrealized gains and losses on marketable
securities categorized as
available-for-sale.
The Company has disclosed comprehensive income as a component of
stockholders equity.
Loss
Contingencies
The Company is subject to the possibility of various loss
contingencies arising in the ordinary course of business.
Management considers the likelihood of loss or impairment of an
asset or the incurrence of a liability, as well as its ability
to reasonably estimate the amount of loss, in determining loss
contingencies. An estimated loss contingency is accrued when it
is probable that an asset has been impaired or a liability has
been incurred and the amount of loss can be reasonably
estimated. The Company regularly evaluates current information
available to its management to determine whether such accruals
should be adjusted and whether new accruals are required.
From time to time, the Company is involved in disputes,
litigation and other legal actions. The Company records a charge
equal to at least the minimum estimated liability for a loss
contingency only when both of the following conditions are met:
(i) information available prior to issuance of the
financial statements indicates that it is probable that an asset
had been impaired or a liability had been incurred at the date
of the financial statements, and (ii) the range of loss can
be reasonably estimated. The actual liability in any such
matters may be materially different from the Companys
estimates, which could result in the need to adjust the
liability and record additional expenses.
F-10
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Stock-Based
Compensation
The Company records stock-based compensation expense for
employee stock options granted or modified on or after
July 1, 2006 based on estimated fair values for these stock
options. The Company continues to account for stock options
granted to employees prior to July 1, 2006 based on the
intrinsic value of those stock options.
Fair values of share-based payment awards are determined on the
date of grant using an option-pricing model. The Company has
selected the Black-Scholes option pricing model to estimate the
fair value of its stock options awards to employees. In applying
the Black-Scholes option pricing model, the Companys
determination of fair value of the share-based payment award on
the date of grant is affected by the Companys estimated
fair value of common shares, as well as assumptions regarding a
number of highly complex and subjective variables. These
variables include, but are not limited to, the Companys
expected stock price volatility over the term of the stock
options and the employees actual and projected stock
option exercise and pre-vesting employment termination behaviors.
For awards with graded vesting, the Company recognizes
stock-based compensation expense over the requisite service
period using the straight-line method, based on awards
ultimately expected to vest. The Company estimates future
forfeitures at the date of grant and revises the estimates, if
necessary, in subsequent periods if actual forfeitures differ
from those estimates.
See Note 10 for further information.
Segment
Reporting
Operating segments are defined as components of an enterprise
about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and
in assessing performance. The Companys chief operating
decision maker is its chief executive officer. The
Companys chief executive officer reviews financial
information presented on a consolidated basis, accompanied by
information about operating segments, including net sales and
operating income before depreciation, amortization and
stock-based compensation expense.
The Company determined its operating segments to be DMS, which
derives substantially all of its revenue from fees earned
through the delivery of qualified leads and paid clicks, and
DSS, which derives substantially all of its revenue from the
sale of direct selling services through a hosted solution. The
Companys reportable operating segments consist of DMS and
DSS. The accounting policies of the two reportable operating
segments are the same as those described in Note 1, Summary
of Significant Accounting Policies.
The Company evaluates the performance of its operating segments
based on net sales and operating income before depreciation,
amortization and stock-based compensation expense.
F-11
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
The Company does not allocate most of its assets, as well as its
depreciation and amortization expense, stock-based compensation
expense, interest income, interest expense and income tax
expense by segment. Accordingly, the Company does not report
such information.
Summarized information by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Net revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS
|
|
$
|
159,744
|
|
|
$
|
188,429
|
|
|
$
|
257,420
|
|
|
$
|
62,994
|
|
|
|
78,157
|
|
DSS
|
|
|
7,626
|
|
|
|
3,601
|
|
|
|
3,107
|
|
|
|
684
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
167,370
|
|
|
$
|
192,030
|
|
|
$
|
260,527
|
|
|
$
|
63,678
|
|
|
$
|
78,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income before depreciation, amortization and
stock-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS
|
|
|
31,611
|
|
|
|
34,740
|
|
|
|
55,251
|
|
|
|
11,922
|
|
|
|
18,002
|
|
DSS
|
|
|
4,501
|
|
|
|
1,539
|
|
|
|
1,621
|
|
|
|
235
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income before depreciation, amortization
and stock-based compensation expense
|
|
|
36,112
|
|
|
|
36,279
|
|
|
|
56,872
|
|
|
|
12,157
|
|
|
|
18,150
|
|
Depreciation and amortization
|
|
|
(9,637
|
)
|
|
|
(11,727
|
)
|
|
|
(15,978
|
)
|
|
|
(4,114
|
)
|
|
|
(3,952
|
)
|
Stock-based compensation expense
|
|
|
(2,071
|
)
|
|
|
(3,222
|
)
|
|
|
(6,173
|
)
|
|
|
(1,398
|
)
|
|
|
(2,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
24,404
|
|
|
$
|
21,330
|
|
|
$
|
34,721
|
|
|
$
|
6,645
|
|
|
$
|
11,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth net revenue and long-lived assets
by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
167,141
|
|
|
$
|
191,654
|
|
|
$
|
260,206
|
|
|
$
|
63,630
|
|
|
$
|
78,475
|
|
Europe
|
|
|
229
|
|
|
|
376
|
|
|
|
321
|
|
|
|
48
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
167,370
|
|
|
$
|
192,030
|
|
|
$
|
260,527
|
|
|
$
|
63,678
|
|
|
$
|
78,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
177,854
|
|
|
$
|
211,337
|
|
|
$
|
233,902
|
|
Europe
|
|
|
1,224
|
|
|
|
927
|
|
|
|
806
|
|
Asia/Pacific
|
|
|
668
|
|
|
|
614
|
|
|
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
179,746
|
|
|
$
|
212,878
|
|
|
$
|
235,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
5,451
|
|
|
$
|
4,485
|
|
|
$
|
4,412
|
|
Europe
|
|
|
22
|
|
|
|
35
|
|
|
|
|
|
Asia/Pacific
|
|
|
252
|
|
|
|
221
|
|
|
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
5,725
|
|
|
$
|
4,741
|
|
|
$
|
4,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board
(FASB) issued a new accounting standard that changes
the accounting for business combinations, including the
measurement of acquirer shares issued in consideration for a
business combination, the recognition of contingent
consideration, the accounting for pre-acquisition gain and loss
contingencies, the recognition of capitalized in-process
research and development, the accounting for acquisition-related
restructuring cost accruals, the treatment of
acquisition-related transaction costs and the recognition of
changes in the acquirers income tax valuation allowance.
The new standard applies prospectively to business combinations
for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after
December 15, 2008. The adoption of the new standard did not
have a material impact on the Companys consolidated
financial statements, but is likely to have a material impact on
how the Company accounts for any future business combinations
into which the Company may enter.
In May 2009, the FASB issued a new accounting standard that
establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued. In particular, the new standard
sets forth (i) the period after the balance sheet date
during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition
or disclosure in the financial statements; (ii) the
circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its
financial statements; and (3) the disclosures that an
entity should make about events or transactions that occurred
after the balance sheet date. The Company applied the
requirement of this standard effective June 30, 2009 and
included additional disclosures in the notes to the
Companys consolidated financial statements.
In June 2009, the FASB issued a new accounting standard that
provides for a codification of accounting standards to be the
authoritative source of generally accepted accounting principles
in the United States. Rules and interpretive releases of the SEC
under federal securities laws are also sources of authoritative
GAAP for SEC registrants. The Company adopted the provisions of
the authoritative accounting guidance for the interim reporting
period ended September 30, 2009. The adoption did not have
a material effect on the Companys consolidated results of
operations or financial condition.
In October 2009, the FASB issued a new accounting standard that
changes the accounting for arrangements with multiple
deliverables. Specifically, the new standard requires an entity
to allocate
F-13
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
arrangement consideration at the inception of an arrangement to
all of its deliverables based on their relative selling prices.
In addition, the new standard eliminates the use of the residual
method of allocation and requires the relative-selling-price
method in all circumstances in which an entity recognizes
revenue for an arrangement with multiple deliverables. In
October 2009, the FASB also issued a new accounting standard
that changes revenue recognition for tangible products
containing software and hardware elements. Specifically, if
certain requirements are met, revenue arrangements that contain
tangible products with software elements that are essential to
the functionality of the products are scoped out of the existing
software revenue recognition accounting guidance and will be
accounted for under the multiple-element arrangements revenue
recognition guidance discussed above. Both standards will be
effective for the Company in the first quarter of fiscal year
2011. Early adoption is permitted. The Company does not
anticipate the adoption of these standards to have a material
impact on its consolidated financial statements.
|
|
3.
|
Revision
of prior period financial statements
|
Stock-Based
Compensation
The Company licenses software from a third-party to automate the
administration of its employee equity programs and calculate its
stock-based compensation expense. During the first quarter of
fiscal year 2010, the Company noted that the version of the
software it used incorrectly calculated stock-based compensation
expense by continuing to apply a weighted average forfeiture
rate to the vested portion of stock option awards until the
grants final vest date, rather than reflecting actual
forfeitures as awards vested. The net effect of the error was an
understatement of stock-based compensation expense of
approximately $133, $492 and $538 in fiscal years 2007, 2008 and
2009, respectively.
Cash Flow
Presentation
The Company determined in the first quarter of fiscal year 2010
that in its statement of cash flows for fiscal year 2008, it had
improperly reflected an increase in liabilities resulting from
the recording of a deferred tax liability in connection with an
acquisition in operating activities instead of investing
activities.
The Company assessed the materiality of these errors on prior
period financial statements in accordance with the SECs
Staff Accounting Bulletin No. 99 (SAB 99),
and concluded that the errors were not material to any prior
annual or interim periods but the cumulative error would be
material to the three months ended September 30, 2010, if
the entire correction was recorded in the current period.
Accordingly, the Company has revised certain prior amounts and
balances in its financial statements in fiscal years 2007, 2008
and 2009 to allow for the correct recording of these amounts in
accordance with the SECs Staff Accounting Bulletin
No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year
Financial Statement.
F-14
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
The following tables summarize the effect of the correction of
the immaterial errors on the Companys financial statements
for fiscal years 2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
|
As Reported
|
|
As Revised
|
|
As Reported
|
|
As Revised
|
|
As Reported
|
|
As Revised
|
|
Consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
117,905
|
|
|
$
|
108,945
|
|
|
$
|
130,610
|
|
|
$
|
130,869
|
|
|
$
|
181,370
|
|
|
$
|
181,593
|
|
Gross profit
|
|
|
49,465
|
|
|
|
58,425
|
|
|
|
61,420
|
|
|
|
61,161
|
|
|
|
79,157
|
|
|
|
78,934
|
|
Operating income
|
|
|
24,537
|
|
|
|
24,404
|
|
|
|
21,822
|
|
|
|
21,330
|
|
|
|
35,259
|
|
|
|
34,721
|
|
Net income
|
|
|
15,733
|
|
|
|
15,610
|
|
|
|
13,228
|
|
|
|
12,867
|
|
|
|
17,914
|
|
|
|
17,274
|
|
Net income per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.37
|
|
|
$
|
0.36
|
|
|
$
|
0.29
|
|
|
$
|
0.28
|
|
|
$
|
0.42
|
|
|
$
|
0.41
|
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
0.34
|
|
|
$
|
0.27
|
|
|
$
|
0.26
|
|
|
$
|
0.40
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheets at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
31,267
|
|
|
$
|
31,144
|
|
|
$
|
44,495
|
|
|
$
|
42,306
|
|
|
$
|
62,409
|
|
|
$
|
59,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
25,197
|
|
|
$
|
25,197
|
|
|
$
|
28,599
|
|
|
$
|
24,751
|
|
|
$
|
32,570
|
|
|
$
|
32,570
|
|
Net cash used in investing activities
|
|
|
(26,365
|
)
|
|
|
(26,365
|
)
|
|
|
(53,096
|
)
|
|
|
(49,248
|
)
|
|
|
(27,326
|
)
|
|
|
(27,326
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(2,803
|
)
|
|
|
(2,803
|
)
|
|
|
22,756
|
|
|
|
22,756
|
|
|
|
(5,012
|
)
|
|
|
(5,012
|
)
|
|
|
4.
|
Net
income attributable to common stockholders and pro forma net
income per share
|
Basic and diluted net income per share attributable to common
stockholders are presented in conformity with the two-class
method required for participating securities. Holders of
Series A, Series B and Series C convertible
preferred stock are each entitled to receive 8% per annum
non-cumulative dividends, payable prior and in preference to any
dividends on any other shares of the Companys capital
stock. In the event a dividend is paid on common stock,
Series A, Series B and Series C convertible
preferred stockholders are entitled to a proportionate share of
any such dividend as if they were holders of common shares (on
an as-if converted basis).
Under the two-class method, basic net income per share
attributable to common stockholders is computed by dividing the
net income attributable to common stockholders by the weighted
average number of common shares outstanding during the period.
Net income attributable to common stockholders is determined by
allocating undistributed earnings, calculated as net income less
current period Series A, Series B and Series C
convertible preferred stock non-cumulative dividends, between
common stock and Series A, Series B and Series C
convertible preferred stockholders. Diluted net income per share
attributable to common stockholders is computed by using the
weighted average number of common shares outstanding, including
potential dilutive shares of common stock assuming the dilutive
effect of outstanding stock options using the treasury stock
method.
F-15
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Pro forma basic and diluted net income per share were computed
to give effect to the conversion of the Series A,
Series B and Series C convertible preferred stock
using the as-if converted method into common stock as though the
conversion had occurred as of July 1, 2008 or the original
date of issuance or later.
The following table presents the calculation of basic and
diluted net income per share attributable to common stockholders
and pro forma basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
Three Months Ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
15,610
|
|
|
$
|
12,867
|
|
|
$
|
17,274
|
|
|
$
|
3,304
|
|
|
$
|
6,513
|
|
8% non-cumulative dividends on convertible preferred stock
|
|
|
(3,276
|
)
|
|
|
(3,276
|
)
|
|
|
(3,276
|
)
|
|
|
(819
|
)
|
|
|
(819
|
)
|
Undistributed earnings allocated to convertible preferred stock
|
|
|
(7,690
|
)
|
|
|
(5,925
|
)
|
|
|
(8,599
|
)
|
|
|
(1,527
|
)
|
|
|
(3,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic
|
|
$
|
4,644
|
|
|
$
|
3,666
|
|
|
$
|
5,399
|
|
|
$
|
958
|
|
|
$
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common stockholders basic
|
|
$
|
4,644
|
|
|
$
|
3,666
|
|
|
$
|
5,399
|
|
|
$
|
958
|
|
|
$
|
2,207
|
|
Undistributed earnings re-allocated to common stock
|
|
|
522
|
|
|
|
360
|
|
|
|
399
|
|
|
|
77
|
|
|
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
diluted
|
|
$
|
5,166
|
|
|
$
|
4,026
|
|
|
$
|
5,798
|
|
|
$
|
1,035
|
|
|
$
|
2,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computing basic net
income per share
|
|
|
12,789
|
|
|
|
13,104
|
|
|
|
13,294
|
|
|
|
13,279
|
|
|
|
13,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computing basic net
income per share
|
|
|
12,789
|
|
|
|
13,104
|
|
|
|
13,294
|
|
|
|
13,279
|
|
|
|
13,405
|
|
Add weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,474
|
|
|
|
2,221
|
|
|
|
1,677
|
|
|
|
1,852
|
|
|
|
1,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used in computing diluted net
income per share
|
|
|
15,263
|
|
|
|
15,325
|
|
|
|
14,971
|
|
|
|
15,131
|
|
|
|
15,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.36
|
|
|
$
|
0.28
|
|
|
$
|
0.41
|
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.34
|
|
|
$
|
0.26
|
|
|
$
|
0.39
|
|
|
$
|
0.07
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares from above
|
|
|
|
|
|
|
|
|
|
|
13,294
|
|
|
|
|
|
|
|
13,405
|
|
Add assumed conversion of convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
21,177
|
|
|
|
|
|
|
|
21,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing pro forma basic net income per share
|
|
|
|
|
|
|
|
|
|
|
34,471
|
|
|
|
|
|
|
|
34,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares from above
|
|
|
|
|
|
|
|
|
|
|
14,971
|
|
|
|
|
|
|
|
15,381
|
|
Add conversion of Series A, Series B, and
Series C convertible preferred stock excluded under the two
class method
|
|
|
|
|
|
|
|
|
|
|
21,177
|
|
|
|
|
|
|
|
21,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share used in computing pro forma diluted net income per share
|
|
|
|
|
|
|
|
|
|
|
36,148
|
|
|
|
|
|
|
|
36,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.50
|
|
|
|
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.48
|
|
|
|
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
|
|
5.
|
Balance
Sheet Components
|
Marketable
Securities
The Companys investments in marketable securities
designated as
available-for-sale
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Carrying
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Corporate debt securities
|
|
$
|
2,296
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
2,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities
|
|
$
|
2,296
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
2,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized proceeds of $29,172 and $2,302 from the
sale and maturities of its investments in marketable securities
for fiscal years 2008 and 2009, respectively. The Company did
not realize any gains or losses from sales of its investments in
marketable securities for fiscal years 2007, 2008 and 2009.
Fair
Value Measurements
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (i.e., the
exit price) in an orderly transaction between market
participants at the measurement date. A hierarchy for inputs
used in measuring fair value has been defined to minimize the
use of unobservable inputs by requiring the use of observable
market data when available. Observable inputs are inputs that
market participants would use in pricing the asset or liability
based on active market data. Unobservable inputs are inputs that
reflect the Companys assumptions about the assumptions
market participants would use in pricing the asset or liability
based on the best information available in the circumstances.
The fair value hierarchy prioritizes the inputs into three broad
levels:
Level 1
Inputs are unadjusted quoted
prices in active markets for identical assets or liabilities.
Level 2
Inputs are quoted prices for
similar assets and liabilities in active markets or inputs that
are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the
full term of the financial instrument.
Level 3
Inputs are unobservable inputs
based on the Companys assumptions.
All cash equivalents at June 30, 2009 and
September 30, 2009 (unaudited) are considered Level 1.
Accounts
Receivable, Net
Accounts receivable, net balances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Accounts receivable
|
|
$
|
27,443
|
|
|
$
|
36,792
|
|
|
$
|
42,736
|
|
Less: Allowance for doubtful accounts
|
|
|
(622
|
)
|
|
|
(506
|
)
|
|
|
(466
|
)
|
Less: Allowance for sales reserve
|
|
|
(1,540
|
)
|
|
|
(3,003
|
)
|
|
|
(3,255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,281
|
|
|
$
|
33,283
|
|
|
$
|
39,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Property
and Equipment, Net
Property and equipment, net balances are comprised of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Computer equipment
|
|
$
|
9,670
|
|
|
$
|
10,295
|
|
|
$
|
10,414
|
|
Software
|
|
|
4,512
|
|
|
|
4,955
|
|
|
|
5,015
|
|
Furniture and fixtures
|
|
|
1,802
|
|
|
|
1,992
|
|
|
|
1,865
|
|
Leasehold improvements
|
|
|
579
|
|
|
|
694
|
|
|
|
700
|
|
Internal software development costs
|
|
|
12,396
|
|
|
|
13,456
|
|
|
|
13,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,959
|
|
|
|
31,392
|
|
|
|
31,767
|
|
Less: Accumulated depreciation and amortization
|
|
|
(23,234
|
)
|
|
|
(26,651
|
)
|
|
|
(27,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,725
|
|
|
$
|
4,741
|
|
|
$
|
4,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $3,135, $2,400 and $2,742 for fiscal
years 2007, 2008 and 2009, respectively; and $549 and $503 for
the three months ended September 30, 2008 and 2009
(unaudited), respectively. Amortization expense related to
internal software development costs was $1,965, $1,816 and
$1,500 for fiscal years 2007, 2008 and 2009, respectively, and
$482 and $294 for the three months ended September 30, 2008
and 2009 (unaudited), respectively.
Intangible
Assets, Net
Intangible assets excluding goodwill, net balances consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
|
June 30, 2009
|
|
|
September 30, 2009
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Customer/publisher relationships
|
|
$
|
18,789
|
|
|
$
|
(2,046
|
)
|
|
$
|
16,743
|
|
|
$
|
22,982
|
|
|
$
|
(6,299
|
)
|
|
$
|
16,683
|
|
|
$
|
24,311
|
|
|
$
|
(7,462
|
)
|
|
$
|
16,849
|
|
Content
|
|
|
15,467
|
|
|
|
(6,530
|
)
|
|
|
8,937
|
|
|
|
18,145
|
|
|
|
(10,546
|
)
|
|
|
7,599
|
|
|
|
21,250
|
|
|
|
(11,648
|
)
|
|
|
9,602
|
|
Website/trade/domain names
|
|
|
6,216
|
|
|
|
(2,446
|
)
|
|
|
3,770
|
|
|
|
9,187
|
|
|
|
(2,988
|
)
|
|
|
6,199
|
|
|
|
10,407
|
|
|
|
(3,366
|
)
|
|
|
7,041
|
|
Acquired technology and other
|
|
|
9,286
|
|
|
|
(3,910
|
)
|
|
|
5,376
|
|
|
|
10,034
|
|
|
|
(6,525
|
)
|
|
|
3,509
|
|
|
|
10,116
|
|
|
|
(7,037
|
)
|
|
|
3,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
49,758
|
|
|
$
|
(14,932
|
)
|
|
$
|
34,826
|
|
|
$
|
60,348
|
|
|
$
|
(26,358
|
)
|
|
$
|
33,990
|
|
|
$
|
66,084
|
|
|
$
|
(29,513
|
)
|
|
$
|
36,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets was $4,537, $7,511 and $11,736
for fiscal years 2007, 2008 and 2009, respectively; and $3,083
and $3,155 for the three months ended September 30, 2008
and 2009 (unaudited), respectively.
F-18
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Amortization expense for the Companys acquisition-related
intangible assets as of June 30, 2009 for each of the next
five years is as follows:
|
|
|
|
|
Fiscal Year Ending June 30,
|
|
|
|
|
2010
|
|
$
|
12,137
|
|
2011
|
|
|
9,402
|
|
2012
|
|
|
6,553
|
|
2013
|
|
|
4,057
|
|
2014
|
|
|
921
|
|
Thereafter
|
|
|
920
|
|
|
|
|
|
|
|
|
$
|
33,990
|
|
|
|
|
|
|
Goodwill
The changes in the carrying amount of goodwill for fiscal years
2007, 2008 and 2009 and for the three months ended
September 30, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS
|
|
|
DSS
|
|
|
Total
|
|
|
Balance at June 30, 2007
|
|
$
|
23,320
|
|
|
$
|
1,231
|
|
|
$
|
24,551
|
|
Additions
|
|
|
55,917
|
|
|
|
|
|
|
|
55,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
79,237
|
|
|
|
1,231
|
|
|
|
80,468
|
|
Additions
|
|
|
26,276
|
|
|
|
|
|
|
|
26,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
|
105,513
|
|
|
|
1,231
|
|
|
|
106,744
|
|
Additions (unaudited)
|
|
|
12,711
|
|
|
|
|
|
|
|
12,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 (unaudited)
|
|
$
|
118,224
|
|
|
$
|
1,231
|
|
|
$
|
119,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal years 2007, 2008 and 2009, and for three months ended
September 30, 2009 (unaudited), the additions to goodwill
relate to the Companys acquisitions as described in
Note 6, and primarily reflect the value of the synergies
expected to be generated from combining the Companys
technology and know-how with the acquired entities access
to online visitors.
Accrued
expenses and other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Accrued media costs
|
|
$
|
7,943
|
|
|
$
|
12,920
|
|
|
$
|
15,545
|
|
Accrued compensation and related expenses
|
|
|
5,286
|
|
|
|
6,457
|
|
|
|
3,431
|
|
Accrued taxes payable
|
|
|
3,090
|
|
|
|
430
|
|
|
|
4,708
|
|
Accrued professional service and other business expenses
|
|
|
3,252
|
|
|
|
1,987
|
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
19,571
|
|
|
$
|
21,794
|
|
|
$
|
26,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Acquisition
of Payler Corp D/B/A HSH Associates Financial Publishers
(HSH) (unaudited)
On September 14, 2009, the Company acquired 100% of the
outstanding shares of HSH, a New Jersey-based online marketing
business, in exchange for $6,000 in cash paid upon closing of
the acquisition and the issuance of $4,000 in
non-interest-bearing promissory notes payable in five
installments over the next five years. The results of HSHs
acquired operations have been included in the consolidated
financial statements since the acquisition date. The Company
acquired HSH for its capacity to generate online visitors in the
financial services market. The total purchase price recorded was
as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
6,000
|
|
Fair value of debt (net of $241 of imputed interest)
|
|
|
3,759
|
|
|
|
|
|
|
|
|
$
|
9,759
|
|
|
|
|
|
|
The acquisition was accounted for as a purchase business
combination. The Company allocated the purchase price to
tangible assets acquired, liabilities assumed and identifiable
intangible assets acquired based on their estimated fair values.
The excess of the purchase price over the aggregate fair values
was recorded as goodwill. The goodwill is not deductible for tax
purposes. The following table summarizes the allocation of the
purchase price and the estimated useful lives of the
identifiable intangible assets acquired as of the date of the
acquisition:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Tangible assets acquired
|
|
$
|
50
|
|
|
|
Liabilities assumed
|
|
|
(1,684
|
)
|
|
|
Advertiser relationships
|
|
|
1,200
|
|
|
3 years
|
Trade name
|
|
|
800
|
|
|
6 years
|
Content
|
|
|
1,300
|
|
|
6 years
|
Goodwill
|
|
|
8,093
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
9,759
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of U.S. Citizens for Fair Credit Card Terms, Inc.
(CardRatings)
On August 5, 2008, the Company acquired 100% of the
outstanding shares of CardRatings, an Arkansas-based online
marketing company, in exchange for $10,000 in cash paid upon
closing of the acquisition and the issuance of $5,000 in
non-interest-bearing promissory notes payable in five
installments over the next five years, secured by the assets
acquired. The Company paid $372 in working capital adjustment
following the closing of the acquisition. The results of
CardRatings acquired operations have been included in the
consolidated financial statements since the acquisition date.
The Company acquired CardRatings for its
F-20
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
capacity to generate online visitors in the financial services
market. The total purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
10,372
|
|
Fair value of debt (net of $722 of imputed interest)
|
|
|
4,278
|
|
Acquisition-related costs
|
|
|
20
|
|
|
|
|
|
|
|
|
$
|
14,670
|
|
|
|
|
|
|
The acquisition was accounted for as a purchase business
combination. The Company allocated the purchase price to
tangible assets acquired, liabilities assumed and identifiable
intangible assets acquired based on their estimated fair values.
The excess of the purchase price over the aggregate fair values
was recorded as goodwill. The goodwill is entirely deductible
for tax purposes. The following table summarizes the allocation
of the purchase price and the estimated useful lives of the
identifiable intangible assets acquired as of the date of the
acquisition:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Tangible assets acquired
|
|
$
|
834
|
|
|
|
Liabilities assumed
|
|
|
(206
|
)
|
|
|
Advertiser relationships
|
|
|
2,325
|
|
|
7 years
|
Trade name
|
|
|
776
|
|
|
5 years
|
Noncompete agreements
|
|
|
124
|
|
|
3 years
|
Content
|
|
|
140
|
|
|
2 years
|
Goodwill
|
|
|
10,677
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
14,670
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Cyberspace Communications Corporation
(SureHits)
On April 9, 2008, the Company acquired 100% of the
outstanding shares of SureHits, an Oklahoma-based online
marketing company, in exchange for $26,519 in cash paid upon
closing of the acquisition and $1,913 payable in two equal
installments over the next year related to employee
change-in-control
provisions. Additionally, the sellers have the potential to earn
up to an additional $18,000 over the subsequent 45 months,
such earn-out amounts being contingent upon the achievement of
specified financial targets. The results of SureHits
operations have been included in the consolidated financial
statements since the acquisition date. The Company acquired
SureHits to broaden its media access and client base in the
financial services market. The total purchase price recorded was
as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
26,519
|
|
Fair value of debt (net of $72 of imputed interest)
|
|
|
1,841
|
|
Acquisition-related costs
|
|
|
212
|
|
|
|
|
|
|
|
|
$
|
28,572
|
|
|
|
|
|
|
F-21
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
The acquisition was accounted for as a purchase business
combination. The Company allocated the purchase price to
tangible assets acquired, liabilities assumed and identifiable
intangible assets acquired based on their estimated fair values.
The excess of the purchase price over the aggregate fair values
was recorded as goodwill. The goodwill is entirely deductible
for tax purposes. The following table summarizes the allocation
of the purchase price and the estimated useful lives of the
identifiable intangible assets acquired as of the date of the
acquisition:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Tangible assets acquired
|
|
$
|
4,006
|
|
|
|
Liabilities assumed
|
|
|
(2,998
|
)
|
|
|
Advertiser relationships
|
|
|
7,692
|
|
|
3-5 years
|
Acquired technology
|
|
|
2,482
|
|
|
3 years
|
Publisher relationships
|
|
|
391
|
|
|
2 years
|
Trade name
|
|
|
199
|
|
|
5 years
|
Noncompete agreements
|
|
|
176
|
|
|
3 years
|
Goodwill
|
|
|
16,624
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
28,572
|
|
|
|
|
|
|
|
|
|
|
In fiscal year 2009, the Company paid $4,500 in earnout payments
upon the achievement of the specified financial targets. The
earnout payments were recorded as goodwill.
Acquisition
of ReliableRemodeler.com, Inc.
(ReliableRemodeler)
On February 7, 2008, the Company acquired 100% of the
outstanding shares of ReliableRemodeler, an Oregon-based online
company specializing in home renovation and contractor
referrals, in exchange for $17,500 in cash paid upon closing of
the acquisition, $2,000 of which was placed in escrow, and the
issuance of $8,000 in non-interest-bearing, unsecured promissory
notes payable in three installments over the next four years.
The results of ReliableRemodelers acquired operations have
been included in the consolidated financial statements since the
acquisition date. The Company acquired ReliableRemodeler to
broaden its media access and client base in the home services
market. The total purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
17,500
|
|
Fair value of debt (net of $1,277 of imputed interest)
|
|
|
6,723
|
|
Acquisition-related costs
|
|
|
54
|
|
|
|
|
|
|
|
|
$
|
24,277
|
|
|
|
|
|
|
F-22
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
The acquisition was accounted for as a purchase business
combination. The Company allocated the purchase price to
tangible assets acquired, liabilities assumed and identifiable
intangible assets acquired based on their estimated fair values.
The excess of the purchase price over the aggregate fair values
was recorded as goodwill. The goodwill is not deductible for tax
purposes. The following table summarizes the allocation of the
purchase price and the estimated useful lives of the
identifiable intangible assets acquired as of the date of the
acquisition:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Tangible assets acquired
|
|
$
|
859
|
|
|
|
Liabilities assumed
|
|
|
(987
|
)
|
|
|
Deferred tax liabilities
|
|
|
(3,849
|
)
|
|
|
Customer relationships
|
|
|
7,476
|
|
|
5 years
|
Acquired technology
|
|
|
1,124
|
|
|
5 years
|
Trade name and domain name
|
|
|
814
|
|
|
5 years
|
Content
|
|
|
183
|
|
|
4 years
|
Goodwill
|
|
|
18,657
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
24,277
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Vendorseek L.L.C. (Vendorseek)
On May 15, 2008, the Company acquired the assets of
Vendorseek, a New Jersey-based provider of online matching
services for businesses that connect Internet visitors with
vendors, in exchange for $10,665 in cash paid upon closing of
the acquisition and the issuance of $3,750 in interest-bearing,
unsecured promissory notes payable in three installments over
the next three years at an annual interest rate of 1.64%. The
results of Vendorseeks operations have been included in
the consolidated financial statements since the acquisition
date. The Company acquired Vendorseek to broaden its media
access and client base in the
business-to-business
market. The total purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
10,665
|
|
Fair value of debt (net of $346 of imputed interest)
|
|
|
3,404
|
|
Acquisition-related costs
|
|
|
128
|
|
|
|
|
|
|
|
|
$
|
14,197
|
|
|
|
|
|
|
F-23
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
The acquisition was accounted for as a purchase business
combination. The Company allocated the purchase price to
tangible assets acquired, liabilities assumed and identifiable
intangible assets acquired based on their estimated fair values.
The excess of the purchase price over the aggregate fair values
was recorded as goodwill. The goodwill is entirely deductible
for tax purposes. The following table summarizes the allocation
of the purchase price and the estimated useful lives of the
identifiable intangible assets acquired as of the date of the
acquisition:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Tangible assets acquired
|
|
$
|
413
|
|
|
|
Liabilities assumed
|
|
|
(221
|
)
|
|
|
Customer relationships
|
|
|
156
|
|
|
2 years
|
Publisher relationships
|
|
|
899
|
|
|
5 years
|
Acquired technology
|
|
|
639
|
|
|
3 years
|
Trade name and domain name
|
|
|
252
|
|
|
5 years
|
Noncompete agreements
|
|
|
88
|
|
|
3 years
|
Goodwill
|
|
|
11,971
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
14,197
|
|
|
|
|
|
|
|
|
|
|
Other
Acquisitions
During the three months ended September 30, 2009
(unaudited), in addition to the acquisition of HSH, the Company
acquired operations from 12 other online publishing businesses
in exchange for $4,468 in cash paid upon closing of the
acquisitions and $2,680 payable in the form of
non-interest-bearing, unsecured promissory notes payable over a
period of time ranging from one to five years. The aggregate
purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
4,468
|
|
Fair value of debt (net of $92 of imputed interest)
|
|
|
2,588
|
|
|
|
|
|
|
|
|
$
|
7,056
|
|
|
|
|
|
|
F-24
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
The acquisitions were accounted for as purchase business
combinations. In each of the acquisitions, the Company allocated
the purchase price to identifiable intangible assets acquired
based on their estimated fair values and liabilities assumed, if
any. The excess of the purchase price over the aggregate fair
values of the identifiable intangible assets was recorded as
goodwill. Goodwill deductible for tax purposes is $3,734. The
following table summarizes the allocation of the purchase prices
of these other acquisitions during the three months ended
September 30, 2009 (unaudited) and the estimated useful
life of the identifiable intangible assets acquired as of the
respective dates of these acquisitions:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Assets assumed
|
|
$
|
1
|
|
|
|
Content
|
|
|
1,059
|
|
|
1-6 years
|
Customer/publisher relationships
|
|
|
129
|
|
|
1-7 years
|
Domain names
|
|
|
420
|
|
|
5 years
|
Noncompete agreements
|
|
|
83
|
|
|
2-3 years
|
Acquired technology
|
|
|
746
|
|
|
3 years
|
Goodwill
|
|
|
4,618
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
7,056
|
|
|
|
|
|
|
|
|
|
|
During fiscal year 2009, in addition to the acquisition of
CardRatings, the Company acquired operations from 33 other
online publishing businesses in exchange for $14,606 in cash
paid upon closing of the acquisitions and $4,268 payable
primarily in the form of non-interest-bearing, unsecured
promissory notes payable over a period of time ranging from one
to five years. The aggregate purchase price recorded was as
follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
14,606
|
|
Fair value of debt (net of $395 of imputed interest)
|
|
|
3,873
|
|
Acquisition-related costs
|
|
|
134
|
|
|
|
|
|
|
|
|
$
|
18,613
|
|
|
|
|
|
|
The acquisitions were accounted for as purchase business
combinations. In each of the acquisitions, the Company allocated
the purchase price to identifiable intangible assets acquired
based on their estimated fair values and liabilities assumed, if
any. No tangible assets were acquired. The excess of the
purchase price over the aggregate fair values of the
identifiable intangible assets was recorded as goodwill. The
goodwill is entirely deductible for tax purposes. The following
table summarizes the allocation of the purchase prices of
F-25
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
these other fiscal year 2009 acquisitions and the estimated
useful life of the identifiable intangible assets acquired as of
the respective dates of these acquisitions:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Liabilities assumed
|
|
$
|
(22
|
)
|
|
|
Content
|
|
|
2,538
|
|
|
1-6 years
|
Customer/publisher relationships
|
|
|
1,952
|
|
|
1-7 years
|
Domain names
|
|
|
2,418
|
|
|
5 years
|
Noncompete agreements
|
|
|
236
|
|
|
5 years
|
Acquired technology
|
|
|
392
|
|
|
3 years
|
Goodwill
|
|
|
11,099
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
18,613
|
|
|
|
|
|
|
|
|
|
|
During the fiscal year 2008, in addition to the acquisitions of
SureHits, ReliableRemodeler and Vendorseek, the Company acquired
operations from 20 other online publishing entities in exchange
for $9,471 in cash paid upon closing of the acquisitions and
$5,354 payable primarily in the form of non-interest-bearing
promissory notes payable over a period of time ranging from one
to three years, the majority of which are secured by the assets
acquired. The aggregate purchase price recorded was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
Cash
|
|
$
|
9,471
|
|
Fair value of debt (net of $412 of imputed interest)
|
|
|
4,942
|
|
Acquisition-related costs
|
|
|
84
|
|
|
|
|
|
|
|
|
$
|
14,497
|
|
|
|
|
|
|
The acquisitions were accounted for as purchase business
combinations. In each of the acquisitions, the Company allocated
the purchase price to identifiable intangible assets acquired
based on their estimated fair values and liabilities assumed, if
any. No tangible assets were acquired nor were any liabilities
assumed. The excess of the purchase price over the aggregate
fair values of the identifiable intangible assets was recorded
as goodwill. The goodwill is entirely deductible for tax
purposes. The following table summarizes the allocation of the
purchase prices of these other fiscal year 2008 acquisitions and
the estimated useful lives of the identifiable intangible assets
acquired as of the respective dates of these acquisitions:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Content
|
|
$
|
3,281
|
|
|
2-5 years
|
Customer/advertiser/publisher relationships
|
|
|
918
|
|
|
2-5 years
|
Domain names
|
|
|
1,364
|
|
|
5 years
|
Noncompete agreements
|
|
|
269
|
|
|
2-3.5 years
|
Goodwill
|
|
|
8,665
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
$
|
14,497
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma Financial Information (unaudited)
The unaudited pro forma financial information in the table below
summarizes the combined results of operations for the Company
and other companies that were acquired since the beginning of
fiscal year 2009
F-26
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
(which were collectively significant for purposes of unaudited
pro forma financial information disclosure) as though the
companies were combined as of the beginning of fiscal year 2008.
The pro forma financial information for all periods presented
also includes the business combination accounting effects
resulting from these acquisitions including amortization charges
from acquired intangible assets and the related tax effects as
though the aforementioned companies were combined as of the
beginning of fiscal year 2008. The pro forma financial
information as presented below is for informational purposes
only and is not indicative of the results of operations that
would have been achieved if the acquisitions had taken place at
the beginning of fiscal year 2008.
The unaudited pro forma financial information was as follows for
fiscal years 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Fiscal Year Ended June 30,
|
|
September 30,
|
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
(Unaudited)
|
|
Net revenue
|
|
$
|
198,478
|
|
|
$
|
263,397
|
|
|
$
|
63,877
|
|
|
$
|
78,718
|
|
Net income
|
|
|
10,232
|
|
|
|
15,111
|
|
|
|
2,919
|
|
|
|
6,220
|
|
Basic earnings per share
|
|
$
|
0.20
|
|
|
$
|
0.34
|
|
|
$
|
0.06
|
|
|
$
|
0.16
|
|
Diluted earnings per share
|
|
$
|
0.19
|
|
|
$
|
0.33
|
|
|
$
|
0.06
|
|
|
$
|
0.15
|
|
Promissory
Notes
During fiscal years 2008 and 2009 and the three months ended
September 30, 2009 (unaudited), the Company issued total
promissory notes for the acquisition of businesses of $16,910,
$8,151 and $6,347, respectively, net of imputed interest amounts
of $2,107, $1,117 and $333, respectively. Other than for one
acquisition in fiscal year 2008 in which $3,750 in promissory
notes were issued at an annual interest rate of 1.64%, all of
the promissory notes are non-interest-bearing. Interest was
imputed such that the notes carry an interest rate commensurate
with that available to the Company in the market for similar
debt instruments. Accretion of notes payable of $421, $404 and
$563 was recorded during the fiscal years 2007, 2008 and 2009,
respectively. Certain of the promissory notes are secured by the
assets acquired in respect to which the notes were issued.
Term
Loan and Revolving Credit Facility
In August 2006, the Company signed a loan and security agreement
that made available a $30,000 revolving credit facility from a
financial institution. In January 2008, the Company signed an
amendment to this loan and security agreement, expanding the
revolving credit availability to $60,000.
In September 2008, the Company replaced its existing revolving
credit facility of $60,000 with credit facilities totaling
$100,000. The new facilities consist of a $30,000 five-year term
loan, with principal amortization of 10%, 10%, 20%, 25% and 35%
annually, and a $70,000 revolving credit facility. Borrowings
under the credit facilities are collateralized by the
Companys assets and interest is payable quarterly at
specified margins above either LIBOR or the Prime Rate. The
interest rate varies dependent upon the ratio of funded debt to
adjusted EBITDA and ranges from LIBOR + 1.875% to 2.625% or
Prime + 0.75% to 1.25% for the revolving credit facility and
from LIBOR + 2.25% to 3.0% or Prime + 0.75% to 1.25% for the
term loan. The revolver also requires a quarterly facility fee
of $66. As of June 30, 2009, $28,500 was outstanding under
the term loan and $6,257 was outstanding under the revolving
credit facility. The credit facilities expire in September 2013.
The loan and revolving credit facility agreement restricts the
Companys ability to raise
F-27
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
additional debt financing and pay dividends. In addition, the
Company is required to maintain financial ratios computed as
follows:
1. Quick ratio: ratio of (i) the sum of unrestricted
cash and cash equivalents and trade receivables less than
90 days from invoice date to (ii) current liabilities
and face amount of any letters of credit less the current
portion of deferred revenue.
2. Fixed charge coverage: ratio of (i) trailing
12 months of adjusted EBITDA to (ii) the sum of
capital expenditures, net cash interest expense, cash taxes,
cash dividends and trailing twelve months payments of
indebtedness. Payment of unsecured indebtedness is excluded to
the degree that sufficient unused revolving credit facility
exists such that the relevant debt payment could have been made
from the credit facility.
3. Funded debt to adjusted EBITDA: ratio of (i) the
sum of all obligations owed to lending institutions, the face
amount of any letters of credit, indebtedness owed in connection
with acquisition-related notes and indebtedness owed in
connection with capital lease obligations to (ii) trailing
12-month adjusted EBITDA.
The Company was in compliance with the financial ratios as of
June 30, 2009 and September 30, 2009 (unaudited).
Debt
Maturities
The maturities of debt at June 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan and
|
|
|
|
|
|
|
Revolving
|
|
|
|
Notes
|
|
|
Credit
|
|
Year Ending June 30,
|
|
Payable
|
|
|
Facility
|
|
|
2010
|
|
$
|
10,214
|
|
|
$
|
3,000
|
|
2011
|
|
|
8,215
|
|
|
|
4,500
|
|
2012
|
|
|
3,790
|
|
|
|
6,750
|
|
2013
|
|
|
1,330
|
|
|
|
9,000
|
|
2014
|
|
|
1,520
|
|
|
|
11,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,069
|
|
|
|
34,757
|
|
Less: imputed interest and unamortized discounts
|
|
|
(1,850
|
)
|
|
|
(736
|
)
|
Less: current portion
|
|
|
(10,085
|
)
|
|
|
(2,805
|
)
|
|
|
|
|
|
|
|
|
|
Noncurrent portion of debt
|
|
$
|
13,134
|
|
|
$
|
31,216
|
|
|
|
|
|
|
|
|
|
|
Letters
of Credit
The Company has a $500 letter of credit agreement with a
financial institution that is used as collateral for fidelity
bonds placed with an insurance company. The letter of credit
automatically renews annually in September without amendment
unless cancelled by the financial institution within
30 days of the annual expiration date.
The Company also has a $223 letter of credit agreement with a
financial institution that is used as collateral for the
Companys corporate headquarters operating lease. The
letter of credit automatically renews annually in December
without amendment unless cancelled by the financial institution
within 30 days of the annual expiration date.
F-28
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
|
|
8.
|
Convertible
Preferred Stock
|
Convertible preferred shares at June 30, 2008 and 2009 and
at September 30, 2009 (unaudited) consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
|
|
|
|
Shares
|
|
|
Liquidation
|
|
|
Net of
|
|
Series
|
|
Authorized
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Issuance Costs
|
|
|
A
|
|
|
11,000,000
|
|
|
|
10,735,512
|
|
|
$
|
16,577
|
|
|
$
|
9,047
|
|
B
|
|
|
10,200,000
|
|
|
|
9,941,021
|
|
|
|
51,256
|
|
|
|
28,563
|
|
C
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
2,500
|
|
|
|
570
|
|
Undesignated
|
|
|
13,800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,500,000
|
|
|
|
21,176,533
|
|
|
$
|
70,333
|
|
|
$
|
38,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The holders of convertible preferred stock have various rights
and preferences as follows:
Voting
Each share of Series A and B convertible preferred stock
has voting rights equal to the number of shares of common stock
into which it is convertible and votes together as one class
with the common stock. The Series C convertible preferred
stock is non-voting.
Dividends
Holders of Series A, B and C convertible preferred stock
are entitled to receive noncumulative dividends at the per annum
rate of 8% of original issue price or $0.136, $0.236 and $0.40
per share, respectively, when and if declared by the Board of
Directors. The holders of Series A, B and C convertible
preferred stock are also entitled to participate in dividends on
shares of common stock, when and if declared by the Board of
Directors, based on the number of shares of common stock held on
an as-if converted basis. No dividends on convertible preferred
stock or common stock have been declared by the Board from
inception through September 30, 2009.
Liquidation
In the event of any liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of
the convertible preferred stock then outstanding shall be
entitled to be paid out of the assets of the Company available
for distribution to its stockholders, before any payment shall
be made in respect to the common stock, as follows:
|
|
|
|
|
For Series A and B convertible preferred stock, an amount
equal to the sum of (i) the original issue price of the
respective shares of preferred stock plus (ii) an amount
equal to 8% per annum of the original issue price of the
respective shares of preferred stock less (iii) any such
dividends, if declared and paid, to and through the date of full
payment.
|
|
|
|
For Series C convertible preferred stock, an amount equal
to the sum of (i) the original issue price of the shares of
preferred stock plus (ii) any declared and unpaid dividends.
|
Such liquidation payments shall be tendered to the holders of
the respective preferred shares with respect to such
liquidation, dissolution or winding up, and these respective
holders shall not be entitled to any further payment.
In the event of any merger, acquisition or consolidation of the
Company that results in the exchange of outstanding shares of
the Company for securities or other consideration (a
Merger Transaction), before any
F-29
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
payment of any amount shall be made in respect of the
Series A convertible preferred stock and the common stock,
the holders of Series B and Series C convertible
preferred stock then outstanding shall be entitled to be paid
out of the assets of the Company available for distribution to
its stockholders as follows:
|
|
|
|
|
For Series B convertible preferred stock, an amount equal
to 1.75 times the original issue price of the shares of
preferred stock, or $5.16 per share, plus any declared and
unpaid dividends.
|
|
|
|
For Series C convertible preferred stock, an amount equal
to the original issue price of $5.00 per share plus any declared
and unpaid dividends.
|
The holders of Series A convertible preferred stock then
outstanding shall then be entitled to be paid out of the assets
of the Company available for distribution to its stockholders,
before any payment shall be made in respect of the common stock,
an amount equal to the sum of (i) the Series A
original issue price of $1.70 per share plus (ii) an amount
equal to 8% of the Series A original issue price per annum
(iii) less any unpaid dividends, if declared and paid, to
and through the date of full payment. Such liquidation payments
shall be tendered to the holders of the respective preferred
stock, effective upon the closing of such Merger Transaction,
and these respective holders shall not be entitled to any
further payment.
If, upon any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, or Merger Transaction
the assets to be distributed to the holders of any series of
preferred stock shall be insufficient to permit the payment to
such stockholders of the full preferential amounts aforesaid,
then all of the assets of the Company shall be distributed
ratably to the holders of such series on the basis of the full
liquidation preference payable with respect to such series as if
such liquidation preference was paid in full.
These liquidation features cause the convertible preferred stock
to be classified as mezzanine capital rather than as a component
of stockholders equity.
Conversion
Each share of Series A, B and C convertible preferred stock
is convertible, at the option of the holder, into the number of
fully paid and nonassessable shares of common stock that results
from dividing the conversion price per share in effect for the
preferred stock at the time of conversion into the per share
conversion value of such shares subject to adjustment for
dilution. Conversion is automatic if at any time the Company
completes a qualified initial public offering consisting of
gross proceeds to the Company in excess of $25 million and
a public offering price equal to or exceeding $5.90 per share or
if the holders of a majority of the outstanding shares of
Series A, B and C preferred stock give consent in writing
to the conversion into common stock.
At December 31, 2009, the effective conversion ratio was
one-to-one for Series A, B and C convertible preferred
stock.
Redemption
The redemption rights for the Series A, Series B and
Series C convertible preferred stock have expired. As a
result, the Company recorded no accretion for fiscal years 2008
or 2009 or the three months ended September 30, 2009.
F-30
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
The Companys Articles of Incorporation, as amended,
authorize the Company to issue 50,500,000 common shares.
The Company had reserved common stock for the following:
|
|
|
|
|
|
|
Shares
|
|
|
Stock option plans
|
|
|
10,891,100
|
|
Conversion of Series A convertible preferred stock
|
|
|
10,735,512
|
|
Conversion of Series B convertible preferred stock
|
|
|
9,941,021
|
|
Conversion of Series C convertible preferred stock
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
32,067,633
|
|
|
|
|
|
|
Stock-Based
Compensation
For fiscal years 2007, 2008 and 2009, the Company recorded
stock-based compensation expense of $2,071, $3,222 and $6,173,
respectively, resulting in the recognition of related excess tax
benefits $415, $1,707 and $474, respectively. For the three
months ended September 30, 2008 and 2009, the Company
recorded stock-based compensation expense of $1,398 and $2,229,
respectively (unaudited), resulting in the recognition of $559
and $94 in related excess tax benefits, respectively.
The Company includes as part of cash flows from financing
activities the gross benefit of tax deductions related to
stock-based compensation in excess of the grant date fair value
of the related stock-based awards for the options exercised
during fiscal years 2008 and 2009. These amounts are shown as a
reduction of cash flows from operating activities and
correspondingly an increase to cash flows from financing
activities.
Equity
Stock Incentive Plan
On January 2008, the Company adopted the 2008 Equity Incentive
Plan (the 2008 Plan). The 2008 Plan amended and
restated the Companys 1999 Equity Incentive Plan (the
1999 Plan). All outstanding stock awards granted
before the adoption of the amendment and restatement of the 1999
Plan continue to be governed by the terms of the 1999 Plan. All
stock awards granted after January 2008 are governed by the 2008
Plan.
The Companys 2008 Plan permits the grant of stock options
or restricted stock awards to its employees, non-employee
directors, and consultants. Under the 2008 Plan, the Company may
issue incentive stock options (ISOs) only to its
employees. Non-qualified stock options (NQSOs) and
restricted stock awards may be issued to employees, non-employee
directors, and consultants. ISOs and NQSOs are generally granted
to employees with an exercise price equal to the market price of
the Companys common stock at the date of grant, as
determined by the Companys Board of Directors.
The absence of an active market for the Companys common
stock required the Companys Board of Directors, with input
from management, to estimate the fair value of the common stock
for purposes of granting options and for determining stock-based
compensation expense for the periods presented. In response to
these requirements, the Companys Board of Directors
estimated the fair value of the common stock at each meeting at
which options were granted based on factors such as the price of
the most recent convertible preferred stock sales to investors,
the preferences held by the convertible preferred stock in favor
of common stock, the valuations of comparable companies, the
hiring of key personnel, the status of the Companys
development and sales efforts, revenue growth and additional
objectives, and subjective factors relating to the
Companys business. The Company has historically granted
options with an exercise price not less than the
F-31
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
fair value of the underlying common stock as determined at the
time of grant by the Companys Board of Directors.
While, consistent with the previous practice, the Company had
performed a contemporaneous valuation at the time of the
August 7, 2009 grant, it decided to reassess that valuation
for financial reporting purposes in light of the new facts and
circumstances of which it became aware prior to the issuance of
the September 30, 2009 quarterly results of operations,
namely, the acceleration of the Companys IPO plans and
additional data on expected valuation ranges for the IPO. Based
on the reassessment, management concluded that the fair value of
common stock for financial reporting purposes on August 7,
2009 (the date of grant for options to purchase
1,875,050 shares with exercise prices of $9.01 per
share and an option to purchase 87,705 shares with an
exercise price of $9.91 per share) was $13.93.
To date, the Company has not granted any restricted stock
awards. Stock options generally have a contractual term of seven
years and generally vest over four years of continuous service,
with 25 percent of the stock options vesting on the first
anniversary of the date of grant and the remaining
75 percent vesting in equal monthly installments over the
36-month
period thereafter. NQSOs granted to non-employee directors
generally vest immediately on the date of grant. The vesting
periods, based on continuous service, for NQSOs granted to
consultants have varied.
The Companys 1999 Plan, which has expired, permitted the
grant of stock options or restricted stock awards to its
employees, non-employee directors, and consultants. Under the
1999 Plan, the Company issued ISOs only to its employees. NQSOs
were issued to employees, non-employee directors, and
consultants. ISOs were generally granted to employees with an
exercise price equal to the market price of the Companys
common stock at the date of grant, as determined by the
Companys Board of Directors. The Company had the ability,
if it chose, to grant NQSOs with an exercise price equal to
85 percent of the market price of the Companys common
stock at the date of grant but did not do so. Stock options
granted prior to May 31, 2007 generally have a contractual
term of ten years and stock options granted after May 31,
2007 generally expire seven years after the date of grant. Stock
options granted to employees generally vest over four years of
continuous service, with 25 percent of the stock options
vesting on the one-year anniversary of the date of grant and the
remaining 75 percent vesting in equal monthly installments
over the
36-month
period thereafter. NQSOs granted to non-employee directors
vested immediately on the date of grant. The vesting period,
based on continuous service, for NQSOs granted to consultants
have varied.
The Company expects to satisfy the exercise of vested stock
options by issuing new shares that are available for issuance
under both the 1999 and 2008 Plans. As of June 30, 2009,
the Company has reserved a maximum of 16,654,100 shares of
common stock for issuance under the 2008 and 1999 Plans, of
which shares available for issuance totaled 1,739,677.
F-32
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Valuation
Assumptions
For the years ended June 30, 2007, 2008 and 2009 and three
months ended September 30, 2008 and 2009, the fair value of
each stock option award to employees was estimated on the date
of grant using the Black-Scholes option-pricing model, with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Year Ended June 30,
|
|
September 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Expected term (in years)
|
|
4.6 - 6.1
|
|
4.6
|
|
4.6
|
|
4.6
|
|
4.6
|
Weighted-average stock price volatility
|
|
48%
|
|
52%
|
|
62%
|
|
61%
|
|
73%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
4.6% - 4.9%
|
|
2.8% - 4.5%
|
|
1.8% - 3.1%
|
|
3.1%
|
|
2.5%
|
As the Company has limited historical option exercise data, the
expected term of the stock options granted to employees under
the Plan was calculated based on the simplified method as
permitted by Staff Accounting Bulletin (SAB)
No. 107, Share-Based Payment. Under the simplified method,
the expected term is equal to the average of an options
weighted-average vesting period and its contractual term.
Pursuant to SAB 110, the Company is permitted to continue
using the simplified method until sufficient information
regarding exercise behavior, such as historical exercise data or
exercise information from external sources, becomes available.
The Company estimates the expected volatility of its common
stock on the date of grant based on the average volatilities of
similar publicly-traded entities. The Company has no history or
expectation of paying cash dividends on its common stock. The
risk-free interest rate is based on the U.S. Treasury yield
for a term consistent with the expected life of the options in
effect at the time of grant.
F-33
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Stock
Option Award Activity
A summary of stock option activity under the Plans for fiscal
years 2008 and 2009 and the three months ended
September 30, 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (in Years)
|
|
|
Outstanding at June 30, 2007
|
|
|
8,279,468
|
|
|
$
|
6.48
|
|
|
|
|
|
Options granted
|
|
|
1,315,400
|
|
|
|
10.28
|
|
|
|
|
|
Options exercised
|
|
|
(893,197
|
)
|
|
|
2.88
|
|
|
|
|
|
Options forfeited
|
|
|
(784,959
|
)
|
|
|
9.16
|
|
|
|
|
|
Options expired
|
|
|
(122,301
|
)
|
|
|
7.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008
|
|
|
7,794,411
|
|
|
$
|
7.24
|
|
|
|
6.25
|
|
Options granted
|
|
|
2,575,100
|
|
|
|
10.03
|
|
|
|
|
|
Options exercised
|
|
|
(169,716
|
)
|
|
|
1.79
|
|
|
|
|
|
Options forfeited
|
|
|
(656,610
|
)
|
|
|
9.98
|
|
|
|
|
|
Options expired
|
|
|
(391,762
|
)
|
|
|
8.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009
|
|
|
9,151,423
|
|
|
$
|
7.87
|
|
|
|
5.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and
expected-to-vest
at June 30, 2009(1)
|
|
|
8,282,043
|
|
|
$
|
7.65
|
|
|
|
5.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at June 30, 2009
|
|
|
5,428,414
|
|
|
$
|
6.41
|
|
|
|
5.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009
|
|
|
9,151,423
|
|
|
$
|
7.87
|
|
|
|
|
|
Options granted
|
|
|
1,962,755
|
|
|
|
9.05
|
|
|
|
|
|
Options exercised
|
|
|
(211,890
|
)
|
|
|
1.46
|
|
|
|
|
|
Options forfeited
|
|
|
(193,409
|
)
|
|
|
10.05
|
|
|
|
|
|
Options expired
|
|
|
(54,583
|
)
|
|
|
8.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009
|
|
|
10,654,296
|
|
|
$
|
8.17
|
|
|
|
5.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The
expected-to-vest
options are the result of applying the pre-vesting forfeiture
assumption to total outstanding options.
|
The weighted average grant date fair value of stock options
granted was $4.76, $4.76, $5.28, $5.37 and $5.30 during fiscal
years 2007, 2008 and 2009 and the three months ended
September 30, 2008 and 2009 (unaudited), respectively. The
total intrinsic value of all options exercised during fiscal
years 2007, 2008 and 2009 and the three months ended
September 30, 2008 and 2009 (unaudited) was $2,840, $6,606,
$1,365, $481 and $1,600, respectively. Cash received from stock
option exercises for fiscal years 2007, 2008 and 2009 and the
three months ended September 30, 2008 and 2009 (unaudited)
were $714, $2,575, $304, $173 and $296, respectively. The actual
tax benefit realized from stock options exercised during fiscal
years 2007, 2008 and 2009 and the three months ended
September 30, 2008 and 2009 (unaudited) was $366, $1,734,
$544, $255 and $571, respectively.
As of June 30, 2009 and September 30, 2009
(unaudited), there was $18,993 and $34,758 of total unrecognized
compensation cost related to unvested stock options which is
expected to be recognized over a weighted average period of
2.43 years and 2.76 years, respectively.
F-34
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Stock
Repurchases
In fiscal year 2008, the Company repurchased 558,730 shares
of its outstanding common stock at a total cost of $5,606 and an
average cost of $10.03 per share. In fiscal year 2009, the
Company repurchased, in aggregate, 163,275 shares of its
outstanding common stock at a total cost of $1,337 and an
average cost of $8.19 per share. In the three months ended
September 30, 2009 (unaudited), the Company repurchased
71,895 shares of its outstanding common stock at a total
cost of $577, and an average cost of $8.03 per share. Share
repurchases were accounted for as a reduction in additional
paid-in capital.
401(k)
Savings Plan
The Company sponsors a 401(k) defined contribution plan covering
all U.S. employees. Contributions made by the Company are
determined annually by the Board of Directors. There were no
employer contributions under this plan for the fiscal years
June 30, 2007, 2008 and 2009 or the three months ended
September 30, 2009.
The components of our income before income taxes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
US
|
|
$
|
23,914
|
|
|
$
|
20,299
|
|
|
$
|
30,806
|
|
Foreign
|
|
|
1,524
|
|
|
|
1,444
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,438
|
|
|
$
|
21,743
|
|
|
$
|
31,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
9,043
|
|
|
$
|
9,856
|
|
|
$
|
14,018
|
|
State
|
|
|
1,914
|
|
|
|
2,437
|
|
|
|
3,808
|
|
Foreign
|
|
|
475
|
|
|
|
355
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,432
|
|
|
$
|
12,648
|
|
|
$
|
17,990
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,484
|
)
|
|
$
|
(3,074
|
)
|
|
$
|
(4,109
|
)
|
State
|
|
|
(120
|
)
|
|
|
(698
|
)
|
|
|
94
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,604
|
)
|
|
|
(3,772
|
)
|
|
|
(4,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,828
|
|
|
$
|
8,876
|
|
|
$
|
13,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
A reconciliation between the statutory federal income tax and
the Companys effective tax rates as a percentage of income
before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
States taxes, net of federal benefit
|
|
|
4.6
|
%
|
|
|
5.1
|
%
|
|
|
8.2
|
%
|
Other
|
|
|
(1.0
|
)%
|
|
|
0.7
|
%
|
|
|
1.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
38.6
|
%
|
|
|
40.8
|
%
|
|
|
44.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the current and long-term deferred tax assets,
net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Net operating loss
|
|
$
|
163
|
|
|
$
|
143
|
|
Deferred revenue
|
|
|
550
|
|
|
|
178
|
|
Reserves and accruals
|
|
|
1,362
|
|
|
|
3,155
|
|
Stock options
|
|
|
|
|
|
|
685
|
|
Other
|
|
|
663
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
$
|
2,738
|
|
|
$
|
5,543
|
|
|
|
|
|
|
|
|
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
(1,433
|
)
|
|
$
|
(460
|
)
|
Net operating loss
|
|
|
143
|
|
|
|
156
|
|
Fixed assets
|
|
|
229
|
|
|
|
(74
|
)
|
Stock options
|
|
|
1,436
|
|
|
|
2,055
|
|
Foreign
|
|
|
15
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred tax assets
|
|
|
390
|
|
|
|
1,681
|
|
Valuation allowance
|
|
|
(143
|
)
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets, net
|
|
$
|
247
|
|
|
$
|
1,525
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net
|
|
$
|
2,985
|
|
|
$
|
7,068
|
|
|
|
|
|
|
|
|
|
|
Management periodically evaluates the realizability of the
deferred tax assets and recognizes the tax benefit only as
reassessment demonstrates that they are realizable. At such
time, if it is determined that it is more likely than not that
the deferred tax assets are realizable, the valuation allowance
will be adjusted. As of June 30, 2009, management believes
the U.S. deferred tax assets were realizable. Therefore, no
valuation allowance in the U.S. was deemed necessary. The
valuation allowance increased by $13 in fiscal year 2009 related
to higher foreign deferred tax assets.
The Companys Japanese subsidiary had net operating loss
carryforwards of $370 that will begin to expire in 2011.
Deferred tax assets related to those net operating loss
carryforwards were fully reserved as of June 30, 2009.
United States federal income taxes have not been provided for
the $377 of undistributed earnings of the Companys foreign
subsidiaries as of June 30, 2009. The Companys
present intention is to not permanently
F-36
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
reinvest the undistributed earnings of its Canadian subsidiary
offshore. The Company would be subject to additional United
States taxes if these earnings were repatriated. Determination
of the amount of unrecognized deferred income tax liability
related to these earnings is not material to the financial
statements.
Effective July 1, 2007, the Company adopted the accounting
guidance on uncertainties in income taxes. The cumulative effect
of adoption to the opening balance of retained earnings account
was $1,705. A reconciliation of the beginning and ending amounts
of unrecognized tax benefits since the adoption of accounting
guidance on uncertainty in income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
Balance as of July 1
|
|
$
|
2,383
|
|
|
$
|
2,248
|
|
|
|
|
|
Gross increases current period tax positions
|
|
|
193
|
|
|
|
868
|
|
|
|
|
|
Gross decreases current period tax positions
|
|
|
(328
|
)
|
|
|
(293
|
)
|
|
|
|
|
Reductions as a result of lapsed statute of limitations
|
|
|
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30
|
|
$
|
2,248
|
|
|
$
|
2,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys policy is to include interest and penalties
related to unrecognized tax benefits within the Companys
provision for income taxes. Upon adoption, the Company had
accrued $75 for interest and penalties related to unrecognized
tax benefits. As of June 30, 2009, the Company has accrued
$442 for interest and penalties related to the unrecognized tax
benefits. The balance of unrecognized tax benefits and the
related interest and penalties is recorded as a noncurrent
liability on the Companys consolidated balance sheet.
As of June 30, 2009, unrecognized tax benefits of $2,617,
if recognized, would affect the Companys effective tax
rate. The Company does not anticipate that the amount of
existing unrecognized tax benefits will significantly increase
or decrease within the next 12 months.
With few exceptions, the Company is no longer subject to
U.S. federal, state and local, or
non-U.S., income
tax examinations by tax authorities for years before 2004. The
Internal Revenue Service (IRS) commenced an
examination of the Companys U.S. income tax return
for its fiscal year ended June 30, 2007 that is expected to
be completed during the second quarter of fiscal year 2010. In
addition, ReliableRemodeler, a wholly-owned subsidiary that was
acquired by the Company, is under audit by the IRS for tax year
2006. The audit is currently in progress with no estimated
completion date. The Company has also been contacted for a state
income tax audit for fiscal years 2007 and 2008. The audit is
expected to commence during the fourth quarter of fiscal year
2010. The Company believes it is entitled to partial or full
indemnification for losses attributable to such audit under the
ReliableRemodeler acquisition agreement. The Company files
income tax returns in the United States, various U.S. states and
certain foreign jurisdictions. As of June 30, 2009, the tax
years 2005 through 2009 remain open in the U.S., the tax years
2004 through 2009 remain open in the various state
jurisdictions, and the tax years 2003 through 2009 remain open
in the various foreign jurisdictions.
|
|
12.
|
Commitments
and Contingencies
|
Leases
The Company leases office space and equipment under
non-cancelable operating leases with various expiration dates
through September 2012. Rent expense for the fiscal years 2007,
2008 and 2009 was $1,691, $2,151 and $2,550, respectively, and
$614 and $663 for the three months ended September 30, 2008
and 2009 respectively. The terms of the facility leases
generally provide for rental payments on a graduated scale. The
F-37
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
Company recognizes rent expense on a straight-line basis over
the lease period and has accrued for rent expense incurred but
not paid.
Future annual minimum lease payments under all noncancelable
operating leases as of June 30, 2009, are as follows:
|
|
|
|
|
|
|
Operating
|
|
Year Ending June 30,
|
|
Leases
|
|
|
2010
|
|
$
|
1,104
|
|
2011
|
|
|
242
|
|
2012
|
|
|
22
|
|
|
|
|
|
|
|
|
$
|
1,368
|
|
|
|
|
|
|
The lease for the Companys corporate headquarters expires
in October 2010. The Company is presently considering renewing
this lease or seeking a lease for an alternate property.
Guarantor
Arrangements
The Company has agreements whereby it indemnifies its officers
and directors for certain events or occurrences while the
officer or director is, or was serving, at the Companys
request in such capacity. The term of the indemnification period
is for the officer or directors lifetime. The maximum
potential amount of future payments the Company could be
required to make under these indemnification agreements is
unlimited; however, the Company has a director and officer
insurance policy that limits its exposure and enables the
Company to recover a portion of any future amounts paid. As a
result of its insurance policy coverage, the Company believes
the estimated fair value of these indemnification agreements is
minimal. Accordingly, the Company had no liabilities recorded
for these agreements as of June 30, 2008 and 2009.
In the ordinary course of its business, the Company enters into
standard indemnification provisions in its agreements with its
customers. Pursuant to these provisions, the Company indemnifies
its customers for losses suffered or incurred in connection with
third-party claims that a Company product infringed upon any
United States patent, copyright or other intellectual property
rights. Where applicable, the Company generally limits such
infringement indemnities to those claims directed solely to its
products and not in combination with other software or products.
With respect to its DSS products, the Company also generally
reserves the right to resolve such claims by designing a
non-infringing alternative or by obtaining a license on
reasonable terms, and failing that, to terminate its
relationship with the customer. Subject to these limitations,
the term of such indemnity provisions is generally coterminous
with the corresponding agreements.
The potential amount of future payments to defend lawsuits or
settle indemnified claims under these indemnification provisions
is unlimited; however, the Company believes the estimated fair
value of these indemnity provisions is minimal, and accordingly,
the Company had no liabilities recorded for these agreements as
of June 30, 2008 and 2009.
During fiscal year 2009, the Company settled an indemnity
obligation with respect to one ongoing litigation matter. See
discussion below for further details.
Litigation
In August 2005, the Company was notified by one of its clients
that epicRealm Licensing, LLC (epicRealm LLC), a
non-operating patent holding company, had filed a lawsuit
against such client in the United States District Court for the
Eastern District of Texas alleging that certain web-based
services provided by the Company and others to such client
infringed patents held by epicRealm LLC.
F-38
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
In August 2006, the Company filed suit against epicRealm
Licensing LP (epicRealm LP) in the
United States District Court for the District of Delaware
seeking to invalidate certain patents owned by epicRealm LP. In
April 2007, epicRealm LP filed counterclaims against the Company
alleging patent infringement. Parallel Networks, LLC was later
substituted for epicRealm LP as the patent holder and
party-in-interest.
In April 2009, the Company entered into a settlement and license
agreement (Agreement) with Parallel Networks
pertaining to the patents in question (Licensed
Patents). Under the terms of the Agreement, Parallel
Networks granted the Company a perpetual, royalty-free,
non-sublicensable and generally non-transferable, worldwide
right and license under the Licensed Patents: (i) to use
any product technology or service covered by or which embodies
any one or more claims of the Licensed Patents (as defined in
the Agreement); and (ii) to practice any method covered by
any one or more claims of the Licensed Patents in connection
with the activities in clause (i). Additionally, Parallel
Networks covenants not to sue the Company.
The Company paid Parallel Networks a one-time, non-refundable
fee of $850. The Company recognized an intangible asset of $226
related to the estimated fair value of the license and expensed
the remaining $624 as a settlement expense.
|
|
13.
|
Related
Party Transactions
|
Katrina Boydon serves as the Companys Vice President of
Content and Compliance and is the sister of Bronwyn Syiek, the
Companys President and Chief Operating Officer.
Ms. Boydons fiscal year 2010 base salary is $193 per
year, and she has a fiscal year 2010 target bonus of $67. In
fiscal years 2007, 2008 and 2009, Ms. Boydon received a
base salary of $149 (later increased to $158), $169 (later
increased to $175) and $184 per year, respectively, and a bonus
payout of $46, $45 and $51, respectively. In fiscal years 2007,
2008, 2009 and 2010, Ms. Boydon was granted options to
purchase an aggregate of 64,000, 20,000, 30,000 and
45,000 shares of the Companys common stock,
respectively.
Rian Valenti serves as a client sales and development associate
and is the son of Doug Valenti, the Companys Chief
Executive Officer and Chairman. Mr. Rian Valentis
fiscal year 2010 base salary is $54 per year, and he has a
fiscal year 2010 commission opportunity of $45. Mr. Rian
Valenti joined us in fiscal year 2009 with a base salary of $52.
In fiscal year 2009, Mr. Rian Valenti received an aggregate
of $2 in commissions. In fiscal year 2009, Mr. Rian Valenti
was granted an option to purchase an aggregate of
1,500 shares of the Companys common stock.
The Company has a preferred publisher agreement with Remilon, an
online publishing entity, one of whose primary owners is the
brother-in-law
of one of the Companys Executive Vice Presidents. Under
the preferred publisher agreement, the Company pays commissions
for qualified leads generated from links on Remilons
website. The Company paid commissions to Remilon for the fiscal
years June 30, 2007, 2008 and 2009 and the three months
ended September 30, 2008 and 2009 of $3,109, $3,070,
$4,204, $997 and $1,366, respectively. Amounts payable to
Remilon at June 30, 2008 and 2009 and September 30,
2009 were $489, $721 and $811, respectively. This contract
expired in October 2009.
The Company has evaluated subsequent events through
January 14, 2010. For the reissuance of these financial
statements, the Company has evaluated subsequent events through
January 25, 2010 (unaudited).
Option
Grants
On October 6, 2009, the Company issued options to purchase
220,660 shares of common stock with an exercise price of
$11.08 per share. While, consistent with the previous practice,
the Company had performed a
F-39
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
contemporaneous valuation at the time of the grant, in November
2009, it decided to reassess that valuation for financial
reporting purposes in light of the Companys acceleration
of its plans for a proposed IPO and additional data on expected
valuation ranges for the IPO. Based on the reassessment,
management concluded that the fair market value of the
Companys common stock at October 6, 2009 for
financial reporting purposes was $16.88. The Company will
recognize stock compensation expense for the October 2009 option
grants accordingly.
On November 17, 2009, the Company issued options to
purchase an additional 1,080,500 shares of common stock
with an exercise price of $19.00 per share, based on a
contemporaneous management valuation and the expected valuation
ranges for this offering at such time.
Acquisitions
after September 30, 2009
In October 2009, the Company acquired the website business of
Insure.com, an Illinois-based online marketing company, in
exchange for $15 million in cash paid upon closing of the
acquisition and a $1 million non-interest-bearing,
unsecured promissory note. The note is payable in one annual
installment. In November 2009, the Company acquired the website
assets of the Internet.com division of WebMediaBrands, Inc. for
$16.0 million in cash and a $2.0 million non-interest-bearing,
unsecured promissory note.
2010
Equity Incentive Plan
In November 2009, the Companys board of directors adopted
the 2010 Equity Incentive Plan (the 2010 Incentive
Plan), and the Company expects that its stockholders will
approve the 2010 Incentive Plan prior to the closing of this
offering. The 2010 Incentive Plan will become effective
immediately upon the signing of the underwriting agreement for
this offering. The 2010 Incentive Plan provides for the grant of
incentive stock options, nonstatutory stock options, restricted
stock awards, restricted stock unit awards, stock appreciation
rights, performance-based stock awards and other forms of equity
compensation. In addition, the 2010 Incentive Plan provides for
the grant of performance cash awards. Incentive stock options
may be granted only to employees. All other awards may be
granted to employees, including officers, nonemployee directors
and consultants.
2010
Non-Employee Directors Stock Award Plan
In November 2009, the Companys board of directors adopted
the 2010 Non-Employee Directors Stock Award Plan (the
Directors Plan) and the Company expects that
its stockholders will approve the Directors Plan prior to
the completion of this offering. The Directors Plan will
become effective immediately upon the signing of the
underwriting agreement for this offering. The Directors
Plan provides for the automatic grant of nonstatutory stock
options to purchase shares of our common stock to our
non-employee directors. The Directors Plan also provides
for the discretionary grant of restricted stock units.
Debt
On November 18, 2009, the Company entered into an amendment
of its existing credit facility pursuant to which the
Companys lenders agreed to increase the maximum amount
available under the Companys revolving credit facility
from $70.0 million to $100.0 million.
In January 2010, the Company replaced its existing credit
facility with a credit facility with a total borrowing capacity
of $175.0 million. The new facility consists of a
$35.0 million four-year term loan, with principal
amortization of 10%, 15%, 35% and 40% annually, and a
$140.0 million four-year revolving credit facility.
Borrowings under the credit facility are collateralized by the
Companys assets and interest is payable quarterly at
specified margins above either LIBOR or the Prime Rate. The
interest rate varies dependent upon
F-40
QUINSTREET,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(In
thousands, except share and per share data)
the ratio of funded debt to adjusted EBITDA and ranges from
LIBOR + 2.125% to 2.875% or Prime + 1.00% to 1.50% for the
revolving credit facility and from LIBOR + 2.50% to 3.25% or
Prime + 1.00% to 1.50% for the term loan. The revolver also
requires a quarterly facility fee of $131,000. The credit
facility expires in January 2014. The loan and revolving credit
facility agreement restricts the Companys ability to raise
additional debt financing and pay dividends. In addition, the
Company is required to maintain financial ratios computed as
follows:
1. Quick ratio: ratio of (i) the sum of unrestricted
cash and cash equivalents and trade receivables less than
90 days from invoice date to (ii) current liabilities
and face amount of any letters of credit less the current
portion of deferred revenue.
2. Fixed charge coverage: ratio of (i) trailing
12 months of Adjusted EBITDA to (ii) the sum of
capital expenditures, net cash interest expense, cash taxes,
cash dividends and trailing twelve months payments of
indebtedness. Payment of unsecured indebtedness is excluded to
the degree that sufficient unused revolving credit facility
exists such that the relevant debt payment could have been made
from the credit facility.
3. Funded debt to Adjusted EBITDA: ratio of (i) the
sum of all obligations owed to lending institutions, the face
amount of any letters of credit, indebtedness owed in connection
with acquisition related notes and indebtedness owed in
connection with capital lease obligations to (ii) trailing
12-month
Adjusted EBITDA.
Reincorporation
in Delaware
In December 2009, the Company reincorporated in Delaware and, in
connection therewith, increased its authorized number of shares
of common and preferred stock 50,500,000 and 35,500,000,
respectively, and established the par value of each share of
common and preferred stock to be $0.001. In connection with the
reincorporation, the previously outstanding
5,367,756 shares of Series A convertible preferred
stock were converted on a two-for-one basis into
10,735,512 shares of Series A convertible preferred stock
of the reincorporated company. Conversion and liquidation rights
of Series A convertible preferred stock were adjusted
consistent with the conversion. In connection with the
reincorporation, common stock and additional paid-in capital
amounts in these financial statements have been adjusted to
reflect the par value of common stock shares. All share
information included in these financial statements, including
Notes 8 and 9, has been adjusted to reflect this reincorporation
and the increase of the number of Series A convertible
preferred stock.
F-41
10,000,000 Shares
QuinStreet,
Inc.
Common
Stock
PROSPECTUS
|
|
|
Credit
Suisse
|
BofA Merrill Lynch
|
J.P. Morgan
|
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
ITEM 13.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth the costs and expenses, other
than underwriting discounts and commissions, payable in
connection with the sale and distribution of the shares being
registered. All amounts are estimated except the SEC
registration fee, the FINRA filing fee and the NASDAQ filing
fee. The fees payable to Qatalyst Partners LP are based on an
assumed public offering price of $18.00 per share, which is the
midpoint of the range listed on the cover page of the prospectus
which is a part of this registration statement, and exclude
additional fees that may be payable upon exercise of the
underwriters over-allotment option. Except as otherwise
noted, all the expenses below will be paid by QuinStreet.
|
|
|
|
|
Item
|
|
Amount
|
|
|
SEC Registration fee
|
|
$
|
13,950
|
|
FINRA filing fee
|
|
|
25,500
|
|
NASDAQ listing fee
|
|
|
125,000
|
|
Advisory fees payable to Qatalyst Partners LP(1)
|
|
|
2,520,000
|
|
Legal fees and expenses
|
|
|
900,000
|
|
Accounting fees and expenses
|
|
|
975,000
|
|
Printing and engraving expenses
|
|
|
200,000
|
|
Transfer agent and registrar fees and expenses
|
|
|
25,000
|
|
Blue Sky fees and expenses
|
|
|
20,000
|
|
Miscellaneous fees and expenses
|
|
|
50,000
|
|
|
|
|
|
|
Total
|
|
$
|
4,854,450
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Assuming an initial public offering price per share of $18.00.
An additional amount of $378,000 will be payable to Qatalyst
Partners LP if the underwriters exercise in full their option to
purchase an aggregate of 1,500,000 shares to cover
over-allotments. The underwriters have agreed to reimburse us
for the expenses payable to Qatalyst.
|
|
|
ITEM 14.
|
Indemnification
of Directors and Officers.
|
Section 145 of the Delaware General Corporation Law
authorizes a court to award, or a corporations board of
directors to grant, indemnity to directors and officers in terms
sufficiently broad to permit such indemnification under certain
circumstances for liabilities, including reimbursement for
expenses incurred, arising under the Securities Act of 1933, as
amended. Our amended and restated certificate of incorporation
to be in effect upon the completion of this offering eliminates
the liability of our directors for monetary damages to the
fullest extent permitted under the Delaware General Corporation
Law. Our amended and restated bylaws to be in effect upon
completion of this offering require us to indemnify our
directors and executive officers to the maximum extent not
prohibited by the Delaware General Corporation Law or any other
applicable law and allow us to indemnify other officers,
employees and other agents as set forth in the Delaware General
Corporation Law or any other applicable law.
We have entered into indemnification agreements with our
directors and executive officers, whereby we have agreed to
indemnify our directors and executive officers to the fullest
extent permitted by law, including indemnification against
expenses and liabilities incurred in legal proceedings to which
the director or officer was, or is threatened to be made, a
party by reason of the fact that such director or officer is or
was a director, officer, employee or agent of QuinStreet,
provided that such director or officer acted in good faith and
in a manner that the director or officer reasonably believed to
be in, or not opposed to, the best interest of QuinStreet. At
present, there is no pending litigation or proceeding involving
a director or officer of
II-1
QuinStreet regarding which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
We maintain insurance policies that indemnify our directors and
officers against various liabilities arising under the
Securities Act of 1933 and the Securities Exchange Act of 1934
that might be incurred by any director or officer in his or her
capacity as such.
The underwriters are obligated, under certain circumstances,
pursuant to the underwriting agreement to be filed as
Exhibit 1.1 hereto, to indemnify us, our officers and
directors against liabilities under the Securities Act of 1933,
as amended.
|
|
ITEM 15.
|
Recent
Sales of Unregistered Securities.
|
Since July 1, 2006, we have not sold any unregistered
securities other than the grant of stock options to purchase an
aggregate of 9,522,299 shares of common stock to employees,
consultants and directors pursuant to our 2008 Equity Incentive
Plan, having exercise prices ranging from $9.01 to $19.00 per
share. During such period, options to purchase 1,992,042 shares
have been exercised for cash consideration in the aggregate
amount of $5,050,753.
The offers, sales and issuances of the securities described in
this Item 15 were deemed to be exempt from registration
under the Securities Act under either (1) Rule 701 promulgated
under the Securities Act as offers and sale of securities
pursuant to certain compensatory benefit plans and contracts
relating to compensation in compliance with Rule 701 or (2)
Section 4(2) or 3(b) of the Securities Act as transactions
by an issuer not involving any public offering. The recipients
of securities in the transactions exempt under Section 4(2)
of the Securities Act represented their intention to acquire the
securities for investment only and not with view to or for sale
in connection with any distribution thereof and appropriate
legends were affixed to the stock certificates and instruments
issued in such transactions.
|
|
ITEM 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) Exhibits.
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement.
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of QuinStreet,
Inc., as currently in effect.
|
|
3
|
.2
|
|
Form of Amended and Restated Certificate of Incorporation of
QuinStreet, Inc., to be in effect upon completion of the
offering.
|
|
3
|
.3
|
|
Amended and Restated Bylaws of QuinStreet, Inc., as currently in
effect.
|
|
3
|
.4
|
|
Form of Amended and Restated Bylaws of QuinStreet, Inc., to be
in effect upon completion of the offering.
|
|
4
|
.1
|
|
Form of QuinStreet, Inc.s Common Stock Certificate.
|
|
4
|
.2
|
|
Second Amended and Restated Investor Rights Agreement, by and
between QuinStreet, Inc., Douglas Valenti and the investors
listed on Schedule 1 thereto, dated May 28, 2003.
|
|
5
|
.1
|
|
Form of Opinion of Cooley Godward Kronish LLP.
|
|
10
|
.1+
|
|
QuinStreet, Inc. 2008 Equity Incentive Plan.
|
|
10
|
.2+
|
|
Forms of Option Agreement and Option Grant Notice under 2008
Equity Incentive Plan (for non-executive officer employees).
|
|
10
|
.3+
|
|
Forms of Option Agreement and Option Grant Notice under 2008
Equity Incentive Plan (for executive officers).
|
|
10
|
.4+
|
|
Forms of Option Agreement and Option Grant Notice under 2008
Equity Incentive Plan (for non-employee directors).
|
|
10
|
.5+
|
|
QuinStreet, Inc. 2010 Equity Incentive Plan.
|
|
10
|
.6+
|
|
Forms of Option Agreement and Option Grant Notice under 2010
Equity Incentive Plan (for non-executive officer employees).
|
lI-2
|
|
|
|
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
10
|
.7+
|
|
Forms of Option Agreement and Option Grant Notice under 2010
Equity Incentive Plan (for executive officers).
|
|
10
|
.8+
|
|
QuinStreet, Inc. 2010 Non-Employee Directors Stock Award
Plan.
|
|
10
|
.9+
|
|
Form of Option Agreement and Option Grant Notice for Initial
Grants under the 2010 Non-Employee Directors Stock Award
Plan.
|
|
10
|
.10+
|
|
Form of Option Agreement and Option Grant Notice for Annual
Grants under the 2010 Non-Employee Directors Stock Award
Plan.
|
|
10
|
.11+
|
|
Form of 2010 Incremental Bonus Plan.
|
|
10
|
.12+
|
|
Annual Incentive Plan.
|
|
10
|
.13
|
|
Amended and Restated Revolving Credit and Term Loan Agreement,
by and among QuinStreet, Inc., the lenders thereto and Comerica
Bank as Administrative Agent, dated as of January 13, 2010.
|
|
10
|
.14
|
|
Security Agreement, by and among QuinStreet, Inc., certain
subsidiaries of QuinStreet, Inc. and Comerica Bank as
Administrative Agent, dated as of September 29, 2008.
|
|
10
|
.15#
|
|
QuinStreet Merchant Agreement, dated as of July 3, 2001, by
and between QuinStreet, Inc. and DeVry, Inc.
|
|
10
|
.16#
|
|
Letter Agreement, dated as of December 2, 2003, by and
between QuinStreet, Inc. and DeVry, Inc.
|
|
10
|
.17#
|
|
Letter Agreement by and between QuinStreet, Inc. and DeVry, Inc.
|
|
10
|
.18#
|
|
Letter Agreement, dated as of October 5, 2007, by and
between QuinStreet, Inc. and DeVry, Inc.
|
|
10
|
.19+
|
|
Form of Indemnification Agreement made by and between
QuinStreet, Inc. and each of its directors and executive
officers.
|
|
10
|
.20
|
|
Office Lease Agreement, dated as of June 2, 2003, by and
between QuinStreet, Inc. and CA-Parkside Towers Limited
Partnership, as amended.
|
|
21
|
.1
|
|
List of subsidiaries.
|
|
23
|
.1
|
|
Consent of Cooley Godward Kronish LLP (included in
Exhibit 5.1).
|
|
23
|
.2
|
|
Consent of PricewaterhouseCoopers LLP, an independent registered
public accounting firm.
|
|
24
|
.1
|
|
Power of Attorney.
|
|
|
|
|
|
Previously filed.
|
|
+
|
|
Indicates management contract or compensatory plan.
|
|
#
|
|
We have requested confidential treatment for portions of this
exhibit.
|
(b) Financial Statement Schedules.
The following schedule is filed as part of this registration
statement.
Schedule II Valuation and Qualifying
Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule II:
|
|
|
|
|
|
|
|
|
Valuation and
|
|
|
|
|
|
|
|
|
Qualifying Accounts
|
|
Charged to
|
|
|
|
|
|
|
Balance at the
|
|
Expenses/
|
|
Write-offs
|
|
Balance at
|
|
|
Beginning
|
|
Against the
|
|
Net of
|
|
the End of
|
Allowance for doubtful accounts and sales credits
|
|
of the Year
|
|
Revenue
|
|
Receivables
|
|
the Year
|
|
Fiscal year 2007
|
|
$
|
474
|
|
|
$
|
781
|
|
|
$
|
(161
|
)
|
|
$
|
1,094
|
|
Fiscal year 2008
|
|
$
|
1,094
|
|
|
$
|
1,217
|
|
|
$
|
(150
|
)
|
|
$
|
2,161
|
|
Fiscal year 2009
|
|
$
|
2,161
|
|
|
$
|
1,463
|
|
|
$
|
(115
|
)
|
|
$
|
3,509
|
|
lI-3
Note: Additions to the allowance for doubtful accounts are
charged to expense. Additions to the allowance for sales credits
are charged against revenues.
All other schedules are omitted because the information called
for is not required or is shown either in the financial
statements or the notes thereto.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting
Agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities 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
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
lI-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we
have duly caused this Amendment No. 3 to the Registration
Statement on
Form S-1
to be signed on our behalf by the undersigned, thereunto duly
authorized, in the City of Foster City, State of California, on
the 25
th
day of January, 2010.
QUINSTREET, INC.
Douglas Valenti
Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 3 to the Registration Statement
has been signed by the following persons in the capacities and
on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Douglas
Valenti
Douglas
Valenti
|
|
Chief Executive Officer and Chairman (
Principal Executive
Officer
)
|
|
January 25, 2010
|
|
|
|
|
|
/s/ Kenneth
Hahn
Kenneth
Hahn
|
|
Chief Financial Officer
(
Principal Financial and Accounting Officer
)
|
|
January 25, 2010
|
|
|
|
|
|
*
William
Bradley
|
|
Director
|
|
January 25, 2010
|
|
|
|
|
|
*
John
G. McDonald
|
|
Director
|
|
January 25, 2010
|
|
|
|
|
|
*
Gregory
Sands
|
|
Director
|
|
January 25, 2010
|
|
|
|
|
|
*
James
Simons
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Director
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|
January 25, 2010
|
|
|
|
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*
Glenn
Solomon
|
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Director
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|
January 25, 2010
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|
|
|
|
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*
Dana
Stalder
|
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Director
|
|
January 25, 2010
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|
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*By:
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/s/ Kenneth
Hahn
Kenneth
Hahn
Attorney-in-fact
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lI-5
EXHIBIT INDEX
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|
|
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Exhibit No.
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|
Description of Exhibit
|
|
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1
|
.1
|
|
Form of Underwriting Agreement.
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of QuinStreet,
Inc., as currently in effect.
|
|
3
|
.2
|
|
Form of Amended and Restated Certificate of Incorporation of
QuinStreet, Inc., to be in effect upon completion of the
offering.
|
|
3
|
.3
|
|
Amended and Restated Bylaws of QuinStreet, Inc., as currently in
effect.
|
|
3
|
.4
|
|
Form of Amended and Restated Bylaws of QuinStreet, Inc., to be
in effect upon completion of the offering.
|
|
4
|
.1
|
|
Form of QuinStreet, Inc.s Common Stock Certificate.
|
|
4
|
.2
|
|
Second Amended and Restated Investor Rights Agreement, by and
between QuinStreet, Inc., Douglas Valenti and the investors
listed on Schedule 1 thereto, dated May 28, 2003.
|
|
5
|
.1
|
|
Form of Opinion of Cooley Godward Kronish LLP.
|
|
10
|
.1+
|
|
QuinStreet, Inc. 2008 Equity Incentive Plan.
|
|
10
|
.2+
|
|
Forms of Option Agreement and Option Grant Notice under 2008
Equity Incentive Plan (for non-executive officer employees).
|
|
10
|
.3+
|
|
Forms of Option Agreement and Option Grant Notice under 2008
Equity Incentive Plan (for executive officers).
|
|
10
|
.4+
|
|
Forms of Option Agreement and Option Grant Notice under 2008
Equity Incentive Plan (for non-employee directors).
|
|
10
|
.5+
|
|
QuinStreet, Inc. 2010 Equity Incentive Plan.
|
|
10
|
.6+
|
|
Forms of Option Agreement and Option Grant Notice under 2010
Equity Incentive Plan (for non-executive officer employees).
|
|
10
|
.7+
|
|
Forms of Option Agreement and Option Grant Notice under 2010
Equity Incentive Plan (for executive officers).
|
|
10
|
.8+
|
|
QuinStreet, Inc. 2010 Non-Employee Directors Stock Award
Plan.
|
|
10
|
.9+
|
|
Form of Option Agreement and Option Grant Notice for Initial
Grants under the 2010 Non-Employee Directors Stock Award
Plan.
|
|
10
|
.10+
|
|
Form of Option Agreement and Option Grant Notice for Annual
Grants under the 2010 Non-Employee Directors Stock Award
Plan.
|
|
10
|
.11+
|
|
Form of 2010 Incremental Bonus Plan.
|
|
10
|
.12+
|
|
Annual Incentive Plan.
|
|
10
|
.13
|
|
Amended and Restated Revolving Credit and Term Loan Agreement,
by and among QuinStreet, Inc., the lenders thereto and Comerica
Bank as Administrative Agent, dated as of January 13, 2010.
|
|
10
|
.14
|
|
Security Agreement, by and among QuinStreet, Inc., certain
subsidiaries of QuinStreet, Inc. and Comerica Bank as
Administrative Agent, dated as of September 29, 2008.
|
|
10
|
.15#
|
|
QuinStreet Merchant Agreement, dated as of July 3, 2001, by
and between QuinStreet, Inc. and DeVry, Inc.
|
|
10
|
.16#
|
|
Letter Agreement, dated as of December 2, 2003, by and
between QuinStreet, Inc. and DeVry, Inc.
|
|
10
|
.17#
|
|
Letter Agreement by and between QuinStreet, Inc. and DeVry, Inc.
|
|
10
|
.18#
|
|
Letter Agreement, dated as of October 5, 2007, by and
between QuinStreet, Inc. and DeVry, Inc.
|
|
10
|
.19+
|
|
Form of Indemnification Agreement made by and between
QuinStreet, Inc. and each of its directors and executive
officers.
|
|
10
|
.20
|
|
Office Lease Agreement, dated as of June 2, 2003, by and
between QuinStreet, Inc. and CA-Parkside Towers Limited
Partnership, as amended.
|
|
|
|
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Exhibit No.
|
|
Description of Exhibit
|
|
|
21
|
.1
|
|
List of subsidiaries.
|
|
23
|
.1
|
|
Consent of Cooley Godward Kronish LLP (included in
Exhibit 5.1).
|
|
23
|
.2
|
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm.
|
|
24
|
.1
|
|
Power of Attorney.
|
|
|
|
|
|
Previously filed.
|
|
+
|
|
Indicates management contract or compensatory plan.
|
|
#
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|
We have requested confidential treatment for portions of this
exhibit.
|
Exhibit 10.20
PARKSIDE TOWERS
FOSTER CITY, CALIFORNIA
OFFICE LEASE AGREEMENT
BETWEEN
CA-PARKSIDE TOWERS LIMITED PARTNERSHIP, a Delaware limited partnership
(LANDLORD)
AND
QUINSTREET, INC., a California corporation
(TENANT)
OFFICE LEASE AGREEMENT
THIS OFFICE LEASE AGREEMENT
(the
Lease)
is made and entered into as of the 2nd day of
June, 2003, by and between
CA-PARKSIDE TOWERS LIMITED PARTNERSHIP, a Delaware limited
partnership (Landlord)
and
QUINSTREET, INC., a California corporation (Tenant).
The following
exhibits and attachments are incorporated into and made a part of the Lease:
Exhibit A
(Outline and
Location of Premises),
Exhibit B
(Expenses and Taxes),
Exhibit C
(Work Letter),
Exhibit C-1
(Plans),
Exhibit C
-2 (Building Standards),
Exhibit D
(Commencement Letter),
Exhibit E
(Building
Rules and Regulations),
Exhibit F
(Additional Provisions),
Exhibit F-1
(Refusal Space),
Exhibit G
(Parking Agreement) and
Exhibit H
(Form of Letter of Credit).
1. Basic Lease Information.
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1.01
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|
Building
shall collectively mean the buildings and retail concourse in Foster City,
California, located at 1001 East Hillsdale Boulevard (the
West Tower),
1031 A-F East
Hillsdale Boulevard (the
Retail Concourse),
and 1051 East Hillsdale Boulevard (the
East
Tower). Rentable Square Footage of the Building
is deemed to be
398,460
square feet
based upon the combined rentable area of the West Tower, the Retail Concourse and the East
Tower.
|
|
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1.02
|
|
Premises
shall mean the area shown on
Exhibit A
to this Lease. The Premises is
located on the eighth floor of the East Tower and known as suite 800. If the Premises
include one or more floors in their entirety, all corridors and restroom facilities located
on such full floor(s) shall be considered part of the Premises. The
Rentable Square
Footage of the Premises
is deemed to be
35,435
square feet. Landlord and Tenant stipulate
and agree that the Rentable Square Footage of the Building and the Rentable Square Footage
of the Premises are correct.
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1.03
|
|
Base Rent:
|
|
|
|
|
|
|
|
|
|
|
|
Annual Rate
|
|
Monthly
|
Months of Term
|
|
Per Square Foot
|
|
Base Rent
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1 - 12
|
|
$
|
22.80
|
|
|
$
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67,326.50
|
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13 - 24
|
|
$
|
24.60
|
|
|
$
|
72,641.75
|
|
25 - 36
|
|
$
|
26.40
|
|
|
$
|
77,957.00
|
|
37 - 48
|
|
$
|
27.60
|
|
|
$
|
81,500.50
|
|
49 - 60
|
|
$
|
28.80
|
|
|
$
|
85,044.00
|
|
61 - 72
|
|
$
|
30.00
|
|
|
$
|
88,587.50
|
|
|
|
|
Notwithstanding anything in this Section of the Lease to the contrary, so long as
Tenant is not in default under this Lease, Tenant shall be entitled to an abatement
of Base Rent in the amount of $67,326.50 per month for three consecutive full calendar
months of the Term, beginning with the first full calendar month of the Term (the
Base Rent Abatement Period).
The total amount of Base Rent abated during the Base
Rent Abatement Period shall equal $201,979.50 (the
Abated Base Rent).
If Tenant
defaults at any time during the Term and fails to cure such default within any
applicable cure period under the Lease, all Abated Base Rent shall immediately become
due and payable. The payment by Tenant of the Abated Base Rent in the event of a
default shall not limit or affect any of Landlords other rights, pursuant to this
Lease or at law or in equity. During the Base Rent Abatement Period, only Base Rent
shall be abated, and all Additional Rent and other costs and charges specified in this
Lease shall remain as due and payable pursuant to the provisions of this Lease.
|
|
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1.04
|
|
Tenants Pro Rata Share: 8.8930%.
For purposes of determining Tenants Pro Rata
Share, and as used throughout
Exhibit B
of this Lease, the Building shall mean,
collectively, the West Tower, the Retail Concourse and the East Tower, it being understood
and agreed that all of the foregoing buildings, collectively, are treated as a single
building for purposes of obtaining or providing services or otherwise determining Expenses
and/or Taxes. In calculating Tenants Pro Rata Share of Expenses and/or Taxes with respect
to the Premises, the Rentable Square Footage of the Building described in Section 1.01
above reflects the combined rentable area in the foregoing buildings, collectively, and
Tenants Pro Rata Share with respect to the Premises, as described above, is based upon
the foregoing Rentable Square Footage of the Building. However, notwithstanding the
foregoing, if one or more buildings are removed from the group of buildings comprising the
Building, as described above in this Section, whether as a result of a sale or demolition
of the building(s) or otherwise, or if one or more buildings owned by Landlord are added to
the group of buildings comprising the Building, as
|
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
1
|
|
|
described above in this Section, then the definition of Building and the Rentable
Square Footage of the Building, as described in this Section 1, and Tenants Pro
Rata Share with respect to the Premises, shall be appropriately modified or adjusted
to reflect the deletion or addition of such buildings, and, if Tenants Pro Rata Share
of Expenses and/or Taxes with respect to the Premises is based upon increases in
Expenses and/or Taxes over a Base Year, then Expenses and/or Taxes for the Base Year
shall be restated on a going forward basis effective as of the date such buildings are
deleted or added to the definition of Building as described in this Section.
|
|
1.05
|
|
Base Year
for Taxes (defined in
Exhibit B):
2004;
Base Year
for Expenses (defined
in
Exhibit B):
2004.
|
|
|
1.06
|
|
Term:
A period of 72 months. Subject to Section 3, the Term shall commence on October
15, 2003 (the
Commencement Date)
and, unless terminated early in accordance with this
Lease, end on October 14, 2009 (the
Termination Date
).
|
|
|
1.07
|
|
[Intentionally Omitted.]
|
|
|
1.08
|
|
Security Deposit:
$177,175.00, as more fully described in Section 6.
|
|
|
1.09
|
|
Guarantor(s):
None.
|
|
|
1.10
|
|
Broker(s):
Wayne Mascia Associates.
|
|
|
1.11
|
|
Permitted Use:
General office use.
|
|
|
1.12
|
|
Notice Address(es):
|
|
|
|
|
|
Landlord:
|
|
Tenant:
|
|
CA-Parkside Towers Limited Partnership
|
|
Prior to Commencement Date
:
|
|
c/o Equity Office Management, L.L.C.
|
|
301 Constitution Drive
|
|
725 Saginaw Drive
|
|
Menlo Park, CA 94025
|
|
Redwood City, California 94063
|
|
Attn: Michael McDonough
|
|
Attention: Property Manager
|
|
|
|
|
|
Following the Commencement Date
:
|
|
|
|
1051 East Hillsdale Boulevard
|
|
|
|
Suite 800
|
|
|
|
Foster City, CA 94404
|
|
|
|
Attn: Michael McDonough
|
|
|
|
A copy of any notices to Landlord shall be sent to Equity Office, Two North Riverside
Plaza, Suite 2100, Chicago, Illinois, 60606, Attn: San Francisco Regional Counsel.
|
|
|
1.13
|
|
Business Day(s)
are Monday through Friday of each week, exclusive of New Years Day,
Presidents Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day
(Holidays)
. Landlord may designate additional Holidays that are commonly recognized
by other office buildings in the area where the Building is located.
Building Service
Hours
are 6:00 a.m. to 6:00 p.m. on Business Days.
|
|
|
1.14
|
|
Landlord Work
means the work that Landlord is obligated to perform in the Premises
pursuant to a separate agreement (the
Work Letter
) attached to this Lease as
Exhibit C
.
|
|
|
1.15
|
|
Property
means the Building and the parcel(s) of land on which it is located and, at
Landlords discretion, the parking facilities and other improvements, if any, serving the
Building and the parcel(s) of land on which they are located.
|
2. Lease Grant.
The Premises are hereby leased to Tenant from Landlord, together with the right to use any
portions of the Property that are designated by Landlord for the common use of tenants and others
(the
Common Areas
).
3. Adjustment of Commencement Date; Possession.
3.01 If Landlord is required to perform Landlord Work prior to the Commencement Date: (a) the
date set forth in Section 1.06 as the Commencement Date shall instead be defined as the
Target
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
2
Commencement
Date
; (b) the actual Commencement Date shall be the date on which the Landlord Work
is Substantially Complete (defined below); and (c) the Termination Date will the last day of the
Term as determined based upon the actual Commencement Date. Landlords failure to Substantially
Complete the Landlord Work by the Target Commencement Date shall not be a default by Landlord or
otherwise render Landlord liable for damages; provided, however, that if the Commencement Date has
not occurred on or before October 16, 2003 (the Outside Completion Date), Tenant shall be
entitled to a rent abatement following the Commencement Date, in addition to the Abated Base Rent
described in Section 1.03, of $2,171.82 for every day in the period beginning on the Outside
Completion Date and ending on the Commencement Date. Landlord and Tenant acknowledge and agree that
the Outside Completion Date shall be postponed by the number of days the Commencement Date is
delayed due to events of Force Majeure. Promptly after the determination of the Commencement Date,
Landlord and Tenant shall enter into a commencement letter agreement in the form attached as
Exhibit D
. If the Termination Date does not fall on the last day of a calendar month, Landlord and
Tenant may elect to adjust the Termination Date to the last day of the calendar month in which
Termination Date occurs by the mutual execution of a commencement letter agreement setting forth
such adjusted date. The Landlord Work shall be deemed to be
Substantially Complete
on the later
of (a) the date that all Landlord Work has been performed, other than any details of construction,
mechanical adjustment or any other similar matter, the non-completion of which does not materially
interfere with Tenants use of the Premises, in a good and workmanlike manner and in compliance
with the Plans (as defined in the Work Letter and subject to any revisions to the Plans approved by
Landlord and Tenant in accordance with the Work Letter), and (b) the date Landlord receives from
the appropriate governmental authorities all approvals necessary for the occupancy of the Premises.
If Landlord is delayed in the performance of the Landlord Work as a result of the acts or omissions
of Tenant, the Tenant Related Parties (defined in Section 13) or their respective contractors or
vendors, including, without limitation, changes requested by Tenant to approved plans, Tenants
failure to comply with any of its obligations under this Lease, or the specification of any
materials or equipment with long lead times (a
Tenant Delay
), the Landlord Work shall be deemed
to be Substantially Complete on the date that Landlord could reasonably have been expected to
Substantially Complete the Landlord Work absent any Tenant Delay.
3.02 Subject to Landlords obligation to perform Landlord Work and the Common Area Work, the
Premises are accepted by Tenant in as is condition and configuration without any representations
or warranties by Landlord. By taking possession of the Premises, Tenant agrees that the Premises
are in good order and satisfactory condition. Notwithstanding the foregoing, except to the extent
caused by Tenant or any Tenant Related Party, as of the Commencement Date, the Building electrical,
heating, ventilation and air conditioning, mechanical and plumbing systems serving the Premises and
the Common Areas of the Building shall be in good order and satisfactory condition and in
compliance with applicable Laws (as defined in Section 5). If the foregoing are not in good working
order or compliance as provided above, Landlord shall be responsible for repairing or restoring
same, or correcting such violations, at its cost and expense, provided that the foregoing shall not
prohibit Landlord from including the cost of routine maintenance and repair of such Building
systems in Expenses as otherwise permitted under Section 4.02 hereof. If Tenant takes possession of
the Premises before the Commencement Date, such possession shall be subject to the terms and
conditions of this Lease and Tenant shall pay Rent (defined in Section 4.01) to Landlord for each
day of possession before the Commencement Date. However, except for the reasonable cost of services
requested by Tenant (e.g. freight elevator usage), Tenant shall not be required to pay Rent for any
days of possession before the Commencement Date during which Tenant, with the approval of Landlord,
is in possession of the Premises for the sole purpose of performing improvements or installing
furniture, equipment or other personal property. Notwithstanding the foregoing but subject to the
terms of this Section 3.02, Landlord grants Tenant the right to enter the Premises, at Tenants
sole risk, thirty (30) days prior to Landlords then reasonable estimate of the Commencement Date,
for the purpose of installing telecommunications and data cabling, fiber optic links, equipment,
furnishings and other personalty, and for conducting business operations in the Premises. Landlord
may withdraw such permission to enter the Premises prior to the Commencement Date at any time that
Landlord reasonably determines that such entry by Tenant is causing a dangerous situation for
Landlord, Tenant or their respective contractors or employees, or if Landlord reasonably
determines that such entry by Tenant is hampering or otherwise preventing Landlord from
proceeding with the completion of Landlords Work at the earliest possible date.
4. Rent.
4.01 Tenant shall pay Landlord, without any setoff or deduction, unless expressly set forth in
this Lease, all Base Rent and Additional Rent due for the Term (collectively referred to as
Rent
).
Additional Rent
means all sums (exclusive of Base Rent) that Tenant is required to pay
Landlord under this Lease. Tenant shall pay and be liable for all rental, sales and use taxes (but
excluding income taxes), if any, imposed upon or measured by Rent. Base Rent and recurring monthly
charges of Additional Rent shall be due and payable in advance on the first day of each calendar
month without notice or demand, provided that the installment of Base Rent for the fourth (subject
to Tenants right to receive Abated Base Rent pursuant to Section 1.03 of this Lease) full calendar
month of the Term, and the first monthly installment of Additional Rent for Expenses and Taxes,
shall be payable upon the execution of this Lease by Tenant. All other items of Rent shall be due
and payable by Tenant on or
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
3
before 30 days after billing by Landlord. Rent shall be made payable to the entity, and sent to the
address, Landlord designates and shall be made by good and sufficient check or by other means
acceptable to Landlord. Tenant shall pay Landlord an administration fee equal to 5% of all past due
Rent, provided that Tenant shall be entitled to a grace period of 5 days for the first 2 late
payments of Rent in a calendar year. In addition, past due Rent shall accrue interest at a rate per
annum equal to the Bank of America prime rate, as the same may be announced from time to time,
plus two percent (2%). Landlords acceptance of less than the correct amount of Rent shall be
considered a payment on account of the earliest Rent due. Rent for any partial month during the
Term shall be prorated. No endorsement or statement on a check or letter accompanying payment shall
be considered an accord and satisfaction. Tenants covenant to pay Rent is independent of every
other covenant in this Lease.
4.02 Tenant shall pay Tenants Pro Rata Share of Taxes and Expenses in accordance
Exhibit B
of
this Lease.
5. Compliance with Laws; Use.
The Premises shall be used for the Permitted Use and for no other use whatsoever. Tenant shall
comply with all statutes, codes, ordinances, orders, rules and regulations of any municipal or
governmental entity whether in effect now or later, including the Americans with Disabilities Act
(Law(s)),
regarding the operation of Tenants business and the use, condition, configuration and
occupancy of the Premises. In addition, Tenant shall, at its sole cost and expense, promptly comply
with any Laws that relate to the Base Building (defined below), but only to the extent such
obligations are triggered by Tenants use of the Premises, other than for general office use, or
Alterations or improvements in the Premises performed or requested by Tenant other than the
Landlord Work.
Base Building
shall include the structural portions of the Building, the public
restrooms and the Building mechanical, electrical and plumbing systems and equipment located in the
internal core of the Building on the floor or floors on which the Premises are located.
Notwithstanding the foregoing, Landlord, at its sole cost and expense (except to the extent
properly included in Expenses), shall be responsible for correcting any violations of Laws with
respect to the Premises, provided that Landlords obligation shall be limited to violations that
arise out of or prior to the Landlord Work. Landlord shall have the right to contest any alleged
violation in good faith, including, without limitation, the right to apply for and obtain a waiver
or deferment of compliance, the right to assert any and all defenses allowed by Law and the right
to appeal any decisions, judgments or rulings to the fullest extent permitted by Law. Landlord,
after the exhaustion of any and all rights to appeal or contest, will make all repairs, additions,
alterations or improvements necessary to comply with the terms of any final order or judgment.
Notwithstanding the foregoing, Tenant, not Landlord, shall be responsible for the correction of any
violations that arise out of or in connection with any claims brought under any provision of the
Americans with Disabilities Act other than Title III, the specific nature of Tenants business in
the Premises (other than general office use), the acts or omissions of Tenant, its agents,
employees or contractors, Tenants arrangement of any furniture, equipment or other property in the
Premises, any repairs, alterations, additions or improvements performed by or on behalf of Tenant
(other than the Landlord Work) and any design or configuration of the Premises specifically
requested by Tenant after being informed that such design or configuration may not be in strict
compliance with the ADA. Tenant shall promptly provide Landlord with copies of any notices it
receives regarding an alleged violation of Law. Tenant shall comply with the rules and regulations
of the Building attached as
Exhibit E
and such other reasonable rules and regulations adopted by
Landlord from time to time, including rules and regulations for the performance of Alterations
(defined in Section 9).
6. Security Deposit.
The Security Deposit shall be delivered to Landlord upon the execution of this Lease by Tenant
and held by Landlord without liability for interest (unless required by Law) as security for the
performance of Tenants obligations. The Security Deposit is not an advance payment of Rent or a
measure of damages. Landlord may use all or a portion of the Security Deposit to satisfy past due
Rent or to cure any Default (defined in Section 18) by Tenant. If Landlord uses any portion of the
Security Deposit, Tenant shall, within 5 days after demand, restore the Security Deposit to its
original amount. Landlord shall return any unapplied portion of the Security Deposit to Tenant
within 30 days after the later to occur of the Termination Date or the date Tenant surrenders the
Premises to Landlord in compliance with Section 25. In addition to any other deductions Landlord is
entitled to make pursuant to the terms hereof, Landlord shall have the right to make a good faith
estimate of any unreconciled Expenses and/or Taxes as of the Termination Date and to deduct any
anticipated shortfall from the Security Deposit. Landlord may assign the Security Deposit to a
successor or transferee and, following the assignment, Landlord shall have no further liability for
the return of the Security Deposit. Landlord shall not be required to keep the Security Deposit
separate from its other accounts. Tenant hereby waives the provisions of Section 1950.7 of the
California Civil Code, or any similar or successor Laws now or hereinafter in effect.
The Security Deposit may be in the form of an irrevocable letter of credit (the
Letter of Credit),
which Letter of Credit shall: (a) be in the amount of $177,175.00;
(b) be issued on the form attached
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
4
hereto as
Exhibit H;
(c) name Landlord as its beneficiary; and (d) be drawn on an FDIC insured
financial institution satisfactory to the Landlord. The Letter of Credit (and any renewals or
replacements thereof) shall be for a term of not less than 1 year. Tenant agrees that it shall from
time to time, as necessary, whether as a result of a draw on the Letter of Credit by Landlord
pursuant to the terms hereof or as a result of the expiration of the Letter of Credit then in effect, renew or
replace the original and any subsequent Letter of Credit so that a Letter of Credit, in the amount
required hereunder, is in effect until a date which is at least 60 days after the Termination Date
of the Lease. If Tenant fails to furnish such renewal or replacement at least 60 days prior to the
stated expiration date of the Letter of Credit then held by Landlord, Landlord may draw upon such
Letter of Credit and hold the proceeds thereof (and such proceeds need not be segregated) as a
Security Deposit pursuant to the terms of this Section 6. Any renewal or replacement of the
original or any subsequent Letter of Credit shall meet the requirements for the original Letter of
Credit as set forth above, except that such replacement or renewal shall be issued by an FDIC
insured financial institution satisfactory to the Landlord at the time of the issuance thereof.
If Landlord draws on the Letter of Credit as permitted in this Lease or the Letter of Credit,
then, upon demand of Landlord, Tenant shall restore the amount available under the Letter of Credit
to its original amount by providing Landlord with an amendment to the Letter of Credit evidencing
that the amount available under the Letter of Credit has been restored to its original amount. In
the alternative, Tenant may provide Landlord with cash, to be held by Landlord in accordance with
this Article, equal to the restoration amount required under the Letter of Credit.
7. Building Services.
7.01 Landlord shall furnish Tenant with the following services: (a) water for use in the Base
Building lavatories, and for any fixtures which would normally be found in a general office space for
use of all employees therein (for example, without limitation, drinking fountains and fixtures and
equipment that may be found in a kitchenette breakroom area, such as a sink, icemaker, dishwasher, and water
lines to a refrigerator; collectively, the Breakroom Fixtures). Even though same may be located in
the Premises, Landlord agrees to be responsible for the maintenance and repair of any fixtures and
water lines serving the lavatories on each floor on which the Premises are located, except to the
extent caused by any misuse or vandalism of Tenant, its employees, contractors or any other parties in the
Premises at the invitation of Tenant. However, Tenant shall be responsible, at Tenants cost, for the
repair and maintenance of the water line(s) and fixtures within the Premises relating to any Breakroom
Fixtures; (b) customary heat and air conditioning in season during Building Service Hours. Tenant shall
have the right to receive HVAC service during hours other than Building Service Hours by paying
Landlords then standard charge for additional HVAC service and providing such prior notice as is reasonably
specified by Landlord; (c) standard janitorial service on Business Days; (d) Elevator service, provided
that Landlord shall lock off elevator access to the fourth through seventh floors of the Building
so long as the same are unoccupied; (e) Electricity in accordance with the terms and conditions in Section
7.02; and (f) a permanent security desk in the lobby of the Building, (g) such other services as Landlord
reasonably determines are necessary or appropriate for the Property.
7.02 Electricity used by Tenant in the Premises shall, at Landlords option, be paid for by
Tenant either: (a) through inclusion in Expenses (except as provided for excess usage); (b) by a
separate charge payable by Tenant to Landlord; or (c) by separate charge billed by the applicable
utility company and payable directly by Tenant. Without the consent of Landlord, Tenants use of
electrical service shall not exceed, either in voltage, rated capacity, use beyond Building Service
Hours or overall load, that which Landlord reasonably deems to be standard for the Building. For
purposes hereof, such standard for the Building is: (i) a design load of 1.6 watts per square foot
of net usable floor area for all building standard overhead lighting located within the Premises
which requires a voltage of 480/277 volts; and (ii) a connected load of 5 watts per square foot of
net usable area for all equipment located and operated within the Premises which requires a voltage
of 120/208 volts single phase or less, it being understood that electricity required to operate the
base building HVAC system is not included within or deducted from such 5 watts per square foot
described in this subsection. Landlord shall have the right to measure electrical usage by commonly
accepted methods. If it is determined that Tenant is using excess electricity, Tenant shall pay
Landlord for the cost of such excess electrical usage as Additional Rent.
7.03 Landlords failure to furnish, or any interruption, diminishment or termination of
services due to the application of Laws, the failure of any equipment, the performance of repairs,
improvements or alterations, utility interruptions or the occurrence of an event of Force Majeure
(defined in Section 26.03) (collectively a
Service
Failure
) shall not render Landlord liable to
Tenant, constitute a constructive eviction of Tenant, give rise to an abatement of Rent, nor
relieve Tenant from the obligation to fulfill any covenant or agreement. However, if the Premises,
or a material portion of the Premises, are made untenantable for a period in excess of 3
consecutive Business Days as a result of a Service Failure that is reasonably within the control of
Landlord to correct, then Tenant, as its sole remedy, shall be entitled to receive an abatement of
Rent payable hereunder during the period beginning on the 4
th
consecutive Business Day
of the Service Failure and ending on the day the service has been restored. If the entire
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Premises have not been rendered untenantable by the Service Failure, the amount of abatement shall
be equitably prorated.
8. Leasehold Improvements.
All improvements in and to the Premises, including any Alterations (collectively,
Leasehold
Improvements)
shall remain upon the Premises at the end of the Term without compensation to
Tenant. Landlord, however, by written notice to Tenant at least 30 days prior to the Termination
Date, may require Tenant, at its expense, to remove (a) any Cable (defined in Section 9.01)
installed by or for the benefit of Tenant, and (b) any Landlord Work or Alterations that, in
Landlords reasonable judgment, are of a nature that would require removal and repair costs that
are materially in excess of the removal and repair costs associated with standard office
improvements (collectively referred to as
Required Removables).
Required Removables shall
include, without limitation, internal stairways, raised floors, personal baths and showers, vaults,
rolling file systems and structural alterations and modifications. The designated Required
Removables shall be removed by Tenant before the Termination Date. Tenant shall repair damage
caused by the installation or removal of Required Removables. If Tenant fails to perform its
obligations in a timely manner, Landlord may perform such work at Tenants expense. Tenant, at the
time it requests approval for a proposed Alteration, may request in writing that Landlord advise
Tenant whether the Alteration or any portion of the Alteration is a Required Removable. Within 10
days after receipt of Tenants request, Landlord shall advise Tenant in writing as to which
portions of the Alteration are Required Removables. Notwithstanding anything in the foregoing to
the contrary, Tenant shall not be required to remove any portion of the Landlord Work shown on the
Plans as of the date of this Lease, as such terms are defined in the Work Letter.
9. Repairs and Alterations.
9.01 Tenant shall periodically inspect the Premises to identify any conditions that are
dangerous or in need of maintenance or repair. Tenant shall promptly provide Landlord with notice
of any such conditions. Tenant shall, at its sole cost and expense, perform all maintenance and
repairs to the Premises that are not Landlords express responsibility under this Lease, and keep
the Premises in good condition and repair, reasonable wear and tear excepted. Tenants repair and
maintenance obligations include, without limitation, repairs to: (a) floor covering; (b) interior
partitions; (c) doors; (d) the interior side of demising walls; (e) electronic, phone and data
cabling and related equipment that is installed by or for the exclusive benefit of Tenant
(collectively,
Cable);
(f) supplemental air conditioning units, kitchens, including hot water
heaters, plumbing, and similar facilities exclusively serving Tenant; and (g) Alterations. To the
extent Landlord is not reimbursed by insurance proceeds, Tenant shall reimburse Landlord for the
cost of repairing damage to the Building caused by the acts of Tenant, Tenant Related Parties and
their respective contractors and vendors. If Tenant fails to make any repairs to the Premises for
more than 15 days after notice from Landlord (although notice shall not be required in an
emergency), Landlord may make the repairs, and Tenant shall pay the reasonable cost of the repairs,
together with an administrative charge in an amount equal to 5% of the cost of the repairs.
9.02 Landlord shall keep and maintain in good repair and working order and perform maintenance
upon the: (a) structural elements of the Building; (b) mechanical (including HVAC), electrical,
plumbing and fire/life safety systems serving the Building in general; (c) Common Areas; (d) roof
of the Building; (e) exterior windows of the Building; and (f) elevators serving the Building.
Landlord shall promptly make repairs for which Landlord is responsible. Tenant hereby waives any
and all rights under and benefits of subsection 1 of Section 1932, and Sections 1941 and 1942 of
the California Civil Code, or any similar or successor Laws now or hereinafter in effect.
9.03 Tenant shall not make alterations, repairs, additions or improvements or install any Cable
(collectively referred to as
Alterations)
without first obtaining the written consent of Landlord
in each instance, which consent shall not be unreasonably withheld or delayed. However, Landlords
consent shall not be required for any Alteration that satisfies all of the following criteria (a
Cosmetic Alteration):
(a) is of a cosmetic nature such as painting, wallpapering, hanging
pictures and installing carpeting; (b) is not visible from the exterior of the Premises or
Building; (c) will not affect the Base Building; and (d) does not require work to be performed
inside the walls or above the ceiling of the Premises. Cosmetic Alterations shall be subject to all
the other provisions of this Section 9.03. Prior to starting work, Tenant shall furnish Landlord
with plans and specifications; names of contractors reasonably acceptable to Landlord (provided
that Landlord may designate specific contractors with respect to Base Building); required permits
and approvals; evidence of contractors and subcontractors insurance in amounts reasonably
required by Landlord and naming Landlord as an additional insured; and any security for performance
in amounts reasonably required by Landlord. Changes to the plans and specifications must also be
submitted to Landlord for its approval. Alterations shall be constructed in a good and workmanlike
manner using materials of a quality reasonably approved by Landlord. Tenant shall reimburse
Landlord for any sums paid by Landlord for third party examination of Tenants plans for
non-Cosmetic Alterations, in addition, Tenant shall pay Landlord a fee for Landlords oversight and
coordination of any non-Cosmetic Alterations equal to 2% of the cost of the Alterations. Upon
completion, Tenant shall furnish as-built plans for non-Cosmetic Alterations, completion
affidavits and
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full and final waivers of lien. Landlords approval of an Alteration shall not be deemed a
representation by Landlord that the Alteration complies with Law.
10. Entry by Landlord.
Landlord may enter the Premises to inspect, show or clean the Premises or to perform or
facilitate the performance of repairs, alterations or additions to the Premises or any portion of
the Building. Except in emergencies or to provide Building services, Landlord shall provide Tenant
with reasonable prior (not less than 24 hours, except for entry during the last 9 months of the
Term for purposes of showing the Premises to prospective tenants) verbal notice of entry and shall
use reasonable efforts to minimize any interference with Tenants use of the Premises. If
reasonably necessary, Landlord may temporarily close all or a portion of the Premises to perform
repairs, alterations and additions. However, except in emergencies, Landlord will not close the
Premises if the work can reasonably be completed on weekends and after Building Service Hours.
Entry by Landlord shall not constitute a constructive eviction or entitle Tenant to an abatement or
reduction of Rent. Notwithstanding the foregoing, if Landlord temporarily closes the Premises as
provided above for a period in excess of 2 consecutive Business Days, Tenant, as its sole remedy,
shall be entitled to receive a per diem abatement of Base Rent during the period beginning on the
3
rd
consecutive Business Day of closure and ending on the date on which the Premises are
returned to Tenant in a tenantable condition. Tenant, however, shall not be entitled to an
abatement if the repairs, alterations and/or additions to be performed are required as a result of
the acts or omissions of Tenant, its agents, employees or contractors, including, without
limitation, a default by Tenant in its maintenance and repair obligations under the Lease.
11. Assignment and Subletting.
11.01 Except in connection with a Permitted Transfer (defined in Section 11.04), Tenant shall
not assign, sublease, transfer or encumber any interest in this Lease or allow any third party to
use any portion of the Premises (collectively or individually, but excluding Permitted Transfers, a
Transfer)
without the prior written consent of Landlord, which consent shall not be unreasonably
withheld, conditioned or delayed if Landlord does not exercise its recapture rights under Section
11.02. If the entity which controls the voting shares/rights of Tenant changes at any time, such
change of ownership or control shall constitute a Transfer unless (a) Tenant is an entity whose
outstanding stock is listed on a recognized securities exchange or if at least 80% of its voting
stock is owned by another entity, the voting stock of which is so listed, or (b) the change of
ownership otherwise qualifies as Permitted Transfer under Section 11.04. Tenant hereby waives the
provisions of Section 1995.310 of the California Civil Code, or any similar or successor Laws, now
or hereinafter in effect, and all other remedies, including, without limitation, any right at law
or equity to terminate this Lease, on its own behalf and, to the extent permitted under all
applicable Laws, on behalf of the proposed transferee. Any attempted Transfer in violation of this
Section is voidable by Landlord. In no event shall any Transfer, including a Permitted Transfer,
release or relieve Tenant from any obligation under this Lease.
11.02 Tenant shall provide Landlord with financial statements for the proposed transferee, a
fully executed copy of the proposed assignment, sublease or other Transfer documentation and such
other information as Landlord may reasonably request. Within 10 Business Days after receipt of the
required information and documentation, Landlord shall either: (a) consent to the Transfer by
execution of a consent agreement in a form reasonably designated by Landlord; (b) reasonably refuse
to consent to the Transfer in writing; or (c) in the event of an assignment of this Lease or
subletting of more than 20% of the Rentable Area of the Premises for a proposed sublease term, with
or without renewal options relating thereto, set to expire during the last 12 months of the Term of
the Lease, recapture the portion of the Premises that Tenant is proposing to Transfer. If Landlord
exercises its right to recapture, this Lease shall automatically be amended (or terminated if the
entire Premises is being assigned or sublet) to delete the applicable portion of the Premises
effective on the proposed effective date of the Transfer. Tenant shall pay Landlord a review fee of
$750.00 for Landlords review of any Permitted Transfer or requested Transfer.
11.03 Tenant shall pay Landlord 50% of all rent and other consideration which Tenant receives
as a result of a Transfer that is in excess of the Rent payable to Landlord for the portion of the
Premises and Term covered by the Transfer. Tenant shall pay Landlord for Landlords share of the
excess within 30 days after Tenants receipt of the excess. Tenant may deduct from the excess, on a
straight-line basis, all reasonable and customary expenses directly incurred by Tenant attributable
to the Transfer. If Tenant is in Default, Landlord may require that all sublease payments be made
directly to Landlord, in which case Tenant shall receive a credit against Rent in the amount of
Tenants share of payments received by Landlord.
11.04 Tenant may assign this Lease to a successor to Tenant by purchase, merger, consolidation
or reorganization (an
Ownership Change)
or assign this Lease or sublet all or a portion of the
Premises to an Affiliate without the consent of Landlord, provided that all of the following
conditions are satisfied (a
Permitted Transfer):
(a) Tenant is not in Default; (b) in the event
of an Ownership Change, Tenants successor shall own substantially all of the assets of Tenant and
have a net worth which is at least equal
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to Tenants net worth as of the day prior to the proposed Ownership Change; (c) the Permitted Use
does not allow the Premises to be used for retail purposes; and (d) Tenant shall give Landlord
written notice at least 15 Business Days prior to the effective date of the Permitted Transfer
(provided that, if prohibited by confidentiality in connection with a proposed purchase, merger,
consolidation or reorganization, then Tenant shall give Landlord written notice within 10 days
after the effective date of the proposed purchase, merger, consolidation or reorganization).
Tenants notice to Landlord shall include information and documentation evidencing the Permitted
Transfer and showing that each of the above conditions has been satisfied. If requested by
Landlord, Tenants successor shall sign a commercially reasonable form of assumption agreement.
Affiliate
shall mean an entity controlled by, controlling or under common control with Tenant.
12. Liens.
Tenant shall not permit mechanics or other liens to be placed upon the Property, Premises or
Tenants leasehold interest in connection with any work or service done or purportedly done by or
for the benefit of Tenant or its transferees. Tenant shall give Landlord notice at least 15 days
prior to the commencement of any work in the Premises to afford Landlord the opportunity, where
applicable, to post and record notices of non-responsibility. Tenant, within 10 days of notice from
Landlord, shall fully discharge any lien by settlement, by bonding or by insuring over the lien in
the manner prescribed by the applicable lien Law. If Tenant fails to do so, Landlord may bond,
insure over or otherwise discharge the lien. Tenant shall reimburse Landlord for any amount paid by
Landlord, including, without limitation, reasonable attorneys fees.
13. Indemnity and Waiver of Claims.
Tenant hereby waives all claims against and releases Landlord and its trustees, members,
principals, beneficiaries, partners, officers, directors, employees, Mortgagees (defined in Section
23) and agents (the
Landlord Related Parties)
from all claims for any injury to or death of
persons, damage to property or business loss in any manner related to (a) Force Majeure, (b) acts
of third parties, (c) the bursting or leaking of any tank, water closet, drain or other pipe, (d)
the inadequacy or failure of any security services, personnel or equipment, or (e) any matter not
within the reasonable control of Landlord. Notwithstanding the foregoing, except as provided in
Section 15 to the contrary, Tenant shall not be required to waive any claims against Landlord
(other than for loss or damage to Tenants business) where such loss or damage is due to the gross
negligence or willful misconduct of Landlord or any Landlord Related Parties, and nothing herein
shall be construed as to diminish the repair and maintenance obligations of Landlord contained
elsewhere in this Lease. Except to the extent caused by the negligence or willful misconduct of
Landlord or any Landlord Related Parties or Landlords contractors, Tenant shall indemnify, defend
and hold Landlord and Landlord Related Parties harmless against and from all liabilities,
obligations, damages, penalties, claims, actions, costs, charges and expenses, including, without
limitation, reasonable attorneys fees and other professional fees (if and to the extent permitted
by Law) (collectively referred to as
Losses),
which may be imposed upon, incurred by or asserted
against Landlord or any of the Landlord Related Parties by any third party and arising out of or in
connection with any damage or injury occurring in the Premises or any acts or omissions (including
violations of Law) of Tenant, the Tenant Related Parties or any of Tenants transferees,
contractors or licensees. Except to the extent caused by the negligence or willful misconduct of
Tenant or any Tenant Related Parties, Landlord shall indemnify, defend and hold Tenant, its
trustees, members, principals, beneficiaries, partners, officers, directors, employees and agents
(Tenant Related Parties)
harmless against and from all Losses which may be imposed upon, incurred
by or asserted against Tenant or any of the Tenant Related Parties by any third party and arising
out of or in connection with the acts or omissions (including violations of Law) of Landlord or the
Landlord Related Parties.
14. Insurance.
Tenant shall maintain the following insurance
(Tenants Insurance):
(a) Commercial General
Liability Insurance applicable to the Premises and its appurtenances providing, on an occurrence
basis, a minimum combined single limit of $2,000,000.00; (b) Property/Business Interruption
Insurance written on an All Risk or Special Perils form, with coverage for broad form water damage
including earthquake sprinkler leakage, at replacement cost value and with a replacement cost
endorsement covering all of Tenants business and trade fixtures, equipment, movable partitions,
furniture, merchandise and other personal property within the Premises
(Tenants Property)
and
any Leasehold Improvements performed by or for the benefit of Tenant; (c) Workers Compensation
Insurance in amounts required by Law; and (d) Employers Liability Coverage of at least
$1,000,000.00 per occurrence. Any company writing Tenants Insurance shall have an A.M. Best rating
of not less than A-VIII. All Commercial General Liability Insurance policies shall name as
additional insureds Landlord (or its successors and assignees), the managing agent for the Building
(or any successor), EOP Operating Limited Partnership, Equity Office Properties Trust and their
respective members, principals, beneficiaries, partners, officers, directors, employees, and
agents, and other designees of Landlord and its successors as the interest of such designees shall
appear. All policies of Tenants Insurance shall contain endorsements that the
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insurer(s) shall give Landlord and its designees at least 30 days advance written notice of any
cancellation, termination, material change or lapse of insurance. Tenant shall provide Landlord
with a certificate of insurance evidencing Tenants Insurance prior to the earlier to occur of the
Commencement Date or the date Tenant is provided with possession of the Premises, and thereafter as
necessary to assure that Landlord always has current certificates evidencing Tenants Insurance. So
long as the same is available at commercially reasonable rates, Landlord shall maintain so called All Risk property insurance on the
Building at replacement cost value as reasonably estimated by Landlord.
15. Subrogation.
Landlord and Tenant hereby waive and shall cause their respective insurance carriers to waive
any and all rights of recovery, claims, actions or causes of action against the other for any loss
or damage with respect to Tenants Property, Leasehold Improvements, the Building, the Premises, or
any contents thereof, including rights, claims, actions and causes of action based on negligence,
which loss or damage is (or would have been, had the insurance required by this Lease been carried)
covered by insurance.
16. Casualty Damage.
16.01 If all or any portion of the Premises becomes untenantable by reason of fire or other
casualty to the Premises (collectively a
Casualty),
Landlord, with reasonable promptness, shall
cause a general contractor selected by Landlord to provide Landlord and Tenant with a written
estimate of the amount of time required using standard working methods to Substantially Complete
the repair and restoration of the Premises and any Common Areas necessary to provide access to the
Premises
(Completion Estimate).
If the Completion Estimate indicates that the Premises or any
Common Areas necessary to provide access to the Premises cannot be made tenantable within 270 days
from the date the repair is started, then either party shall have the right to terminate this Lease
upon written notice to the other within 10 days after receipt of the Completion Estimate. In
addition, Tenant, by notice to Landlord within 10 days after the date of the Completion Estimate,
shall have the right to terminate this Lease if: (1) the Premises have been materially damaged and
there is less than 2 years of the Term remaining on the date of the Casualty; and (2) the
Completion Estimate indicates that the Premises or any Common Areas necessary to provide access to
the Premises cannot be made tenantable within 90 days from the date the repair is started. Tenant,
however, shall not have the right to terminate this Lease if the Casualty was caused by the gross
negligence or intentional misconduct of Tenant or any Tenant Related Parties, regardless of
anything in the foregoing to the contrary. Landlord, by notice to Tenant within 90 days after the
date of the Casualty, also shall have the right to terminate this Lease if: (1) the Premises have
been materially damaged and there is less than 2 years of the Term remaining on the date of the
Casualty; (2) any Mortgagee requires that the insurance proceeds be applied to the payment of the
mortgage debt; or (3) a material uninsured loss to the Building occurs.
16.02 If this Lease is not terminated, Landlord shall promptly and diligently, subject to
reasonable delays for insurance adjustment or other matters beyond Landlords reasonable control,
restore the Premises and Common Areas. Such restoration shall be to substantially the same
condition that existed prior to the Casualty, except for modifications required by Law or any other
modifications to the Common Areas deemed desirable by Landlord. Upon notice from Landlord, Tenant
shall assign to Landlord (or to any party designated by Landlord) all property insurance proceeds
payable to Tenant under Tenants Insurance with respect to any Leasehold Improvements performed by
or for the benefit of Tenant; provided if the estimated cost to repair such Leasehold Improvements
exceeds the amount of insurance proceeds received by Landlord from Tenants insurance carrier, the
excess cost of such repairs shall be paid by Tenant to Landlord prior to Landlords commencement of
repairs. Within 15 days of demand, Tenant shall also pay Landlord for any additional excess costs
that are determined during the performance of the repairs. Landlord shall not be liable for any
inconvenience to Tenant, or injury to Tenants business resulting in any way from the Casualty or
the repair thereof, except to the extent caused by the gross negligence or willful misconduct of
Landlord or Landlords employees or contractors. Provided that Tenant is not in Default, during any
period of time that all or a material portion of the Premises is rendered untenantable as a result
of a Casualty, the Rent shall abate for the portion of the Premises that is untenantable and not
used by Tenant. Notwithstanding the foregoing, if Tenant was entitled to but elected not to
exercise its right to terminate the Lease and Landlord does not substantially complete the repair
and restoration of the Premises within 60 days after the expiration of the estimated period of time
set forth in the Completion Estimate, which period shall be extended to the extent of any
Reconstruction Delays, then Tenant may terminate this Lease by written notice to Landlord within 15
days after the expiration of such period, as the same may be extended. For purposes of this Lease,
the term Reconstruction Delays shall mean: (i) any delays caused by the insurance adjustment
process; and (ii) any delays caused by Tenant.
16.03 The provisions of this Lease, including this Section 16, constitute an express agreement
between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any
part of the Premises or the Property, and any Laws, including, without limitation, Sections 1932(2)
and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning
damage or destruction in
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the absence of an express agreement between the parties, and any similar or successor Laws now or
hereinafter in effect, shall have no application to this Lease or any damage or destruction to all
or any part of the Premises or the Property.
17. Condemnation.
Either party may terminate this Lease if any material part of the Premises is taken or
condemned for any public or quasi-public use under Law, by eminent domain or private purchase in
lieu thereof (a
Taking).
Landlord shall also have the right to terminate this Lease if there is a
Taking of any portion of the Building or Property which would have a material adverse effect on
Landlords ability to profitably operate the remainder of the Building. The terminating party shall
provide written notice of termination to the other party within 45 days after it first receives
notice of the Taking. The termination shall be effective on the date the physical taking occurs. If
this Lease is not terminated, Base Rent and Tenants Pro Rata Share shall be appropriately adjusted
to account for any reduction in the square footage of the Building or Premises. All compensation
awarded for a Taking shall be the property of Landlord. The right to receive compensation or
proceeds are expressly waived by Tenant, however, Tenant may file a separate claim for Tenants
Property and Tenants reasonable relocation expenses, provided the filing of the claim does not
diminish the amount of Landlords award. If only a part of the Premises is subject to a Taking and
this Lease is not terminated, Landlord, with reasonable diligence, will restore the remaining
portion of the Premises as nearly as practicable to the condition immediately prior to the Taking.
Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of the
California Code of Civil Procedure, or any similar or successor Laws.
18. Events of Default.
Each
of the following occurrences shall be a
Default
: (a) Tenants failure to pay any
portion of Rent when due, if the failure continues for 3 days after written notice to Tenant
(Monetary Default)
; (b) Tenants failure (other than a Monetary Default) to comply with any term,
provision, condition or covenant of this Lease, if the failure is not cured within 30 days after
written notice to Tenant provided, however, if Tenants failure to comply cannot reasonably be
cured within 30 days, Tenant shall be allowed additional time (not to exceed 90 days) as is
reasonably necessary to cure the failure so long as Tenant begins the cure within 30 days and
diligently pursues the cure to completion; (c) Tenant or any Guarantor becomes insolvent, makes a
transfer in fraud of creditors, makes an assignment for the benefit of creditors, admits in writing
its inability to pay its debts when due or forfeits or loses its right to conduct business; (d) the
leasehold estate is taken by process or operation of Law; or (e) Tenant is in default beyond any
notice and cure period under any other lease or agreement with Landlord at the Building or
Property. All notices sent under this Section shall be in satisfaction of, and not in addition to,
notice required by Law.
19. Remedies.
19.01 Upon the occurrence of any Default under this Lease, whether enumerated in Section 18 or
not, Landlord shall have the option to pursue any one or more of the following remedies without any
notice (except as expressly prescribed herein) or demand whatsoever (and without limiting the
generality of the foregoing, Tenant hereby specifically waives notice and demand for payment of
Rent or other obligations, except for those notices specifically required pursuant to the terms of
Section 18 or this Section 19, and waives any and all other notices or demand requirements imposed
by applicable law):
|
(a)
|
|
Terminate this Lease and Tenants right to possession of the Premises and
recover from Tenant an award of damages equal to the sum of the following:
|
|
(i)
|
|
The Worth at the Time of Award of the unpaid Rent which had been
earned at the time of termination;
|
|
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(ii)
|
|
The Worth at the Time of Award of the amount by which the unpaid Rent which
would have been earned after termination until the time of award exceeds the
amount of such Rent loss that Tenant affirmatively proves could have been
reasonably avoided;
|
|
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(iii)
|
|
The Worth at the Time of Award of the amount by which the unpaid Rent for the
balance of the Term after the time of award exceeds the amount of such Rent loss
that Tenant affirmatively proves could be reasonably avoided;
|
|
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(iv)
|
|
Any other amount necessary to compensate Landlord for all the detriment either
proximately caused by Tenants failure to perform Tenants obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom;
and
|
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(v)
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All such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time under applicable law.
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The
Worth at the Time of Award
of the amounts referred to in parts (i) and (ii)
above, shall be computed by allowing interest at the lesser of a per annum rate equal
to: (A) the greatest per annum rate of interest permitted from time to time under
applicable law, or (B) the Prime Rate plus 5%. For purposes hereof, the
Prime Rate
shall be the per annum interest rate publicly announced as its prime or base rate by
a federally insured bank selected by Landlord in the State of California. The
Worth
at the Time of Award
of the amount referred to in part (iii), above, shall be
computed by discounting such amount at the discount rate of the Federal Reserve Bank
of San Francisco at the time of award plus 1%;
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(b)
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Employ the remedy described in California Civil Code § 1951.4 (Landlord may
continue this Lease in effect after Tenants breach and abandonment and recover Rent as
it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable
limitations); or
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(c)
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Notwithstanding Landlords exercise of the remedy described in California Civil
Code § 1951.4 in respect of an event or events of default, at such time thereafter as
Landlord may elect in writing, to terminate this Lease and Tenants right to possession
of the Premises and recover an award of damages as provided above in Paragraph 19.01
(a).
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19.02 The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a
waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other
than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlords
knowledge of such preceding breach at the time of acceptance of such Rent. No waiver by Landlord of
any breach hereof shall be effective unless such waiver is in writing and signed by Landlord.
19.03 TENANT HEREBY WAIVES ANY AND ALL RIGHTS CONFERRED BY SECTION 3275 OF THE CIVIL CODE OF
CALIFORNIA AND BY SECTIONS 1174 (c) AND 1179 OF THE CODE OF CIVIL PROCEDURE OF CALIFORNIA AND ANY
AND ALL OTHER LAWS AND RULES OF LAW FROM TIME TO TIME IN EFFECT DURING THE LEASE TERM PROVIDING
THAT TENANT SHALL HAVE ANY RIGHT TO REDEEM, REINSTATE OR RESTORE THIS LEASE FOLLOWING ITS
TERMINATION BY REASON OF TENANTS BREACH. TENANT ALSO HEREBY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY IN ANY LITIGATION ARISING OUT OF OR RELATING TO THIS
LEASE.
19.04 No right or remedy herein conferred upon or reserved to Landlord is intended to be
exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and
in addition to any other right or remedy given hereunder or now or hereafter existing by agreement,
applicable law or in equity. In addition to other remedies provided in this Lease, Landlord shall
be entitled, to the extent permitted by applicable law, to injunctive relief, or to a decree
compelling performance of any of the covenants, agreements, conditions or provisions of this Lease,
or to any other remedy allowed to Landlord at law or in equity. Forbearance by Landlord to enforce
one or more of the remedies herein provided upon an event of default shall not be deemed or
construed to constitute a waiver of such default.
19.05 If Tenant is in Default of any of its non-monetary obligations under the Lease, Landlord
shall have the right to perform such obligations. Tenant shall reimburse Landlord for the cost of
such performance upon demand together with an administrative charge equal to 5% of the cost of the
work performed by Landlord.
19.06 This Section 19 shall be enforceable to the maximum extent such enforcement is not
prohibited by applicable law, and the unenforceability of any portion thereof shall not thereby
render unenforceable any other portion.
20. Limitation of Liability.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, THE LIABILITY OF LANDLORD
(AND OF ANY SUCCESSOR LANDLORD) SHALL BE LIMITED TO THE LESSER OF (A) THE INTEREST OF LANDLORD IN
THE PROPERTY, OR (B) THE EQUITY INTEREST LANDLORD WOULD HAVE IN THE PROPERTY IF THE PROPERTY WERE
ENCUMBERED BY THIRD PARTY DEBT IN AN AMOUNT EQUAL TO 70% OF THE VALUE OF THE PROPERTY. TENANT SHALL
LOOK SOLELY TO LANDLORDS INTEREST IN THE PROPERTY FOR THE RECOVERY OF ANY JUDGMENT OR AWARD
AGAINST LANDLORD OR ANY LANDLORD RELATED PARTY. NEITHER LANDLORD NOR ANY LANDLORD RELATED PARTY
SHALL BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY, AND IN NO EVENT SHALL LANDLORD OR ANY
LANDLORD RELATED PARTY BE LIABLE TO TENANT FOR ANY LOST PROFIT, DAMAGE TO OR LOSS OF BUSINESS OR
ANY FORM OF SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGE. BEFORE FILING SUIT FOR AN ALLEGED DEFAULT BY
LANDLORD,
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
11
TENANT SHALL GIVE LANDLORD AND THE MORTGAGEE(S) WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES
(DEFINED IN SECTION 23 BELOW), NOTICE AND REASONABLE TIME TO CURE THE ALLEGED DEFAULT.
21. [Intentionally Omitted].
22. Holding Over.
If Tenant fails to surrender all or any part of the Premises at the termination of this Lease,
occupancy of the Premises after termination shall be that of a tenancy at sufferance. Tenants
occupancy shall be subject to all the terms and provisions of this Lease, and Tenant shall pay an
amount (on a per month basis without reduction for partial months during the holdover) equal to
150% of the sum of the Base Rent and Additional Rent due for the period immediately preceding the
holdover. No holdover by Tenant or payment by Tenant after the termination of this Lease shall be
construed to extend the Term or prevent Landlord from immediate recovery of possession of the
Premises by summary proceedings or otherwise. If Landlord is unable to deliver possession of the
Premises to a new tenant or to perform improvements for a new tenant as a result of Tenants
holdover and Tenant fails to vacate the Premises within 15 days after notice from Landlord, Tenant
shall be liable for all damages that Landlord suffers from the holdover.
23. Subordination to Mortgages; Estoppel Certificate.
Tenant accepts this Lease subject and subordinate to any mortgage(s), deed(s) of trust, ground
lease(s) or other lien(s) now or subsequently arising upon the Premises, the Building or the
Property, and to renewals, modifications, refinancings and extensions thereof (collectively
referred to as a
Mortgage
). The party having the benefit of a Mortgage shall be referred to as a
Mortgagee
. This clause shall be self-operative, but upon request from a Mortgagee, Tenant shall
execute a commercially reasonable subordination agreement in favor of the Mortgagee.
Notwithstanding the foregoing, as a condition precedent to the future subordination of this Lease
to a future Mortgage, Landlord shall be required to provide Tenant with a non-disturbance,
subordination, and attornment agreement in favor of Tenant from any Mortgagee who comes into
existence after the Commencement Date. Such non-disturbance, subordination, and attornment
agreement in favor of Tenant shall provide that, so long as Tenant is paying the Rent due under the
Lease and is not otherwise in default under the Lease beyond any applicable cure period, its right
to possession and the other terms of the Lease shall remain in full force and effect. Such
non-disturbance, subordination, and attornment agreement may include other commercially reasonable
provisions in favor of the Mortgagee, including, without limitation, additional time on behalf of
the Mortgagee to cure defaults of the Landlord and provide that (a) neither Mortgagee nor any
successor-in-interest shall be bound by (i) any payment of the Base Rent, Additional Rent, or other
sum due under this Lease for more than 1 month in advance or (ii) any amendment or modification of
the Lease made without the express written consent of Mortgagee or any successor-in-interest; (b)
neither Mortgagee nor any successor-in-interest will be liable for (i) any act or omission or
warranties of any prior landlord (including Landlord), (ii) the breach of any warranties or
obligations relating to construction of improvements on the Property or any tenant finish work
performed or to have been performed by any prior landlord (including Landlord), or (iii) the return
of any security deposit, except to the extent such deposits have been received by Mortgagee; and
(c) neither Mortgagee nor any successor-in-interest shall be subject to any offsets or defenses
which Tenant might have against any prior landlord (including Landlord). As an alternative, a
Mortgagee shall have the right at any time to subordinate its Mortgage to this Lease. Upon request,
Tenant, without charge, shall attorn to any successor to Landlords interest in this Lease.
Landlord and Tenant shall each, within 10 days after receipt of a written request from the other,
execute and deliver a commercially reasonable estoppel certificate to those parties as are
reasonably requested by the other (including a Mortgagee or prospective purchaser). Without
limitation, such estoppel certificate may include a certification as to the status of this Lease,
the existence of any defaults and the amount of Rent that is due and payable. Landlord hereby
represents and warrants that there is no Mortgagee as of the date of this Lease.
24. Notice.
All demands, approvals, consents or notices (collectively referred to as a
notice)
shall be
in writing and delivered by hand or sent by registered or certified mail with return receipt
requested or sent by overnight or same day courier service at the partys respective Notice
Address(es) set forth in Section 1. Each notice shall be deemed to have been received on the earlier to occur of actual delivery or the date on which delivery is refused,
or, if Tenant has vacated the Premises or any other Notice Address of Tenant without providing a
new Notice Address, 3 days after notice is deposited in the U.S. mail or with a courier service in
the manner described above. Either party may, at any time, change its Notice Address (other than to
a post office box address) by giving the other party written notice of the new address.
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
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25. Surrender of Premises.
At the termination of this Lease or Tenants right of possession, Tenant shall remove Tenants
Property from the Premises, and quit and surrender the Premises to Landlord, broom clean, and in
good order, condition and repair, ordinary wear and tear and damage which Landlord is obligated to
repair hereunder excepted. If Tenant fails to remove any of Tenants Property within 2 days after
termination of this Lease or Tenants right to possession, Landlord, at Tenants sole cost and
expense, shall be entitled (but not obligated) to remove and store Tenants Property. Landlord
shall not be responsible for the value, preservation or safekeeping of Tenants Property. Tenant
shall pay Landlord, upon demand, the expenses and storage charges incurred. If Tenant fails to
remove Tenants Property from the Premises or storage, within 30 days after notice, Landlord may
deem all or any part of Tenants Property to be abandoned and title to Tenants Property shall vest
in Landlord.
26. Miscellaneous.
26.01 This Lease shall be interpreted and enforced in accordance with the Laws of the State of
California and Landlord and Tenant hereby irrevocably consent to the jurisdiction and proper venue
of such state or commonwealth. If any term or provision of this Lease shall to any extent be void
or unenforceable, the remainder of this Lease shall not be affected. If there is more than one
Tenant or if Tenant is comprised of more than one party or entity, the obligations imposed upon
Tenant shall be joint and several obligations of all the parties and entities, and requests or
demands from any one person or entity comprising Tenant shall be deemed to have been made by all
such persons or entities. Notices to any one person or entity shall be deemed to have been given to
all persons and entities. Each party represents and warrants to the other that each individual
executing this Lease on its behalf is authorized to do so on its behalf. Tenant represents and
warrants to Landlord that Tenant is not, and the entities or individuals constituting Tenant or
which may own or control Tenant or which may be owned or controlled by Tenant are not, among the
individuals or entities identified on any list compiled pursuant to Executive Order 13224 for the
purpose of identifying suspected terrorists.
26.02 If either party institutes a suit against the other for violation of or to enforce any
covenant, term or condition of this Lease, the prevailing party shall be entitled to all of its
costs and expenses, including, without limitation, reasonable attorneys fees. Landlord and Tenant
hereby waive any right to trial by jury in any proceeding based upon a breach of this Lease. Either
partys failure to declare a default immediately upon its occurrence, or delay in taking action for
a default, shall not constitute a waiver of the default, nor shall it constitute an estoppel.
26.03 Whenever a period of time is prescribed for the taking of an action by Landlord or Tenant
(other than the payment of the Security Deposit or Rent), the period of time for the performance of
such action shall be extended by the number of days that the performance is actually delayed due to
strikes beyond such partys control, acts of God, war, terrorist acts and/or civil disturbances
(Force Majeure).
26.04 Landlord shall have the right to transfer and assign, in whole or in part, all of its
rights and obligations under this Lease and in the Building and Property. Upon transfer Landlord
shall be released from any further obligations hereunder and Tenant agrees to look solely to the
successor in interest of Landlord for the performance of such obligations, provided that, any
successor pursuant to a voluntary, third party transfer (but not as part of an involuntary transfer
resulting from a foreclosure or deed in lieu thereof) shall have assumed Landlords obligations
under this Lease.
26.05 Landlord has delivered a copy of this Lease to Tenant for Tenants review only and the
delivery of it does not constitute an offer to Tenant or an option. Tenant represents that it has
dealt directly with and only with the Broker as a broker in connection with this Lease. Landlord
agrees to pay a brokerage commission to Broker in accordance with the terms of a separate written
commission agreement to be entered into between Landlord and Broker. Tenant shall indemnify and
hold Landlord and the Landlord Related Parties harmless from all claims of any brokers other than
Broker claiming to have represented Tenant in connection with this Lease. Landlord shall indemnify
and hold Tenant and the Tenant Related Parties harmless from all claims of any brokers claiming to
have represented Landlord in connection with this Lease. Equity Office Properties Management Corp.
(EOPMC)
is an affiliate of Landlord and represents only the Landlord in this transaction. Any
assistance rendered by any agent or employee of EOPMC in connection with this Lease or any
subsequent amendment or modification hereto has been or will be made as an accommodation to Tenant
solely in furtherance of consummating the transaction on behalf of Landlord, and not as agent for
Tenant.
26.06 Time is of the essence with respect to Tenants exercise of any expansion, renewal or
extension rights granted to Tenant. The expiration of the Term, whether by lapse of time, termination or
otherwise, shall not relieve either party of any obligations which accrued prior to or which may continue to
accrue after the expiration or termination of this Lease.
26.07 Tenant may peacefully have, hold and enjoy the Premises, subject to the terms of this Lease,
provided Tenant pays the Rent and fully performs all of its covenants and agreements. This
covenant shall
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
13
be binding upon Landlord and its successors only during its or their respective periods of
ownership of the Building.
26.08 This Lease does not grant any rights to light or air over or about the Building.
Landlord excepts and reserves exclusively to itself any and all rights not specifically granted to
Tenant under this Lease. This Lease constitutes the entire agreement between the parties and
supersedes all prior agreements and understandings related to the Premises, including all lease
proposals, letters of intent and other documents. Neither party is relying upon any warranty,
statement or representation not contained in this Lease. This Lease may be modified only by a
written agreement signed by an authorized representative of Landlord and Tenant.
[SIGNATURES ARE ON FOLLOWING PAGE]
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
14
Landlord and Tenant have executed this Lease as of the day and year first above written.
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LANDLORD:
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CA-PARKSIDE TOWERS LIMITED PARTNERSHIP,
a Delaware limited partnership
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By: EOM GP, L.L.C., a Delaware limited liability company,
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its general partner
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By: Equity Office Management, L.L.C., a Delaware
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limited liability company, its non-member manager
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By:
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/s/ Mark Geisreiter
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Name:
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Mark Geisreiter
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Title:
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Senior Vice President - San Francisco Region
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TENANT:
QUINSTREET, INC., a California corporation
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By:
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/s/ Douglas J. Valenti
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Name:
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Douglas J. Valenti
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Title:
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President & CEO
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By:
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/s/ Bronwyn Syiek
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Name:
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Bronwyn Syiek
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Title:
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SVP & General Manager
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77-0512121
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Tenants Tax ID Number (SSN or FEIN)
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{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
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EXHIBIT A
OUTLINE AND LOCATION OF PREMISES
{QuinStreet, Inc. -5-00004264.}
May 29, 2003
Matter ID Number: 7329
1
EXHIBIT B
EXPENSES AND TAXES
This Exhibit is attached to and made a part of the Lease by and between
CA-PARKSIDE TOWERS LIMITED
PARTNERSHIP, a Delaware limited partnership (Landlord)
and
QUINSTREET, INC., a California
corporation (Tenant)
for space in the Building located at 1051 East Hillsdale Boulevard, Foster
City, California.
1. Payments.
1.01 Tenant shall pay Tenants Pro Rata Share of the amount, if any, by which Expenses (defined
below) for each calendar year during the Term exceed Expenses for the Base Year (the
Expense
Excess
) and also the amount, if any, by which Taxes (defined below) for each calendar year during
the Term exceed Taxes for the Base Year (the
Tax Excess
). If Expenses or Taxes in any calendar
year decrease below the amount of Expenses or Taxes for the Base Year, Tenants Pro Rata Share of
Expenses or Taxes, as the case may be, for that calendar year shall be $0. Landlord shall provide
Tenant with a good faith estimate of the Expense Excess and of the Tax Excess for each calendar
year during the Term. On or before the first day of each month, commencing in January, 2005, Tenant
shall pay to Landlord a monthly installment equal to one-twelfth of Tenants Pro Rata Share of
Landlords estimate of both the Expense Excess and Tax Excess. After its receipt of the revised
estimate, Tenants monthly payments shall be based upon the revised estimate. If Landlord does not
provide Tenant with an estimate of the Expense Excess or the Tax Excess by January 1 of a calendar
year, Tenant shall continue to pay monthly installments based on the previous years estimate(s)
until Landlord provides Tenant with the new estimate.
1.02 As soon as is practical following the end of each calendar year, Landlord shall furnish
Tenant with a statement of the actual Expenses and Expense Excess and the actual Taxes and Tax
Excess for the prior calendar year. Landlord shall use reasonable efforts to furnish the statement
of actual Expenses on or before June 1 of the calendar year immediately following the calendar year
to which the statement applies. If the estimated Expense Excess or estimated Tax Excess for the
prior calendar year is more than the actual Expense Excess or actual Tax Excess, as the case may
be, for the prior calendar year, Landlord shall either provide Tenant with a refund or apply any
overpayment by Tenant against Additional Rent due or next becoming due, provided if the Term expires
before the determination of the overpayment, Landlord shall refund any overpayment to Tenant after
first deducting the amount of Rent due. If the estimated Expense Excess or estimated Tax Excess for
the prior calendar year is less than the actual Expense Excess or actual Tax Excess, as the case
may be, for such prior year, Tenant shall pay Landlord, within 30 days after its receipt of the
statement of Expenses or Taxes, any underpayment for the prior calendar year.
2.
Expenses.
2.01
Expenses
means all costs and expenses incurred in each calendar year in connection with
operating, maintaining, repairing, and managing the Building and the Property. Landlord agrees to
act in a commercially reasonable manner in incurring Expenses, taking into consideration the class
and the quality of the Building. Expenses include, without limitation: (a) all labor and labor
related costs; (b) management fees (expressed as a percentage of gross receipts for the Building,
not to exceed the prevailing market management fees (expressed as a percentage of gross receipts),
for comparable third party management companies offering comparable management services in office
buildings similar to the Building in class, size, age and location); (c) the cost of equipping,
staffing and operating an on-site and/or off-site management office for the Building, provided if
the management office services one or more other buildings or properties, the shared costs and
expenses of equipping, staffing and operating such management office(s) shall be equitably prorated
and apportioned between the Building and the other buildings or properties; (d) accounting costs;
(e) the cost of services; (f) rental and purchase cost of parts, supplies, tools and equipment; (g)
insurance premiums and deductibles; (h) electricity, gas and other utility costs; and (i) the
amortized cost of capital improvements (as distinguished from replacement parts or components
installed in the ordinary course of business) made subsequent to the Base Year which are: (1)
performed primarily to reduce current or future operating expense costs, upgrade Building security
or otherwise improve the operating efficiency of the Property; or (2) required to comply with any
Laws that are enacted, or first interpreted to apply to the Property, after the date of this Lease.
The cost of capital improvements shall be amortized by Landlord over the lesser of the Payback
Period (defined below) or the useful life of the capital improvement as reasonably determined by
Landlord in accordance with commonly accepted standards for the real estate industry.
Payback
Period
means the reasonably estimated period of time that it takes for the cost savings resulting
from a capital improvement to equal the total cost of the capital improvement. Landlord, by itself
or through an affiliate, shall have the right to directly perform, provide and be compensated for
any services under this Lease. If Landlord incurs Expenses for the Building or Property together
with one or more other buildings or properties, whether pursuant to a reciprocal easement
agreement, common area agreement or
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
1
otherwise, the shared costs and expenses shall be equitably
prorated and apportioned between the Building and Property and the other buildings or properties.
2.02 Expenses shall not include: the cost of capital improvements (except as set forth above);
depreciation; principal payments of mortgage and other non-operating debts of Landlord; the
cost of repairs or other work to the extent Landlord is reimbursed by insurance or condemnation
proceeds; costs in connection with leasing space in the Building, including brokerage commissions; lease concessions, rental abatements and construction allowances granted to specific tenants;
brochures and marketing supplies, legal fees in negotiating and preparing lease document; costs incurred in
connection with the sale, financing or refinancing of the Building; fines, interest and penalties
incurred due to the late payment of Taxes or Expenses; organizational expenses associated with the creation and
operation of the entity which constitutes Landlord; or any penalties or damages that Landlord pays to
Tenant under this Lease or to other tenants in the Building under their respective leases.
The following items are also excluded from Expenses:
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(a)
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Sums (other than management fees, it being agreed that the management fees
included in Expenses are as described in Section 2.01(b) above) paid to subsidiaries or
other affiliates of Landlord for services on or to the Property, Building and/or
Premises, but only to the extent that the costs of such services exceed the competitive
cost for such services rendered by persons or entities of similar skill, competence and
experience.
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(b)
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Any fines, penalties or interest resulting from the negligence or willful
misconduct of the Landlord or its agents, contractors, or employees.
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(c)
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Advertising and promotional expenditures.
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(d)
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Landlords charitable and political contributions.
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(e)
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Ground lease rental.
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(f)
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Attorneys fees and other expenses incurred in connection with negotiations or
disputes with prospective tenants or tenants or other occupants of the Building.
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(g)
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The cost or expense of any services or benefits provided generally to other
tenants in the Building and not provided or available to Tenant.
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(h)
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All costs of purchasing or leasing major sculptures, paintings or other major
works or objects of art (as opposed to decorations purchased or leased by Landlord for display
in the Common Areas of the Building).
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(i)
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Any expenses for which Landlord has received actual reimbursement (other than
through Expenses).
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(j)
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Expenses for the replacement of any item covered under warranty, unless Landlord
has not received payment under such warranty and it would not be fiscally prudent to
pursue legal action to collect on such warranty.
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(k)
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Fines or penalties incurred as a result of violation by Landlord of any applicable Laws.
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2.03 If at any time during a calendar year the Building is not at least 95% occupied or
Landlord is not supplying services to at least 95% of the total Rentable Square Footage of the Building,
Expenses shall, at Landlords option, be determined as if the Building had been 95% occupied and Landlord had
been supplying services to 95% of the Rentable Square Footage of the Building. If Expenses for a
calendar year are determined as provided in the prior sentence, Expenses for the Base Year shall also
be determined in such manner. Notwithstanding the foregoing, Landlord may calculate the
extrapolation of Expenses under this Section based on 100% occupancy and service so long as such percentage is
used consistently for each year of the Term. The extrapolation of Expenses under this Section shall
be performed in accordance with the methodology specified by the Building Owners and Managers Association.
3.
Taxes
shall mean: (a) all real property taxes and other assessments on the Building and/or
Property, including, but not limited to, gross receipts taxes, assessments for special improvement
districts and building improvement districts, governmental charges, fees and assessments for
police, fire, traffic mitigation or other governmental service of purported benefit to the
Property, taxes and assessments levied in substitution or supplementation in whole or in part of
any such taxes and assessments and the Propertys share of any real estate taxes and assessments
under any reciprocal easement agreement, common area agreement or similar agreement as to the
Property; (b) all personal property taxes for property that is owned by Landlord and used in
connection with the operation,
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
2
maintenance and repair of the Property; and (c) all costs and fees incurred in connection with
seeking reductions in any tax liabilities described in (a) and (b), including, without limitation,
any costs incurred by Landlord for compliance, review and appeal of tax liabilities. Without
limitation, Taxes shall not include any income, capital levy, transfer, capital stock, gift, estate
or inheritance tax. If a change in Taxes is obtained for any year of the Term during which Tenant
paid Tenants Pro Rata Share of any Tax Excess, then Taxes for that year will be retroactively
adjusted and Landlord shall provide Tenant with a credit, if any, based on the adjustment.
Likewise, if a change is obtained for Taxes for the Base Year, Taxes for the Base Year shall be
restated and the Tax Excess for all subsequent years shall be recomputed. Tenant shall pay Landlord
the amount of Tenants Pro Rata Share of any such increase in the Tax Excess within 30 days after
Tenants receipt of a statement from Landlord.
4.
Audit Rights.
Tenant, within 365 days after receiving Landlords statement of Expenses, may give
Landlord written notice
(Review Notice)
that Tenant intends to review Landlords records of the
Expenses for the calendar year to which the statement applies. Within a reasonable time after
receipt of the Review Notice (not to exceed 30 days), Landlord shall make all pertinent records
available for inspection that are reasonably necessary for Tenant to conduct its review. If any
records are maintained at a location other than the management office for the Building, Tenant may
either inspect the records at such other location or pay for the reasonable cost of copying and
shipping the records. If Tenant retains an agent to review Landlords records, the agent must be
with a CPA firm licensed to do business in the state or commonwealth where the Property is located.
Tenant shall be solely responsible for all costs, expenses and fees incurred for the audit.
However, notwithstanding the foregoing, if Landlord and Tenant determine that Expenses for the
Building for the year in question were less than stated by more than 5%, Landlord, within 30 days
after its receipt of paid invoices therefor from Tenant, shall reimburse Tenant for the reasonable
amounts paid by Tenant to third parties in connection with such review by Tenant. Within 90 days
after the records are made available to Tenant, Tenant shall have the right to give Landlord
written notice (an
Objection Notice)
stating in reasonable detail any objection to Landlords
statement of Expenses for that year. If Tenant fails to give Landlord an Objection Notice within
the 90 day period or fails to provide Landlord with a Review Notice within the 365 day period
described above, Tenant shall be deemed to have approved Landlords statement of Expenses and shall
be barred from raising any claims regarding the Expenses for that year. The records obtained by
Tenant shall be treated as confidential. In no event shall Tenant be permitted to examine
Landlords records or to dispute any statement of Expenses unless Tenant has paid and continues to
pay all Rent when due.
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
3
EXHIBIT C
WORK LETTER
This work letter (Work Letter) is attached to and made a part of the Lease by and between
CA-PARKSIDE TOWERS LIMITED PARTNERSHIP, a Delaware limited partnership (Landlord)
and
QUINSTREET,
INC., a California corporation (Tenant)
for space in the Building located at 1051 East Hillsdale
Boulevard, Foster City, California.
As used in this Work Letter, the Premises shall be deemed to mean the Premises, as initially
defined in the attached Lease.
1.
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Landlord shall perform improvements to the Premises in accordance with the plans prepared by
API Design, Inc. dated May 28, 2003 (the
Plans),
which are attached hereto as
Exhibit C-1.
The improvements to be performed by Landlord in accordance with the Plans are hereinafter
referred to as the
Landlord Work.
It is agreed that construction of the Landlord Work will
be completed at Landlords sole cost and expense (subject to the terms of Section 2 below)
using Building standard methods, materials and finishes, which standards are attached hereto
as
Exhibit C-2.
If any finishes or materials specified in the Landlord Work are or become
unavailable or have long lead times that would delay Landlords completion of the Landlord
Work, Landlord and Tenant shall work together in good faith to select alternative finishes or
materials to allow Landlord to complete the Landlord Work in a timely manner. Landlord shall
enter into a direct contract for the Landlord Work with Venture Builders as general
contractor. In addition, Landlord shall have the right to select and/or approve of any
subcontractors used in connection with the Landlord Work. Landlords supervision or
performance of any work for or on behalf of Tenant shall not be deemed a representation by
Landlord that such Plans or the revisions thereto comply with applicable insurance
requirements, building codes, ordinances, laws or regulations, or that the improvements
constructed in accordance with the Plans and any revisions thereto will be adequate for
Tenants use, it being agreed that Tenant shall be responsible for all elements of the design
of Tenants plans (including, without limitation, compliance with law, functionality of
design, the structural integrity of the design, the configuration of the premises and the
placement of Tenants furniture, appliances and equipment).
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2.
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If Tenant shall request any revisions to the Plans, Landlord shall have such revisions
prepared at Tenants sole cost and expense and Tenant shall reimburse Landlord for the cost of
preparing any such revisions to the Plans, plus any applicable state sales or use tax thereon,
upon demand. Promptly upon completion of the revisions, Landlord shall notify Tenant in
writing of the increased cost in the Landlord Work, if any, resulting from such revisions to
the Plans. Tenant, within one Business Day, shall notify Landlord in writing whether it
desires to proceed with such revisions. In the absence of such written authorization, Landlord
shall have the option to continue work on the Premises disregarding the requested revision.
Tenant shall be responsible for any Tenant Delay in completion of the Premises resulting from
any revision to the Plans. . If such revisions result in an increase in the cost of Landlord
Work, such increased costs, plus any applicable state sales or use tax thereon, shall be
payable by Tenant upon demand. Notwithstanding anything herein to the contrary, all revisions
to the Plans shall be subject to the approval of Landlord.
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3.
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In addition to the Landlord Work, Landlord shall construct a shower facility on the
5
th
floor of the East Tower, as more fully described in those certain Plans
prepared by API Design, Inc. dated May 13, 2003 (the
Shower Facility)
at Landlords sole cost and expense
using Building Standard methods, materials and finishes. Landlord shall enter into a direct
contract for the Landlord Work with Venture Builders as general contractor. In addition,
Landlord shall have the right to select and/or approve of any subcontractors used in
connection with the Landlord Work. Landlord shall use reasonable efforts to complete the
Shower Facility by November 1, 2003, but any delay in the completion of the Shower Facility
or inconvenience suffered by Tenant during the construction of the Shower Facility shall not
delay the Commencement Date nor shall it subject Landlord to any liability for any loss or
damage resulting therefrom or entitle Tenant to any credit, abatement or adjustment of Rent
or other sums payable under the Lease.
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4.
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This Work Letter shall not be deemed applicable to any additional space added to the Premises
at any time or from time to time, whether by any options under the Lease or otherwise, or to
any portion of the original Premises or any additions to the Premises in the event of a
renewal or extension of the original Term of the Lease, whether by any options under the Lease
or otherwise, unless expressly so provided in the Lease or any amendment or supplement to the
Lease.
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{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
1
EXHIBIT C-1
PLANS
{QuinStreet, Inc. -5-00004264.}
May 29, 2003
Matter ID Number: 7329
1
EXHIBIT C-1
PLANS
FINISH SPECIFICATIONS
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C1
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CARPET
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MFG:
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BIGELOW
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PAINT
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MFG:
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ICI
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STYLE:
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CYBERWEAVE
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P1
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GENERAL
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COLOR:
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SWISS COFFEE
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COLOR:
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SILVER MOSS
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NUMBER:
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2012
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NUMBER:
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W019-3770
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C2
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CARPET
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MFG:
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BIGELOW
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PAINT
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MFG:
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ICI
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STYLE:
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CAMDEN
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P2
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ACCENT
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COLOR:
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AMISH LINEN
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COLOR:
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EARTH MNERAL
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NUMBER:
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563
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NUMBER:
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W310-3887
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C2
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CARPET
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MFG:
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BIGELOW
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MFG:
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ICI
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STYLE:
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SPECTRUM II
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PAINT
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COLOR:
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ABBEY CREAM
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COLOR:
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FAWN
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P3
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ACCENT
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NUMBER:
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484
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NUMBER:
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B5117-862
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WEIGHT:
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36 OZ.
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RT1
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MFG:
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ARMSTRONG
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MFG:
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NEVAMAR
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RESILIENT
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STYLE:
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STONETEX EXCELON
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LP1
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LAMINATED
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STYLE:
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TEMPERA TEXTURED
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TILE
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COLOR:
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SANDSTONE TAN
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PLASTIC
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COLOR:
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OCHRE
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NUMBER:
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52143
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NUMBER:
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TM2IT
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SIZE:
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12 X 12
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RB1
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MFG:
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BURKE
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MFG:
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NEVAMAR
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RESILIENT
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STYLE:
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4 TOPSET
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LP2
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LAMINATED
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STYLE:
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SHIBORI TEXTURED
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BASE
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COLOR:
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BEIGE
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PLASTIC
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COLOR:
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MAIZE
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NUMBER:
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203
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NUMBER:
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SH22T
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{QuinStreet,
Inc. -5-00004264.}
May 30, 2003
Matter ID Number: 7329
2
EXHIBIT C-2
BUILDING STANDARDS
May 27, 2003
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Ms. Carol Donnelly
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Equity Office Properties
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2929 Campus Drive, Suite 125
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San Mateo, CA 94403
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Project:
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QuinStreet
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1051 East Hillsdale Boulevard, Suite 800
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Foster City, CA 94404
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Re:
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Budget Price (revision # 3)
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Dear Carol:
We are
pleased to submit the Budget Price for QuinStreet at the 8th floor of 1051 East Hillsdale
Boulevard. This pricing is based on a space plans dated May 6, 2003 and are further qualified as
follows:
Rough Carpentry
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a)
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One time lobby/elevator protection
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b)
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Barricades/Traffic control
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c)
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General Labor
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d)
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Concrete pad on roof.
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Millwork
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a)
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All millwork is figured to be plastic laminate.
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b)
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Break Room Upper and lower cabinets with countertop.
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c)
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Coffee Bar Upper and lower cabinets with countertop.
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d)
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Copy/mail/Storage upper and lower cabinets with countertop.
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e)
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Phone Room counters
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Doors, Frames and Hardware
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a)
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All wood doors to be flush plain sliced white maple with a clear finish.
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b)
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(37) each 3 x 9 non rated office doors in factory finished aluminum frames.
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a)
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Micro-key hardware.
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b)
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Any work to core and shell doors shown as existing.
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c)
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Keying
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d)
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Grouting of frames.
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e)
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Glass and glazing.
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f)
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Rated assemblies
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{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
1
Glass and Glazing
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a)
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(15) each ¼ clear tempered 3 glass at office sidelights.
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b)
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(7) each ¼ clear tempered 1 glass at office sidelights.
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c)
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Install roll-in gasketing supplied by others.
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Metal Studs and Drywall
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a)
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All walls around core area that are exposed to open office are to be full
height non-rated walls..
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b)
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All walls inside core area are to be ceiling height plus 6 with insulation
laid over the top for sound dampening.
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c)
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In wall insulation at conference rooms only.
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d)
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All perimeter low sill walls up to 38 to be framed rocked and finished.
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e)
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All perimeter over head sill wall to be framed, rocked and finished to hold window
blinds.
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f)
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Soffits up to deck at break rooms Copy/Mail/Storage and Coffee Bar.
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g)
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Frame rock and tape all columns to full height.
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h)
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Rear and adjoining sidewalls in the phone and conference rooms will be 3 5/8
studs filled
with 3 1/2 insulation batts for sound containment.
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a)
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Fire extinguisher cabinets (not shown).
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b)
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Access panels.
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c)
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Fire stopping at penetrations (walls are non rated).
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d)
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Upgrades to existing construction.
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Acoustical Ceiling
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a)
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Acoustical ceiling grid and tile throughout entire core areas (Conf Rooms, Copy
Rooms, Meeting Rooms, Storage, Break Rooms)
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b)
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Server Room to have a dropped 2x4 grid with fissured tiles.
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c)
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Tile to be Armstrong, White 2x2 Dune second look with a 9/16 reveal.
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d)
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The grid is a 9/16 expose tee suspension system in white.
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e)
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All open office to have white PAPER covering to underside of existing
insulation with stick pin installation*.
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*
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Landlord has asked the installing contractor to do a mockup of the proposed ceiling
installation to review with all parties. Until that time, Landlord is willing to commit to
providing a insulation covering that is mutually agreeable for both the customer and the
Landlord, which Landlord believes the specified paper covering can achieve. Parties agree
that a professional/clean installation and aesthetical appearance is necessary to complete
the space in a first class fashion, for the benefit of Quinstreet and future customers
seeking space within the project. In the event it does not meet with both parties approval,
we will identify a suitable covering to achieve both parties desired results.
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Floor Covering
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a)
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All carpeting, VCT and base.
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b)
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Floor preparation as required.
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c)
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Server room (only) floor to have anti-static floor tiles
installed
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NOTE:
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a)
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Carpeting being carried is Mohawk standard carpet.
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b)
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VCT is Armstrong Excelon.
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{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
2
Painting and Wall Covering
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a)
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Paint all partitions as scheduled (see Drywall scope).
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b)
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Base coat and two finish coats.
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c)
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Touch up.
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d)
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Walls to be smooth finish
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Window-coverings
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a)
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Levolor 1 perforated blinds.
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Plumbing
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a)
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(1) sink and faucet each for Break Room and Coffee Bar.
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b)
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(1) water cooler supply for Break Room.
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c)
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(1) coffee maker outlet each for Break Room and Coffee Bar.
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d)
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(1) dishwasher supply for Break Room.
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e)
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(2) condensate drains for HVAC units at Server Room.
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f)
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Core drilling
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g)
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(1) Dishwasher.
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h)
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(1) Garbage disposal
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Fire Sprinklers
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a)
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All design-build sprinkler engineering, fabrication and installation.
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a)
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Special detection systems.
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b)
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Low voltage wiring.
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HVAC
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a)
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Install duct mains
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b)
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Install hot water supply/return mains and distribution.
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c)
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(15) perimeter reheat VAV zones
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d)
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(19) cooling only interior VAV zones
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e)
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Exposed ductwork
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f)
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Transfer fan from break room
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g)
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Install (2) 3 ton chilled water fan coils
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h)
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Chilled water piping
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i)
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Start up
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J)
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DDC controls
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k)
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Air balance.
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I)
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Engineering and Coordination.
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2. Price excludes:
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a)
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Electrical wiring.
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b)
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Relocation of existing conditions.
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c)
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Cutting, coring, and roofing.
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d)
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Duct detectors.
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e)
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Smoke detectors.
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f)
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Concrete pad on roof.
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Electrical/Life Safety/Telecommunications
1. Price includes design-build electrical and life safety engineering, fabrication, and installation of:
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a)
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(108) 2 x 4s
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b)
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(10) downlights
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c)
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(7) undercoutner lights
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d)
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(11) exit signs
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e)
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(30) emergency lights
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f)
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(40) 2 gang switch/motion sensor
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g)
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(86) wall receptacles
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h)
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(11) 120/20 dedicated
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{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
3
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i)
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(20) floor power
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j)
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(20) floor telephone
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k)
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(40) furniture power
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l)
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(40) furniture telephone
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m)
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(4) 3 way switches
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n)
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(13) single switches
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o)
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(1) exhaust fan
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p)
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(20) wall sconces
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q)
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(8) override switches
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r)
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(38) conference room downlites
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s)
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(4) 12 fluorescent indirect uplites
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t)
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(6) 20 fluorescent indirect uplites
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u)
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(15) 24 fluorescent indirect uplites
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v)
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(21) 36 fluorescent indirect uplites
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w)
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EMS
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x)
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Engineering
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y)
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Elevator lobby downlites
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z)
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Temp Power & Lighting
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aa)
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Large Conference rooms to receive a total of 6 duplex receptacles and 6 data
receptacles, the remainder (small & medium conference rooms, phone rooms) shall receive
a total of 3 duplex receptacles and 3 data receptacles which will be placed one per
wall excluding door opening.
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bb)
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Each group of four workstations will be provided with 2 circuits per grouping.
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cc)
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Break
room to receive electrical outlets for (2) 110v vending machines, (2) 110v refrigerators,
(3) 110v microwaves, (2) 110v coffee makers for a total of (12) dedicated circuits.
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2. Server Room includes:
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a)
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120/208 panel
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b)
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Feeder
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c)
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(20) 120/20 dedicated isolated grounds
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d)
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(4) 208/30 dedicated
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e)
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(2) fancoils (HVAC)
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f)
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(1) shunt trip
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g)
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(1) Emon meter
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h)
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(1) 225 KVA transformer
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i)
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Distribution
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j)
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Buss plug
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k)
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Transformer feed
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l)
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Panel feed
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m)
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Light Fixtures
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Security:
1.
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An allowance is being carried for (2) card readers for stair well doors and a low voltage
panel.
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Clarifications
1.
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The electrical includes the connection of the furniture whips to the floor monument only, it
is the responsibility of the furniture contractor to connect the whip to the furniture.
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2.
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Landlord agrees to install draft stops if/as needed per code.
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General Conditions
This is for all of the temporary facilities required by the General Contractor to manage the
project such as supervision, management, and administration.
Exclusions
1.
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Structural engineering or work.
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2.
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Signage.
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3.
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Bathrooms.
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4.
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Keying.
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5.
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Furniture.
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6.
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Work stations.
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7.
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Telecommunications except as noted above
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8.
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All Micro-key hardware and coordination.
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9.
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Audiovisual work, monitors and projectors.
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If you have any questions, or require additional information, please call our office at (650)
598-3961.
Sincerely,
VENTURE BUILDERS
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
4
EXHIBIT D
COMMENCEMENT LETTER
(EXAMPLE)
|
|
|
Re:
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|
Commencement Letter with respect to that certain Lease dated as of the _____ day of
____________ , 2003, by and between
CA-PARKSIDE TOWERS LIMITED PARTNERSHIP, a
Delaware limited partnership,
as Landlord, and
QUINSTREET, INC., a California corporation,
as Tenant, for
35,435
rentable square feet on the eighth floor of the Building located at
1051 East Hillsdale Boulevard, Foster City, California.
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Dear _____________________________:
In accordance with the terms and conditions of the above referenced Lease, Tenant accepts
possession of the Premises and agrees:
|
1.
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The Commencement Date of the Lease is __________________________;
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2.
|
|
The Termination Date of the Lease is_____________________________.
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Please acknowledge your acceptance of possession and agreement to the terms set forth above by
signing all 3 counterparts of this Commencement Letter in the space provided and returning 2 fully
executed counterparts to my attention.
Sincerely,
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Tenant:
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QuinStreet, Inc.
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By:
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Name:
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Title:
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Date:
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{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
1
EXHIBIT E
BUILDING RULES AND REGULATIONS
The following rules and regulations shall apply, where applicable, to the Premises, the
Building, the parking facilities (if any), the Property and the appurtenances. In the event of a
conflict between the following rules and regulations and the remainder of the terms of the Lease,
the remainder of the terms of the Lease shall control. Capitalized terms have the same meaning as
defined in the Lease.
1.
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Sidewalks, doorways, vestibules, halls, stairways and other similar areas shall not be
obstructed by Tenant or used by Tenant for any purpose other than ingress and egress to and
from the Premises. No rubbish, litter, trash, or material shall be placed, emptied, or thrown
in those areas. At no time shall Tenant permit Tenants employees to loiter in Common Areas or
elsewhere about the Building or Property.
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2.
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Plumbing fixtures and appliances shall be used only for the purposes for which designed and
no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed in the
fixtures or appliances. Damage resulting to fixtures or appliances by Tenant, its agents,
employees or invitees shall be paid for by Tenant and
Landlord shall not be responsible for the damage.
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3.
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No signs, advertisements or notices shall be painted or affixed to windows, doors or other
parts of the Building, except those of such color, size, style and in such places as are first
approved in writing by Landlord. Tenant shall be entitled to tenant identification and suite
number signage at the entrance to the Premises, as well as elevator lobby signage on the
8
th
floor of the Building, all of which shall be installed by Landlord, at Tenants
cost and expense, using the standard graphics for the Building. Except in connection with the
hanging of lightweight pictures and wall decorations, no nails, hooks or screws shall be
inserted into any part of the Premises or Building except by the Building maintenance
personnel without Landlords prior approval, which approval shall not be unreasonably
withheld.
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4.
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Landlord shall provide and maintain in the first floor (main lobby) of the Building an
alphabetical directory board or other directory device listing tenants, including Tenant, at
Landlords cost and no other directory shall be permitted unless previously consented to by
Landlord in writing.
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5.
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Tenant shall not place any lock(s) on any door in the Premises or Building without Landlords
prior written consent, which consent shall not be unreasonably withheld, and Landlord shall
have the right at all times to retain and use keys or other access codes or devices to all
locks within and into the Premises. A reasonable number of keys to the locks on the entry
doors in the Premises shall be furnished by Landlord to Tenant at Tenants cost and Tenant
shall not make any duplicate keys. All keys shall be returned to Landlord at the expiration or
early termination of the Lease.
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6.
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All contractors, contractors representatives and installation technicians performing work in
the Building shall be subject to Landlords prior approval, which approval shall not be
unreasonably withheld, and shall be required to comply with Landlords standard rules,
regulations, policies and procedures, which may be revised from time to time.
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7.
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Movement in or out of the Building of furniture or office equipment, or dispatch or receipt
by Tenant of merchandise or materials requiring the use of elevators, stairways, lobby areas
or loading dock areas, shall be restricted to hours reasonably designated by Landlord. Tenant
shall obtain Landlords prior approval by providing a detailed listing of the activity, which
approval shall not be unreasonably withheld. If approved by Landlord, the activity shall be
under the supervision of Landlord and performed in the manner required by Landlord. Tenant
shall assume all risk for damage to articles moved and injury to any persons resulting from
the activity. If equipment, property, or personnel of Landlord or of any other party is
damaged or injured as a result of or in connection with the activity, Tenant shall be solely
liable for any resulting damage, loss or injury.
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8.
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Landlord shall have the right to approve the weight, size, or location of heavy equipment or
articles in and about the Premises, which approval shall not be unreasonably withheld. Damage
to the Building by the installation, maintenance, operation, existence or removal of Tenants
Property shall be repaired at Tenants sole expense.
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9.
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Corridor doors, when not in use, shall be kept closed.
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10.
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Tenant shall not: (1) make or permit any improper, objectionable or unpleasant noises or
odors in the Building, or otherwise interfere in any way with other tenants or persons having
business with them; (2) solicit business or distribute or cause to be distributed, in any
portion of the
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{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
1
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Building, handbills, promotional materials or other advertising; or (3) conduct or permit
other activities in the Building that might, in Landlords sole opinion, constitute a
nuisance.
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11.
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No animals, except those assisting handicapped persons, shall be brought into the Building or
kept in or about the Premises.
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12.
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No inflammable, explosive or dangerous fluids or substances shall be used or kept by Tenant
in the Premises, Building or about the Property, except for those substances as are typically
found in similar premises used for general office purposes and are being used by Tenant in a
safe manner and in accordance with all applicable Laws. Tenant shall not, without Landlords
prior written consent, use, store, install, spill, remove, release or dispose of, within or
about the Premises or any other portion of the Property, any asbestos-containing materials or
any solid, liquid or gaseous material now or subsequently considered toxic or hazardous under
the provisions of 42 U.S.C. Section 9601 et seq. or any other applicable environmental Law
which may now or later be in effect. Tenant shall comply with all Laws pertaining to and
governing the use of these materials by Tenant and shall remain solely liable for the costs of
abatement and removal.
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13.
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Tenant shall not use or occupy the Premises in any manner or for any purpose which might
injure the reputation or impair the present or future value of the Premises or the Building.
Tenant shall not use, or permit any part of the Premises to be used for lodging, sleeping or
for any illegal purpose.
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14.
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Tenant shall not take any action which would violate Landlords labor contracts or which
would cause a work stoppage, picketing, labor disruption or dispute or interfere with
Landlords or any other tenants or occupants business or with the rights and privileges of
any person lawfully in the Building
(Labor Disruption)
. Tenant shall take the actions
necessary to resolve the Labor Disruption, and shall have pickets removed and, at the request
of Landlord, immediately terminate any work in the Premises that gave rise to the Labor
Disruption, until Landlord gives its written consent for the work to resume. Tenant shall have
no claim for damages against Landlord or any of the Landlord Related Parties nor shall the
Commencement Date of the Term be extended as a result of the above actions.
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15.
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Tenant shall not install, operate or maintain in the Premises or in any other area of the
Building, electrical equipment that would overload the electrical system beyond its capacity
for proper, efficient and safe operation as determined solely by Landlord. Tenant shall not
furnish cooling or heating to the Premises, including, without limitation, the use of electric
or gas heating devices, without Landlords prior written consent. Tenant shall not use more
than its proportionate share of telephone lines and other telecommunication facilities
available to service the Building.
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16.
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Tenant shall not operate or permit to be operated a coin or token operated vending machine or
similar device (including, without limitation, telephones, lockers, toilets, scales, amusement
devices and machines for sale of beverages, foods, candy, cigarettes and other goods), except
for machines for the exclusive use of Tenants employees and invitees.
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17.
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Bicycles and other vehicles are not permitted inside the Building or on the walkways outside
the Building, except in areas designated by Landlord. This exclusion is expressly understood
not to apply to conveyances reasonably necessary for the movement of persons with disabilities
or for the easy movement of children under 4 years of age within the Building.
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18.
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Landlord may from time to time adopt systems and procedures for the security and safety of
the Building and the Property, its occupants, entry, use and contents. Tenant, its agents,
employees, contractors, guests and invitees shall comply with Landlords systems and
procedures.
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19.
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Landlord shall have the right to prohibit the use of the name of the Building or any other
publicity by Tenant that in Landlords sole opinion may impair the reputation of the Building
or its desirability. Upon written notice from Landlord, Tenant shall refrain from and
discontinue such publicity immediately.
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20.
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Neither Tenant nor its agents, employees, contractors, guests or invitees shall smoke or
permit smoking in the Common Areas, unless a portion of the Common Areas have been declared a
designated smoking area by Landlord, nor shall the above parties allow smoke from the Premises
to emanate into the Common Areas or any other part of the Building. Landlord shall have the
right to designate the Building (including the Premises) as a non-smoking building.
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21.
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Landlord shall have the right to designate and approve standard window coverings for the
Premises and to establish rules to assure that the Building presents a uniform exterior
appearance. Tenant shall ensure, to the extent reasonably practicable, that window coverings
are closed on windows in the Premises while they are exposed to the direct rays of the sun.
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{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
2
22.
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Deliveries to and from the Premises shall be made only at the times in the areas and through
the entrances and exits reasonably designated by Landlord. Tenant shall not make deliveries to
or from the Premises in a manner that might
interfere with the use by any other tenant of its premises or of the Common Areas, any
pedestrian use, or any use which is inconsistent with good business practice.
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23.
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The work of cleaning personnel shall not be hindered by Tenant after 5:30
p.m
., and
cleaning work may be done at any time when the offices are vacant. Windows, doors and fixtures
may be cleaned at any time. Tenant shall provide adequate waste and rubbish receptacles to
prevent unreasonable hardship to the cleaning service.
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{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
2
EXHIBIT
F
ADDITIONAL PROVISIONS
This Exhibit is attached to and made a part of the Lease by and between
CA-PARKSIDE TOWERS
LIMITED PARTNERSHIP, a Delaware limited partnership (Landlord)
and
QUINSTREET, INC., a California
corporation (Tenant)
for space in the Building located at 1051 East Hillsdale Boulevard, Foster
City, California.
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A.
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Grant of Option; Conditions
. Tenant shall have the right to extend the
Term (the
Renewal Option)
for one additional period of five (5) years commencing on the day
following the Termination Date of the initial Term and ending on the fifth anniversary
of the Termination Date (the
Renewal Term),
if:
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1.
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Landlord receives notice of exercise
(Initial Renewal Notice)
not
less than 9 full calendar months prior to the expiration of the initial Term and
not more than 12 full calendar months prior to the expiration of the initial
Term; and
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2.
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Tenant is not in default under the Lease beyond any applicable cure
periods at the time that Tenant delivers its Initial Renewal Notice or at the
time Tenant delivers its Binding Notice (as defined below); and
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3.
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No part of the Premises is sublet (other than pursuant to a
Permitted Transfer, as defined in Section 11 of the Lease) at the time that
Tenant delivers its Initial Renewal Notice or at the time Tenant delivers its
Binding Notice; and
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4.
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The Lease has not been assigned (other than pursuant to a Permitted
Transfer, as defined in Section 11 of the Lease) prior to the date that Tenant
delivers its Initial Renewal Notice or prior to the date Tenant delivers its
Binding Notice.
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B.
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Terms Applicable to Premises During Renewal Term
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1.
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The initial Base Rent rate per rentable square foot for the
Premises during the Renewal Term shall equal 95% of the Prevailing Market rate
(hereinafter defined) per rentable square foot for the Premises. Base Rent during
the Renewal Term shall increase, if at all, in accordance with the increases
assumed in the determination of Prevailing Market rate. Base Rent attributable to
the Premises shall be payable in monthly installments in accordance with the
terms and conditions of Section 4 of the Lease.
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2.
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Tenant shall pay Additional Rent (i.e. Taxes and Expenses) for the
Premises during the Renewal Term In accordance with the terms of Section 4 of the
Lease, and the manner and method in which Tenant reimburses Landlord for Tenants
share of Taxes and Expenses and the Base Year applicable to such matter, shall be
some of the factors considered in determining the Prevailing Market rate for the
Renewal Term.
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C.
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Initial Procedure for Determining Prevailing Market
. Within 30 days after
receipt of
Tenants Initial Renewal Notice, Landlord shall advise Tenant of the applicable Base
Rent
rate for the Premises for the Renewal Term. Tenant, within 30 days after the date on
which Landlord advises Tenant of the applicable Base Rent rate for the Renewal Term,
shall either (i) give Landlord final binding written notice
(Binding Notice)
of
Tenants
exercise of its Renewal Option, or (ii) if Tenant disagrees with Landlords
determination,
provide Landlord with written notice of rejection (the
Rejection Notice)
. If Tenant
fails
to provide Landlord with either a Binding Notice or Rejection Notice within such 30 day
period, Tenants Renewal Option shall be null and void and of no further force and
effect.
If Tenant provides Landlord with a Binding Notice, Landlord and Tenant shall enter into
the Renewal Amendment (as defined below) upon the terms and conditions set forth
herein. If Tenant provides Landlord with a Rejection Notice, Landlord and Tenant shall
work together in good faith to agree upon the Prevailing Market rate for the Premises
during the Renewal Term. Upon agreement, Landlord and Tenant shall enter into the
Renewal Amendment in accordance with the terms and conditions hereof.
Notwithstanding the foregoing, if Landlord and Tenant fail to agree upon the Prevailing
Market rate within 30 days after the date Tenant provides Landlord with the Rejection
Notice, Tenant, by written notice to Landlord (the
Arbitration Notice)
within 5 days
after
the expiration of such 30 day period, shall have the right to have the Prevailing
Market
rate determined in accordance with the arbitration procedures described in Section D
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{QuinStreet, Inc. -6-00004264.]
May 30, 2003
Matter ID Number: 7329
1
below. If Landlord and Tenant fail to agree upon the Prevailing Market rate within the
30 day period described and Tenant fails to timely exercise its right to arbitrate,
Tenants Renewal Option shall be deemed to be null and void and of no further force
and effect.
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D.
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Arbitration Procedure
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1.
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If Tenant provides Landlord with an Arbitration Notice, Landlord
and Tenant, within
5 days after the date of the Arbitration Notice, shall each simultaneously
submit to
the other, in a sealed envelope, its good faith estimate of the Prevailing
Market
rate for the Premises during the Renewal Term (collectively referred to as the
Estimates
). If the higher of such Estimates is not more than 105% of the lower
of such Estimates, then Prevailing Market rate shall be the average of the two
Estimates. If the Prevailing Market rate is not resolved by the exchange of
Estimates, then, within 7 days after the exchange of Estimates, Landlord and
Tenant shall each select an appraiser to determine which of the two Estimates
most closely reflects the Prevailing Market rate for the Premises during the
Renewal Term. Each appraiser so selected shall be certified as an MAI appraiser
or as an ASA appraiser and shall have had at least 5 years experience within the
previous 10 years as a real estate appraiser working in the Foster City/San
Mateo
area with working knowledge of current rental rates and practices. For purposes
hereof, an MAI appraiser means an individual who holds an MAI designation
conferred by, and is an independent member of, the American Institute of Real
Estate Appraisers (or its successor organization, or in the event there is no
successor organization, the organization and designation most similar), and an
ASA appraiser means an individual who holds the Senior Member designation
conferred by, and is an independent member of, the American Society of
Appraisers (or its successor organization, or, in the event there is no
successor
organization, the organization and designation most similar).
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2.
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Upon selection, Landlords and Tenants appraisers shall work
together in good
faith to agree upon which of the two Estimates most closely reflects the
Prevailing
Market rate for the Premises. The Estimate chosen by such appraisers shall be
binding on both Landlord and Tenant as the Base Rent rate for the Premises
during the Renewal Term, subject to the terms of Section D.4 below regarding the
Minimum Renewal Base Rent, as defined therein. If either Landlord or Tenant
fails to appoint an appraiser within the 7 day period referred to above, the
appraiser appointed by the other party shall be the sole appraiser for the
purposes
hereof. If the two appraisers cannot agree upon which of the two Estimates most
closely reflects the Prevailing Market within 20 days after their appointment,
then,
within 10 days after the expiration of such 20 day period, the two appraisers
shall
select a third appraiser meeting the aforementioned criteria. Once the third
appraiser (i.e. arbitrator) has been selected as provided for above, then, as
soon
thereafter as practicable but in any case within 14 days, the arbitrator shall
make
his determination of which of the two Estimates most closely reflects the
Prevailing
Market rate and such Estimate shall be binding on both Landlord and Tenant as
the Base Rent rate for the Premises, subject to the terms of Section D.4 below
regarding the Minimum Renewal Base Rent, as defined therein. If the arbitrator
believes that expert advice would materially assist him, he may retain one or
more
qualified persons to provide such expert advice. The parties shall share equally
in
the costs of the arbitrator and of any experts retained by the arbitrator. Any
fees
of any appraiser, counsel or experts engaged directly by Landlord or Tenant,
however, shall be borne by the party retaining such appraiser, counsel or
expert.
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3.
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If the Prevailing Market rate has not been determined by the
commencement date
of the Renewal Term, Tenant shall pay Base Rent upon the terms and conditions
in effect during the last month of the initial Term for the Premises until such
time
as the Prevailing Market rate has been determined. Upon such
determination, the
Base Rent for the Premises shall be retroactively adjusted to the commencement
of the Renewal Term for the Premises. If such adjustment results in an
underpayment of Base Rent by Tenant, Tenant shall pay Landlord the amount of
such underpayment within 30 days after the determination thereof. If such
adjustment results in an overpayment of Base Rent by Tenant, Landlord shall
credit such overpayment against the next installment of Base Rent due under the
Lease and, to the extent necessary, any subsequent installments, until the
entire
amount of such overpayment has been credited against Base Rent.
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E.
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Renewal Amendment
. If Tenant is entitled to and properly exercises its
Renewal Option,
Landlord shall prepare an amendment (the
Renewal Amendment
) to reflect changes in
the Base Rent, Term, Termination Date and other appropriate terms. The Renewal
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{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
2
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Amendment shall be sent to Tenant within a reasonable time after receipt of the
Binding Notice and Tenant shall execute and return the Renewal Amendment to Landlord
within 15 days after Tenants receipt of same, but, upon final determination of the
Prevailing Market rate applicable during the Renewal Term as described herein, an
otherwise valid exercise of the Renewal Option shall be fully effective whether or not
the Renewal Amendment is executed.
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F.
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Prevailing Market
. For purposes hereof,
Prevailing Market
shall mean
the arms length fair market annual rental rate per rentable square foot under renewal
leases and amendments entered into on or about the date on which the Prevailing Market
is being determined hereunder for space comparable to the Premises in the Building and
office buildings comparable to the Building in the Foster City/San Mateo area. The
determination of Prevailing Market shall take into account any material economic
differences between the terms of this Lease and any comparison lease or amendment, such
as rent abatements, construction costs and other concessions and the manner, if any, in
which the landlord under any such lease is reimbursed for operating expenses and taxes.
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2.
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Right of First Refusal.
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A.
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Grant of Option; Conditions
. Tenant shall have an ongoing right of first
refusal (the
Right of First Refusal
) with respect to the approximately 36,885 rentable square feet
of
space consisting of the 7
th
floor of the East Tower Building, shown on the
demising plan
attached hereto as
Exhibit F-1
(the
Refusal
Space
). Tenants Right of First Refusal
shall be exercised as follows: when Landlord has a prospective tenant, other than the
then-existing tenant in the applicable portion of the Refusal Space, (the
Prospect
)
interested in leasing all or a portion of the Refusal Space, Landlord shall advise
Tenant
(the
Advice
) of the terms under which Landlord is prepared to lease such portion of
the
Refusal Space to such Prospect and Tenant may lease such portion of the Refusal
Space, under such terms, by providing Landlord with written notice of exercise (the
Notice of Exercise
) within 5 Business Days after the date of the Advice, except that
Tenant shall have no such Right of First Refusal and Landlord need not provide Tenant
with an Advice if:
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1.
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Tenant is in default under the Lease beyond any applicable cure
periods at the time that Landlord would otherwise deliver the Advice; or
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2.
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the Premises, or any portion thereof, is sublet (other than pursuant
to a Permitted Transfer, as defined in Section 11 of the Lease) at the time
Landlord would otherwise deliver the Advice; or
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3.
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the Lease has been assigned (other than pursuant to a Permitted
Transfer, as defined in Section 11 of the Lease) prior to the date Landlord would
otherwise deliver the Advice; or
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4.
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the Refusal Space is not intended for the exclusive use of Tenant or
the transferee of a Permitted Transfer during the Term; or
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5.
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the Tenant or the transferee of a Permitted Transfer is not occupying
the Premises on the date Landlord would otherwise deliver the Advice.
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Notwithstanding anything in the foregoing to the contrary, Landlord shall not deliver
an Advice to Tenant prior to the earlier of the following: (1) the date that is 30
months after the Commencement Date, or (2) the first date by which at least 50% of the
Building is leased, it being understood that Landlord will not lease any portion of the
Refusal Space to a third party prior to the earlier of such dates.
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B.
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Terms for Refusal Space.
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1.
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The term for the Refusal Space shall commence upon the commencement
date stated in the Advice and thereupon such Refusal Space shall be considered a
part of the Premises, provided that all of the terms stated in the Advice,
including the termination date set forth in the Advice, shall govern Tenants
leasing of the Refusal Space and only to the extent that they do not conflict
with the Advice, the terms and conditions of the Lease shall apply to the Refusal
Space. Tenant shall pay Base Rent and Additional Rent for the Refusal Space in
accordance with the terms and conditions of the Advice.
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{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
3
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2.
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The Refusal Space (including improvements and personalty, if any)
shall be accepted by Tenant in its condition and as-built configuration existing
on the earlier of the date Tenant takes possession of the Refusal Space or the
date the term for such Refusal Space commences, unless the Advice specifies work
to be performed by Landlord in the Refusal Space, in which case Landlord shall
perform such work in the Refusal Space. If Landlord is delayed delivering
possession of the Refusal Space due to the holdover or unlawful possession of such
space by any party, Landlord shall use reasonable efforts to obtain possession of
the space, and the commencement of the term for the Refusal Space shall be
postponed until the date Landlord delivers possession of the Refusal Space to
Tenant free from occupancy by any party.
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C.
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Termination of Right of First Refusal.
The rights of Tenant hereunder
with respect to the
Refusal Space shall terminate on the earlier to occur of (i) the original Termination
Date
under this Lease (not including the Renewal Term, if any), (ii) with respect to any
particular Advice, Tenants failure to exercise its Right of First Refusal within the 5
Business Day period provided in Section A above; and (iii) with respect to any
particular
Advice, the date Landlord would have provided Tenant such Advice if Tenant had not
been in violation of one or more of the conditions set forth in Section A above.
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D.
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Refusal Space Amendment.
If Tenant exercises its Right of First Refusal,
Landlord shall
prepare an amendment (the
Refusal Space Amendment)
adding the Refusal Space to
the Premises on the terms set forth in the Advice and reflecting the changes in the
Base
Rent, Rentable Square Footage of the Premises, Tenants Pro Rata Share and other
appropriate terms. A copy of the Refusal Space Amendment shall be sent to Tenant
within a reasonable time after Landlords receipt of the Notice of Exercise executed by
Tenant, and Tenant shall execute and return the Refusal Space Amendment to Landlord
within 15 days thereafter, but an otherwise valid exercise of the Right of First
Refusal
shall be fully effective whether or not the Refusal Space Amendment is executed.
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3.
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Shower Facility.
Subject to the provisions of this Section 3 of Exhibit F, following the
completion of construction of the Shower Facility (as defined in the Work Letter) by Landlord,
so long as Tenant is not in default under this Lease, Tenant shall be entitled to the
non-exclusive use of the Shower Facility. The use of the Shower Facility shall be subject to
the reasonable rules and regulations (including rules regarding hours of use) established from
time to time by Landlord for the Shower Facility. The costs of operating, maintaining and
repairing the Shower Facility may be included as part of Expenses. Tenant acknowledges that
the provisions of this Section shall not be deemed to be a representation by Landlord that
Landlord shall continuously maintain the Shower Facility in its original configuration
throughout the Term, and Landlord shall have the right, at Landlords sole discretion, to
expand, contract or otherwise modify the Shower Facility, so long as the benefits to Tenant in
connection therewith are not materially reduced. Tenant hereby voluntarily releases,
discharges, waives and relinquishes any and all actions or causes of action for personal
injury or property damage occurring to Tenant or its employees or agents arising as a result
of the use of the Shower Facility, or any activities incidental thereto, wherever or however
the same may occur, and further agrees that Tenant will not prosecute any claim for personal
injury or property damage against Landlord or any of its officers, agents, servants or
employees for any said causes of action, except to the extent arising out of the gross
negligence or willful misconduct of Landlord. It is the intention of Tenant with respect to
the Shower Facility to exempt and relieve Landlord from liability for personal injury or
property damage caused by negligence.
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4.
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Temporary Fitness Center Use.
During the period starting with the Commencement Date and
ending on the date on which Landlord first offers Tenant an Advice with respect to all or any
portion of the Refusal Space in accordance with the provisions of Paragraph 2 of this Exhibit
F, Tenant may have access to up to 5,000 rentable square feet in a location designated by
Landlord on the 7
th
floor of the Building (the Fitness Center Space) for the
placing of exercise equipment and use as a fitness center by Tenants employees only, all at
Tenants sole risk and Tenants sole cost and expense. Tenants use of the Fitness Center
Space shall be subject to Landlord reasonable prior approval of the nature of the equipment
to be installed by Tenant and the use thereof, and shall be subject to all the terms and
conditions of the Lease (and the Fitness Center Space shall be considered part of the Premises
for purposes of Tenants insurance and indemnification obligations under the Lease), except
that Tenant shall not be required to pay Base Rent and Additional Rent in connection with such
use. Landlord may deny or withdraw such permission to enter or use the Fitness Center Space
prior to the first Advice at any time that Landlord reasonably determines that such entry by
Tenant is causing a dangerous situation for Landlord, Tenant or their respective contractors
or employees.
|
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
4
EXHIBIT F-1
REFUSAL SPACE
{QuinStreet, Inc. -5-00004264.}
May 29, 2003
Matter ID Number: 7329
1
EXHIBIT G
PARKING AGREEMENT
This Exhibit (the
Parking Agreement)
is attached to and made a part of the Lease by and
between
CA- PARKSIDE TOWERS LIMITED PARTNERSHIP, a Delaware
limited partnership
(
Landlord
) and
QUINSTREET, INC., a California corporation
(
Tenant
) for space in the Building located at 1051
East Hillsdale Boulevard, Foster City, California.
1.
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The capitalized terms used in this Parking Agreement shall have the same definitions as set
forth in the Lease to the extent that such capitalized terms are defined therein and not
redefined in this Parking Agreement. In the event of any conflict between the Lease and this
Parking Agreement, the latter shall control.
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2.
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During the initial Term, Tenant agrees to lease from Landlord and Landlord agrees to lease to
Tenant a total of 128 non-reserved parking spaces in the parking facility servicing the
Building
(Parking Facility)
. During the initial Term, the charge for such 128 non-reserved
parking spaces shall be $0.00 per non-reserved parking pass, per month. Tenant may, from time
to time request additional parking spaces, and if Landlord shall provide the same, such
parking spaces shall be provided and used on a month-to-month basis, and otherwise on the
foregoing terms and provisions, and at such prevailing monthly parking charges as shall be
established from time to time, provided that Tenant shall be entitled to use such additional
parking spaces at no additional charge so long as such additional spaces are available in the
Parking Facility and Tenants use of such additional parking spaces does not interfere with
the rights of the employees and invitees of other tenants of the Building to use the Parking
Facility, as reasonably determined by Landlord. No deductions from the monthly charge, if
any, shall be made for days on which the Parking Facility is not used by Tenant.
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3.
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Tenant shall at all times comply with all applicable ordinances, rules, regulations, codes,
laws, statutes and requirements of all federal, state, county and municipal governmental
bodies or their subdivisions respecting the use of the Parking Facility. Landlord reserves the
right to adopt, modify and enforce reasonable rules
(Rules)
governing the use of the Parking
Facility from time to time including any key-card, sticker or other identification or entrance
system and hours of operation. The Rules set forth herein are currently in effect. Landlord
may refuse to permit any person who violates such Rules to park in the Parking Facility, and
any violation of the Rules shall subject the car to removal from the Parking Facility.
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4.
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Unless specified to the contrary above, the parking spaces hereunder shall be provided on a
non-designated first-come, first-served basis. Tenant acknowledges that Landlord has no
liability for claims arising through acts or omissions of any independent operator of the
Parking Facility. Landlord shall have no liability whatsoever for any damage to items located
in the Parking Facility, nor for any personal injuries or death arising out of any matter
relating to the Parking Facility, and in all events, Tenant agrees to look first to its
insurance carrier and to require that Tenants employees look first to their respective
insurance carriers for payment of any losses sustained in connection with any use of the
Parking Facility. Tenant hereby waives on behalf of its insurance carriers all rights of
subrogation against Landlord or Landlords agents. Landlord reserves the right to assign
specific parking spaces, and to reserve parking spaces for visitors, small cars, handicapped
persons and for other tenants, guests of tenants or other parties, which assignment and
reservation or spaces may be relocated as determined by Landlord from time to time, and Tenant
and persons designated by Tenant hereunder shall not park in any location designated for such
assigned or reserved parking spaces. Tenant acknowledges that the Parking Facility may be
closed entirely or in part in order to make repairs or perform maintenance services, or to
alter, modify, re-stripe or renovate the Parking Facility, or if required by casualty,
strike, condemnation, act of God, governmental law or requirement or other reason beyond the
operators reasonable control. In such event, Landlord shall refund any prepaid parking fee
hereunder, prorated on a per diem basis.
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5.
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If Tenant shall default under this Parking Agreement, the operator shall have the right to
remove from the Parking Facility any vehicles hereunder which shall have been involved or
shall have been owned or driven by parties involved in causing such default, without liability
therefor whatsoever. In addition, if Tenant shall default under this Parking Agreement,
Landlord shall have the right to cancel this Parking Agreement on 30 days written notice,
unless within such 30 day period, Tenant cures such default. If Tenant defaults with respect
to the same term or condition under this Parking Agreement more than 3 times during any 12
month period, and Landlord notifies Tenant thereof promptly after each such default, the next
default of such term or condition during the succeeding 12 month period, shall, at Landlords
election, constitute an incurable default. Such cancellation right shall be cumulative and
in addition to any other rights or remedies available to Landlord at law or equity, or
provided under the Lease (all of which rights and remedies under the Lease are hereby
incorporated herein, as though fully set forth). Any default by Tenant under the Lease shall
be a default under this Parking Agreement.
|
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
1
RULES
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(i)
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Tenant shall have access to the Parking Facility on a 24-hour basis, 7 days a week, subject
to the other terms of this Parking Agreement. Tenant shall not store or permit its employees
to store any automobiles in the Parking Facility without the prior written consent of the
operator. Except for emergency repairs, Tenant and its employees shall not perform any work on
any automobiles while located in the Parking Facility, or on the Property. If it is necessary
for Tenant or its employees to leave an automobile in the Parking Facility overnight, Tenant
shall provide the operator with prior notice thereof designating the license plate number and
model of such automobile.
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(ii)
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Cars must be parked entirely within the stall lines painted on the floor, and only small
cars may be parked in areas reserved for small cars.
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(iii)
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All directional signs and arrows must be
observed.
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(iv)
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The speed limit shall be 5 miles per
hour.
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(v)
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Parking spaces reserved for handicapped persons must be used only by vehicles properly
designated.
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(vi)
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Parking is prohibited in all areas not expressly designated for parking, including without
limitation:
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(a)
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Areas not striped for parking
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(b)
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aisles
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(c)
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where no parking signs are posted
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(d)
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ramps
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(e)
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loading zones
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(vii)
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Parking stickers, key cards or any other devices or forms of identification or entry
supplied by the operator shall remain the property of the operator. Such device must be
displayed as requested and may not be mutilated in any manner. The serial number of the
parking identification device may not be obliterated. Parking passes and devices are not
transferable and any pass or device in the possession of an unauthorized holder will be void.
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(viii)
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Monthly fees shall be payable in advance prior to the first day of each month. Failure to
do so will result in a charge at the prevailing daily parking rate until payment is made, and
no refunds shall be made for such daily charges following the late payment of the monthly
fee. No deductions or allowances from the monthly rate will be made for days on which the
Parking Facility is not used by Tenant or its designees.
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(ix)
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Parking Facility managers or attendants are not authorized to make or allow any exceptions
to these Rules.
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(x)
|
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Every parker is required to park and lock his/her own car.
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(xi)
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Loss or theft of parking pass, identification, key cards or other such devices must be
reported to Landlord and to the Parking Facility manager immediately. Any parking devices
reported lost or stolen found on any authorized car will be confiscated and the illegal
holder will be subject to prosecution. Lost or stolen passes and devices found by Tenant or
its employees must be reported to the office of the Parking Facility immediately.
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(xii)
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Washing, waxing, cleaning or servicing of any vehicle by the customer and/or his agents is
prohibited. Parking spaces may be used only for parking automobiles.
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(xiii)
|
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Tenant agrees to acquaint all persons to whom Tenant assigns a parking space with these
Rules.
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6.
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TENANT ACKNOWLEDGES AND AGREES THAT, TO THE FULLEST EXTENT PERMITTED BY LAW, LANDLORD SHALL NOT BE
RESPONSIBLE FOR ANY LOSS OR DAMAGE TO TENANT OR TENANTS PROPERTY (INCLUDING, WITHOUT LIMITATIONS,
ANY LOSS OR DAMAGE TO TENANTS AUTOMOBILE OR THE CONTENTS THEREOF DUE TO THEFT, VANDALISM OR
ACCIDENT) ARISING FROM OR RELATED TO TENANTS USE OF THE PARKING FACILITY OR EXERCISE OF ANY
RIGHTS UNDER THIS PARKING AGREEMENT, WHETHER OR NOT SUCH LOSS OR DAMAGE RESULTS FROM LANDLORDS
ACTIVE NEGLIGENCE OR NEGLIGENT OMISSION. THE LIMITATION ON LANDLORDS LIABILITY UNDER THE
|
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
2
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PRECEDING SENTENCE SHALL NOT APPLY HOWEVER TO LOSS OR DAMAGE
ARISING DIRECTLY FROM LANDLORDS
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
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7.
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Without limiting the provisions of Paragraph 6 above, Tenant hereby voluntarily releases,
discharges, waives and relinquishes any and all actions or causes of action for personal
injury or property damage occurring to Tenant arising as a result of parking in the Parking
Facility, or any activities incidental thereto, wherever or however the same may occur, and
further agrees that Tenant will not prosecute any claim for personal injury or property damage
against Landlord or any of its officers, agents, servants or employees for any said causes of
action. It is the intention of Tenant by this instrument, to exempt and relieve Landlord from
liability for personal injury or property damage caused by negligence, but shall not apply to
Landlords gross negligence or willful misconduct.
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8.
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The provisions of Section 20 of the Lease are hereby incorporated by reference as if fully
recited.
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Tenant acknowledges that Tenant has read the provisions of this Parking Agreement, has been
fully and completely advised of the potential dangers incidental to parking in the Parking
Facility and is fully aware of the legal consequences of agreeing to this instrument.
|
{QuinStreet, Inc. -6-00004264.}
May 30, 2003
Matter ID Number: 7329
3
FIRST AMENDMENT
THIS
FIRST AMENDMENT
(the
Amendment)
is made and entered into as of June 24
th,
2004,
by and between
CA-PARKSIDE TOWERS LIMITED PARTNERSHIP, a Delaware limited
partnership (Landlord)
and
QU1NSTREET, INC., a
California corporation
(
Tenant
).
RECITALS
A.
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Landlord and Tenant are parties to that certain lease dated
June 2, 2003 (the
Lease
).
Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately
35,435
rentable square feet (the
Original Premises
) described as Suite No. 800 on the
8
th
floor of the building commonly known as Parkside Tower East located at 1051 E.
Hillsdale Drive, Foster City, California (defined in Section 1.01 of the Lease as the
East
Tower
), which is a portion of the
Building
defined in Section 1.01 of the Lease.
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B.
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Tenant has requested that additional space containing approximately
18,442
rentable square
feet described as Suite No. 700 on the 7
th
floor of the Building shown on
Exhibit A
hereto (the
Expansion Space
) be added to the Original Premises and that the Lease be
appropriately amended and Landlord is willing to do the same on the following terms and
conditions.
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NOW, THEREFORE,
in consideration of the above recitals which by this reference are
incorporated herein, the mutual covenants and conditions contained herein and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant
agree as follows:
1.
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Expansion and Effective Date.
Effective as of the Expansion Effective Date (defined
below), the Premises, as defined in the Lease, is increased from 35,435 rentable square feet
on the 8
th
floor to
53,877
rentable square feet on the 7
th
and
8
th
floors by the addition of the Expansion Space, and from and after the
Expansion Effective Date, the Original Premises and the Expansion Space, collectively, shall
be deemed the Premises, as defined in the Lease. The Term for the Expansion Space shall
commence on the Expansion Effective Date and end on the Termination Date. The Expansion Space
is subject to all the terms and conditions of the Lease except as expressly modified herein
and except that Tenant shall not be entitled to receive any allowances, abatements or other
financial concessions granted with respect to the Original Premises unless such concessions
are expressly provided for herein with respect to the Expansion Space.
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1.01.
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The
Expansion Effective Date
shall be the later to occur of (i) November
15, 2004
(Target Expansion Effective Date
), and
(ii) the date upon which the
Expansion Space Landlord Work (as defined in the Expansion Space Work Letter attached
as
Exhibit B
hereto) in the Expansion Space has been Substantially Completed; provided,
however, that if Landlord is delayed in the performance of the Expansion Space
Landlord Work as a result of the acts or omissions of Tenant, the Tenant Related
Parties (defined in Section 13 of the Lease) or their respective contractors or
vendors, including, without limitation, changes requested by Tenant to the Expansion
Space Plans or other approved plans, Tenants failure to comply with any of its
obligations under the Lease or this Amendment or the Expansion Space Work Letter, or
the specification of any materials or equipment with long lead times (a
Tenant
Delay),
the Expansion Space Landlord Work shall be deemed to be Substantially
Complete on the date that Landlord could reasonably have been expected to
Substantially Complete the Expansion Space Landlord Work absent any Tenant Delay.
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The Expansion Space Landlord Work shall be deemed to be
Substantially Complete
on
the later of (a) the date that all Expansion Space Landlord Work has been
performed, other than any details of construction, mechanical adjustment or any
other similar matter, the non-completion of which does not materially interfere
with Tenants use of the Expansion Space, in a good and workmanlike manner and in
compliance with the Expansion Space Plans (as defined in the Expansion Space Work
Letter attached hereto as
Exhibit B
) and subject to any revisions to the Expansion
Space Plans approved by Landlord and
|
June 11,
2004
Matter ID Number: 13883
1
|
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Tenant in accordance with the Expansion Space Work Letter), and (b) the date
Landlord receives from the appropriate governmental authorities all approvals
necessary for the occupancy of the Expansion Space.
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1.02.
|
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The adjustment of the Expansion Effective Date and,
accordingly, the postponement of Tenants obligation to pay Rent on the Expansion
Space shall be Tenants sole remedy and shall constitute full settlement of all claims
that Tenant might otherwise have against Landlord by reason of the Expansion Space not
being ready for occupancy by Tenant on the Target Expansion Effective Date. If the
Expansion Effective Date is delayed pursuant to the foregoing, the Termination Date
under the Lease shall not be similarly extended.
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1.03.
|
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In addition to the postponement, if any, of the Expansion Effective Date as a
result of the applicability of Section 1.01. of this Amendment, the Expansion
Effective Date shall be delayed to the extent that Landlord fails to deliver
possession of the Expansion Space on the Expansion Effective Date for any other reason
(other than Tenant Delays by Tenant), including but not limited to, holding over by
prior occupants. Any such delay in the Expansion Effective Date shall not subject
Landlord to any liability for any loss or damage resulting therefrom. If the
Expansion Effective Date is delayed pursuant to the foregoing, the Termination Date
under the Lease shall not be similarly extended.
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2.
|
|
Base Rent.
In addition to Tenants obligation to pay Base Rent for the
Original Premises, Tenant shall pay Landlord Base Rent for the Expansion Space as follows:
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Annual Rate Per
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Months of Term or Period
|
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Square Foot
|
|
Monthly Base Rent
|
November 15, 2004 October 31, 2005
|
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$
|
24.60
|
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|
$
|
37,806.10
|
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November 1, 2005 October 31, 2006
|
|
$
|
26.40
|
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|
$
|
40,572.40
|
|
November 1, 2006 October 31, 2007
|
|
$
|
27.60
|
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|
$
|
42,416.60
|
|
November 1, 2007 October 31, 2008
|
|
$
|
28.80
|
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|
$
|
44,260.80
|
|
November 1, 2008 October 31, 2009
|
|
$
|
30.00
|
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|
$
|
46,105.00
|
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|
All such Base Rent shall be payable by Tenant in accordance with the terms of the Lease, as
amended hereby.
|
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|
Landlord and Tenant acknowledge that the foregoing schedule is based on the assumption that
the Expansion Effective Date is the Target Expansion Effective Date. If the Expansion
Effective Date is other than the Target Expansion Effective Date, the schedule set forth
above with respect to the payment of any installment(s) of Base Rent for the Expansion
Space shall be appropriately adjusted on a per diem basis to reflect the actual Expansion
Effective Date, and the actual Expansion Effective Date shall be set forth in a
confirmation letter to be prepared by Landlord. However, the effective date of any
increases or decreases in the Base Rent rate shall not be postponed as a result of an
adjustment of the Expansion Effective Date as provided above.
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3.
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Security Deposit.
No Security Deposit shall be required in connection with this
Amendment. The definition of Security Deposit set forth in Section 1.08 of the Lease is
hereby deleted and replaced with None. The first sentence of Article V of the Lease is
hereby amended to include the clause, if any, after the words Security Deposit in the
first sentence. The provisions of Section 8.09 below shall apply to Tenants Letter of
Credit obligations under the Lease, as amended hereby.
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4.
|
|
Tenants Pro Rata Share.
For the period commencing with the Expansion Effective Date
and ending on the Termination Date, Tenants Pro Rata Share for the Expansion Space is
4.6283%.
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5.
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Expenses and Taxes.
For the period commencing with the Expansion Effective Date and
ending on the Termination Date, Tenant shall pay for Tenants Pro Rata Share of Expenses and
Taxes applicable to the Expansion Space in accordance with the terms of the Lease, as amended
hereby.
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6.
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Improvements to Expansion Space.
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6.01.
|
|
Condition of Expansion Space.
Tenant has inspected the Expansion Space and
agrees to accept the same as is without any agreements, representations,
understandings or obligations on the part of Landlord to perform any alterations,
|
June 11,
2004
Matter ID Number: 13883
2
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|
repairs or improvements, except as may be expressly provided otherwise in this
Amendment or in the Expansion Space Work Letter attached hereto as
Exhibit B
.
Notwithstanding the foregoing, except to the extent caused by Tenant or any Tenant
Related Party (as defined in Section 13 of the Lease), as of the Expansion
Effective Date, the electrical, heating, ventilation and air conditioning,
mechanical and plumbing systems serving the Expansion Space shall be in good order
and satisfactory condition and in compliance with applicable Laws (as defined in
Section 5 of the Lease). If the foregoing are not in good working order or
compliance as provided above, Landlord shall be responsible for repairing or
restoring same, or correcting such violations, at its cost and expense, provided
that the foregoing shall not prohibit Landlord from including the cost of routine
maintenance and repair of such systems in Expenses as otherwise permitted under
Section 4.02 of the Lease.
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6.02.
|
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Responsibility for Improvements to Expansion Space.
Landlord shall perform
improvements to the Expansion Space in accordance with the Expansion Space Work Letter
attached hereto as
Exhibit B.
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7.
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Early Access to Expansion Space; Beneficial Occupancy.
Landlord grants Tenant the
right to enter the Expansion Space, at Tenants sole risk, thirty (30) days prior to
Landlords then reasonable estimate of the Expansion Effective Date, for the purpose of
installing telecommunications and data cabling, fiber optic links, equipment, furnishings and
other personalty, and for conducting business operations in the Premises. Such access shall
be subject to the terms and conditions of the Lease, as amended hereby, but Tenant shall not
be required to pay Rent (defined in Section 4.01 of the Lease) to Landlord during such period
of early access before the Expansion Effective Date. However, Tenant shall be responsible for
the reasonable cost of services requested by Tenant (e.g. freight elevator usage of
after-hours HVAC) during such period. Landlord may withdraw or limit such permission to
enter the Expansion Space prior to the Expansion Effective Date at any time that Landlord
reasonably determines that such entry by Tenant is causing a dangerous situation for Landlord,
Tenant or their respective contractors or employees, or if Landlord reasonably determines that
such entry by Tenant is hampering or otherwise preventing Landlord from proceeding with the
completion of the Expansion Space Landlord Work at the earliest possible date.
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In addition to the foregoing, if the Expansion Space Landlord Work is Substantially
Complete prior to the Target Expansion Effective Date, subject to the terms of this Section
7.01, Tenant may take possession of and occupy the Expansion Space for the Permitted Use
and may conduct business operations therein following the date of Substantial Completion of
the Expansion Space Landlord Work and prior to the Expansion Effective Date, which
occupancy shall be subject to the terms and conditions of the Lease, as amended hereby, but
Tenant shall not be required to pay Rent (defined in Section 4.01 of the Lease) to Landlord
during such period of early occupancy before the Expansion Effective Date. However, Tenant
shall be responsible for the reasonable cost of services requested by Tenant (e.g. freight
elevator usage of after-hours HVAC) during such period.
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8.
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Other Pertinent Provisions.
Landlord and Tenant agree that, effective as of the date
of this Amendment (unless different effective
date(s)
is/are specifically referenced in this
Section), the Lease shall be amended in the following additional respects:
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8.01
|
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Renewal Option.
Tenants Renewal Option set forth in Section 1 of
Exhibit F
of
the Lease shall apply to the entire Premises (Original Premises and Expansion Space)
only, and the Renewal Term may be subject to reduction pursuant to Section 8.02 below.
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8.02
|
|
One-Year Extension Option.
Tenant shall have the One-Year Extension Option set
forth below, which Tenant may, at Tenants option, exercise in lieu of one year of the
term of Tenants Renewal Option. Upon Tenants delivery of an Initial Renewal Notice
under the Renewal Option, Tenants One-Year Extension Option automatically shall be of
no further force and effect, and alternatively, upon Tenants delivery of a One-Year
Renewal Notice, Tenants Renewal Option shall automatically be reduced to a 4-year
renewal option commencing at the conclusion of Tenants One-Year Extension Term and the
notice period for the Renewal Option set forth in Section 1.A.1 of
Exhibit F
of the Lease
shall be calculated from the expiration of the One-Year Extension Term rather than from
the expiration of the initial Term.
|
June 11,
2004
Matter ID Number: 13883
3
|
A.
|
|
Grant of Option; Conditions
. Tenant shall have the right to extend
the
Term (the
One-Year Extension Option)
for the entire Premises only
(both the Original Premises and the Expansion Space) for one additional
period of one (1) year commencing on the day following the Termination
Date of the initial Term and ending on the first anniversary of the
Termination Date (the
One-Year Extension Term
), if:
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1.
|
|
Landlord receives notice of exercise
(One-Year
Extension
Notice)
not less than 9 full calendar months prior to the
expiration of the initial Term; and
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2.
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|
Tenant is not in default under the Lease beyond any
applicable cure
periods at the time that Tenant delivers One-Year Extension Notice;
and
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3.
|
|
No part of the Premises is sublet (other than pursuant to a
Permitted Transfer, as defined in Section 11 of the Lease) at the
time that Tenant delivers its One-Year Extension Notice; and
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4.
|
|
The Lease has not been assigned (other than pursuant to a
Permitted Transfer, as defined in Section 11 of the Lease) prior to
the date that Tenant delivers its One-Year Extension Notice.
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|
B.
|
|
Terms Applicable to Premises During One-Year Extension Term
.
|
|
1.
|
|
The Base Rent rate per rentable square foot for the
Premises
during the One-Year Extension Term shall be $2.65 per rentable
square foot for the Premises. Such Base Rent shall be payable in
monthly installments in accordance with the terms and conditions
of Section 4 of the Lease, as amended hereby.
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2.
|
|
Tenant shall continue to pay Additional Rent for the
Premises
during the One-Year Extension Term in accordance with the
terms of the Lease.
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3.
|
|
Tenant shall accept the Premises on an as-is basis for the
One-Year Extension Term and shall not be entitled to any allowances,
improvements or concessions in connection therewith.
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|
C.
|
|
One-Year Extension Amendment
. If Tenant is entitled to and properly
exercises its One-Year Extension Option, Landlord shall prepare an
amendment (the
One-Year Extension Amendment)
to reflect changes
in the Base Rent, Term, Termination Date and other appropriate terms.
The One-Year Extension Amendment shall be sent to Tenant within a
reasonable time after receipt of the One-Year Extension Notice and
Tenant shall execute and return the One-Year Extension Amendment to
Landlord as soon as practicable after Tenants receipt of same, but, upon
delivery of Tenants One-Year Extension Notice, an otherwise valid
exercise of the One-Year Extension Option shall be fully effective
whether or not the One-Year Extension Amendment is executed.
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8.03
|
|
7
th
Floor Right of First Refusal.
The Right of First Refusal set forth in
Section 2 of
Exhibit F
of the Lease shall remain in full force and effect, except that:
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A.
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As amended hereby, such Right of First Refusal shall hereafter be referred
to as the
7
th
Floor Right of First Refusal
, and all references to the
Right
of First Refusal in Section 2 of
Exhibit F
of
the Lease shall refer instead to the
7
th
Floor Right of First Refusal.
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B.
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The Refusal Space for purposes of the 7
th
Floor Right of First
Refusal
shall be amended to include only the approximately 18,443 rentable square
feet that represent the portion of the Refusal Space set forth on
Exhibit F-1
to the Lease other than the Expansion Space,
and accordingly
Exhibit F-1
is hereby deleted and replaced with
Exhibit A-2
attached hereto. As
amended hereby, the term Refusal Space, as defined in Section 2 of
Exhibit F
to the Lease, shall hereafter be referred to as the
7
th
Floor
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June 11, 2004
Matter ID Number: 13883
4
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Refusal Space
, and all references to the Refusal Space in Section 2 of
Exhibit
F
of the Lease shall refer instead to the 7
th
Floor Refusal Space.
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C.
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Section 2.C(i) of
Exhibit F
of the Lease is hereby deleted and replaced with
the following: the original Termination Date under the Lease (not including any
renewal or extension of the Term, whether pursuant to the Renewal Option, the
One-Year Extension Option, or otherwise).
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8.04.
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6
th
Floor Right of First Refusal.
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A.
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Grant of Option; Conditions
. In addition to the Right of First
Refusal set
forth in Section 2 of
Exhibit F
of the Lease, as amended in Section 8.02
below, Tenant shall have an ongoing right of first refusal (the
6
th
Floor
Right of First Refusal
) with respect to the approximately
41,631
rentable square feet of space consisting of the 6
th
floor of the East
Tower,
shown on the demising plan attached hereto as
Exhibit A-1
(the
6
th
Floor Refusal Space
). Tenants 6
th
Floor Right of First Refusal shall
be
exercised as follows: when Landlord has a prospective tenant, other than
the then-existing tenant in the applicable portion of the 6
th
Floor
Refusal
Space, (the
6
th
Floor Prospect
) interested in leasing all or a portion
of
the 6
th
Floor Refusal Space, Landlord shall advise Tenant (the
6
th
Floor
Advice
) of the terms under which Landlord is prepared to lease such
portion of the 6
th
Floor Refusal Space to such Prospect and Tenant may
lease such portion of the 6
th
Floor Refusal Space, under such terms, by
providing Landlord with written notice of exercise (the
6
th
Floor
Notice
of Exercise
) within 5 Business Days after the date of the 6
th
Floor
Advice, except that Tenant shall have no such 6
th
Floor Right of First
Refusal and Landlord need not provide Tenant with a 6
th
Floor Advice if:
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1.
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Tenant is in default under the Lease beyond any applicable
cure
periods at the time that Landlord would otherwise deliver the
6
th
Floor Advice; or
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2.
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the Premises, or any portion thereof, is sublet (other
than
pursuant to a Permitted Transfer, as defined in Section 11 of the
Lease) at the time Landlord would otherwise deliver the 6
th
Floor
Advice; or
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3.
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the Lease has been assigned (other than pursuant to a
Permitted
Transfer, as defined in Section 11 of the Lease) prior to the
date Landlord would otherwise deliver the
6
th
Floor Advice; or
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4.
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the 6
th
Floor Refusal Space is not intended for
the exclusive use
of Tenant or the transferee of a Permitted Transfer during the Term; or
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5.
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the Tenant or the transferee of a Permitted Transfer is not
occupying the Premises on the date Landlord would otherwise
deliver the 6
th
Floor Advice.
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B.
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Terms for
6
th
Floor Refusal Space.
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1.
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The term for the 6
th
Floor Refusal Space shall
commence upon
the commencement date stated in the 6
th
Floor Advice and
thereupon such 6
th
Floor Refusal Space shall be considered a
part
of the Premises, provided that all of the terms stated in the
6
th
Floor Advice, including the termination date set forth in the
6
th
Floor Advice, shall govern Tenants leasing of the 6
th
Floor
Refusal Space and only to the extent that they do not conflict with
the 6
th
Floor Advice, the terms and conditions of the Lease
shall
apply to the 6
th
Floor Refusal Space. Tenant shall pay Base Rent
and Additional Rent for the 6
th
Floor Refusal Space in
accordance
with the terms and conditions of the 6
th
Floor Advice.
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2.
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The 6
th
Floor Refusal Space (including
improvements and
personalty, if any) shall be accepted by Tenant in its condition and
as-built configuration existing on the earlier of the date Tenant
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June 11, 2004
Matter ID Number: 13883
5
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takes possession of the 6
th
Floor Refusal Space or the date
the term for such 6
th
Floor Refusal Space commences, unless
the 6
th
Floor Advice specifies work to be performed by
Landlord in the 6
th
Floor Refusal Space, in which case
Landlord shall perform such work in the 6
th
Floor Refusal
Space. If Landlord is delayed delivering possession of the
6
th
Floor Refusal Space due to the holdover or unlawful possession of such space by
any party, Landlord shall use reasonable efforts to obtain possession of
the space, and the commencement of the term for the
6
th
Floor
Refusal Space shall be postponed until the date Landlord delivers
possession of the 6
th
Floor Refusal Space to Tenant free from
occupancy by any party.
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C.
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Termination of 6
th
Floor Right of First Refusal
. The
rights of Tenant
hereunder with respect to the 6
th
Floor Refusal Space shall terminate
on
the earlier to occur of (i) the original Termination Date under this Lease
(not including the Renewal Term, if any), (ii) with respect to
any particular 6
th
Floor Advice, Tenants failure to exercise its 6
th
Floor
Right of First
Refusal within the 5 Business Day period provided in Section A above;
and (iii) with respect to any particular
6
th
Floor Advice, the date
Landlord
would have provided Tenant such Advice if Tenant had not been in
violation of one or more of the conditions set forth in Section A above.
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D.
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6
th
Floor Refusal Space Amendment.
If Tenant exercises
its 6
th
Floor
Right of First Refusal, Landlord shall prepare an amendment (the
6
th
Floor Refusal Space Amendment)
adding the 6
th
Floor Refusal Space
to the Premises on the terms set forth in the 6
th
Floor Advice and
reflecting the changes in the Base Rent, Rentable Square Footage of the
Premises, Tenants Pro Rata Share and other appropriate terms. A copy
of the 6
th
Floor Refusal Space Amendment shall be sent to Tenant within
a reasonable time after Landlords receipt of the 6
th
Floor Notice of
Exercise executed by Tenant, and Tenant shall execute and return the
6
th
Floor Refusal Space Amendment to Landlord as soon as practicable
thereafter, but an otherwise valid exercise of the
6
th
Floor Right of
First
Refusal shall be fully effective whether or not the 6
th
Floor Refusal
Space
Amendment is executed.
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A.
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Elevator Lobby
. In Section 3 of
Exhibit E
(Building
Rules and
Regulations), the phrase
7
th
floor and the shall be added between
the
words the and 8
th
in the second sentence.
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B.
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Monument Sign
. So long as (i) Tenant is not in default under the
terms of
the Lease; (ii) Tenant is in occupancy of at least 20,000 rentable square
feet of the Premises; and (iii) Tenant has not assigned the Lease or
sublet more than 15% of the Premises to one or more non-affiliated
entities, Tenant shall have the right to have its name listed on the shared
Building monument sign located near the entrance to the East Tower (the
Sign)
. Following installation of Tenants name on the Sign, Tenant
shall be liable for all costs related to the maintenance and, if applicable,
illumination of the sign. In the event that additional names are listed on
the Sign, all future costs of maintenance and repair shall be prorated
between Tenant and the other parties that are listed on such Sign.
Tenant shall be solely responsible for the costs in connection with the
design, fabrication and installation of Tenants name on the Sign. Tenant
must obtain Landlords written consent to any proposed signage and
lettering prior to its fabrication and installation. Landlord reserves the
right to withhold consent to any sign that, in the sole judgment of
Landlord, is not harmonious with the design standards of the Building and
Sign or is in violation of applicable Laws. To obtain Landlords consent,
Tenant shall submit design drawings to Landlord showing the type and
sizes of all lettering; the colors, finishes and types of materials used; and
(if applicable and Landlord consents) any provisions for illumination. If
during the Lease Term (and any extensions thereof) (a) Tenant is in
default under the terms of the Lease after the expiration of applicable
cure periods; or (b) Tenant fails to continuously occupy at least 20,000
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June 11, 2004
Matter ID Number: 13883
6
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rentable square feet of the Premises; or (c) Tenant assigns the Lease to a
non-affiliated entity or subleases more than 15% of the Premises to one or more
non-affiliated entities, then Tenants rights granted herein will terminate and
Landlord may remove Tenants name from the Sign at Tenants sole cost and expense.
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8.06.
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Parking.
Effective as of the Expansion Effective Date, Section 2 of
Exhibit G
(Parking Agreement) of the Lease is hereby amended to increase Tenants non-reserved parking spaces from 128 to 194. Such additional spaces shall be free
of charge during the initial Term of the Lease and shall be subject to all of the
terms and conditions of the Parking Agreement. Landlord agrees that until such
time as consistent actual demand for visitor parking and/or for the retail portion
of the Building occurs such that the whole of the first floor of the parking garage
is needed for regular occupancy by retail customers and visitors to the Buildings
tenants, including Tenant, as reasonably determined by Landlord, Tenant may
use a reasonable and practical portion of its
non-reserved
parking spaces on the
first floor of the parking garage serving the Building.
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8.7.
|
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Landlords Notice Address.
The Landlords Notice Address set forth in Section
1.12 of the Lease is hereby deleted in its entirety and replaced with the following:
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LANDLORDS NOTICE ADDRESS:
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CA-Parkside Towers Limited Partnership
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With a copy to:
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c/o Equity Office Management, L.L.C.
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Equity Office
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950 Tower Lane
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One Market, Spear Tower,
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Suite 950
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Suite 600
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Foster City, California 94404
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San Francisco, California 94105
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Attention: Property Manager
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Attention: Regional
Counsel -
San Francisco Region
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Notwithstanding anything to the contrary contained in the Lease, Rent shall be made
payable to the entity, and sent to the address, Landlord designates and shall be made by
good and sufficient check or by other means acceptable to Landlord.
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8.08
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Temporary Fitness Facility and Access.
For purposes of
Section 4 of
Exhibit F
of the Lease, following the date hereof, the Fitness Center Space shall be
relocated to an area of up to 5,000 rentable square feet designated by Landlord
within the 7
th
Floor Refusal Space, as defined in Section 8.03(B).
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Solely during the period that Tenant is entitled to use the Fitness Center Space pursuant
to Section 4 of
Exhibit F
of the Lease, Tenant shall
have the non-exclusive license
(License)
to use a portion of the
7
th
Floor Refusal Space, in a location
reasonably designated by Landlord, to the extent reasonably necessary for purposes of
ingress and egress to the Fitness Center Space and for no other purpose. Tenants use of
the 7
th
Floor Refusal Space pursuant to the License, as well as Tenants use of
the Fitness Center Space, shall be subject to Tenants insurance, indemnification and
waiver of subrogation obligations under the Lease as if the same were part of the
Premises.
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8.09
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Letter(s) of Credit.
Landlord acknowledges that as of the date hereof Landlord is
holding a Letter of Credit in the amount of $177,175.00, pursuant to Section 6 of
the Lease (the
Original Letter of Credit).
Concurrently with Tenants execution
and delivery of this Amendment to Landlord, Tenant shall deliver to Landlord an
additional Letter of Credit (or an amendment to the Original Letter of Credit)
meeting the requirements of this Section 8.09 for Letters of Credit and in the
amount of (or increasing the original amount by)
$46,105.00,
such that thereafter
Landlord is holding Letter(s) of Credit in the total amount of
$223,280.00
(collectively, or as so amended, the
Increased Letter of Credit).
Effective as of
the date of Landlords receipt and acceptance of the Increased Letter of Credit in
accordance with the provisions hereof, the term Letter of Credit in the Lease shall
thereafter refer to such Increased Letter of Credit. Landlord and Tenant agree that
effective as of the date hereof, Paragraphs 2 and 3 of Section 6 of the Lease are
hereby deleted in their entirety, and the following provisions are hereby added to
the Lease as Section 5 of
Exhibit F.
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June 11, 2004
Matter ID Number: 13883
7
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A.
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General Provisions
.
The Letter of Credit shall be held by Landlord as
collateral for the full performance by Tenant of all of its obligations under the Lease
and for all losses and damages Landlord may suffer as a result of Tenants failure to
comply with one or more provisions of this Lease, including, but not limited to, any post
lease termination damages under section 1951.2 of the California Civil Code. The Letter of
Credit shall be a standby, unconditional, irrevocable, transferable letter of credit in
the form of
Exhibit H
of the Lease and containing the terms required herein, in the face
amount required under the Lease (the
Letter of Credit Amount),
naming Landlord as
beneficiary, issued (or confirmed) by a financial institution satisfactory to Landlord,
permitting multiple and partial draws thereon, and otherwise in form reasonably acceptable
to Landlord. Tenant shall cause the Letter of Credit to be continuously maintained in
effect (whether through replacement, renewal or extension) in the Letter of Credit Amount
through the date (the
Final LC Expiration Date
) that is 60 days after the scheduled
expiration date of the Term or any renewal or extension Term. If the Letter of Credit held
by Landlord expires earlier than the Final LC Expiration Date (whether by reason of a
stated expiration date or a notice of termination or non-renewal given by the issuing
bank), Tenant shall deliver a new Letter of Credit or certificate of renewal or extension
to Landlord not later than 60 days prior to the expiration date of the Letter of Credit
then held by Landlord. Any renewal or replacement Letter of Credit shall comply with all
of the provisions of this Section 5 of
Exhibit F
, shall be irrevocable, transferable and
shall remain in effect (or be automatically renewable) through the Final LC Expiration
Date upon the same terms as the expiring Letter of Credit or such other terms as may be
acceptable to Landlord in its sole discretion.
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B.
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Drawings under Letter of Credit
.
Upon Tenants failure to comply with
one or more provisions of the Lease beyond any applicable cure period or
as otherwise specifically agreed to by Landlord and Tenant pursuant to
the Lease or any amendment thereto, Landlord may, without prejudice to
any other remedy provided in the Lease or by law, draw on the Letter of
Credit and use all or part of the proceeds to (i) satisfy any amounts due
to Landlord from Tenant, and (ii) satisfy any other damage, injury,
expense or liability caused by Tenants failure to so comply. In addition, if
Tenant fails to furnish such renewal or replacement at least 60 days prior
to the stated expiration date of the Letter of Credit then held by Landlord,
Landlord may draw upon such Letter of Credit and hold the proceeds
thereof (and such proceeds need not be segregated) in accordance with
the terms of this Section 5 of
Exhibit F.
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C.
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Use of Proceeds by Landlord.
The proceeds of the Letter of Credit
shall constitute Landlords sole and separate property (and not Tenants
property or the property of Tenants bankruptcy estate) and Landlord may
immediately upon any draw (and without notice to Tenant) apply or offset
the proceeds of the Letter of Credit: (i) against any Rent payable by
Tenant under the Lease that is not paid when due; (ii) against all losses
and damages that Landlord has suffered or that Landlord reasonably
estimates that it may suffer as a result of Tenants failure to comply with
one or more provisions of the Lease, including any damages arising
under section 1951.2 of the California Civil Code following termination of
the Lease; (iii) against any costs incurred by Landlord in connection with
the Lease (including attorneys fees); and (iv) against any other amount
that Landlord may spend or become obligated to spend by reason of
Tenants default. Provided Tenant has performed all of its obligations
under the Lease, Landlord agrees to pay to Tenant within 45 days after
the Final LC Expiration Date the amount of any proceeds of the Letter of
Credit received by Landlord and not applied as allowed above; provided,
that if prior to the Final LC Expiration Date a voluntary petition is filed by
Tenant or any Guarantor, or an involuntary petition is filed against Tenant
or any Guarantor by any of Tenants or Guarantors creditors, under the
Federal Bankruptcy Code, then Landlord shall not be obligated to make
such payment in the amount of the unused Letter of Credit proceeds until
either all preference issues relating to payments under the Lease have
been resolved in such bankruptcy or reorganization case or such
bankruptcy or reorganization case has been dismissed, in each case
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June 11, 2004
Matter ID Number: 13883
8
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pursuant to a final court order not subject to appeal or any stay pending
appeal.
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D.
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Additional Covenants of Tenant
.
If, as result of any
application or use
by Landlord of all or any part of the Letter of Credit, the amount of the
Letter of Credit shall be less than the Letter of Credit Amount, Tenant
shall, within five days thereafter, provide Landlord with additional
letter(s)
of credit in an amount equal to the deficiency (or a replacement letter of
credit in the total Letter of Credit Amount), and any such additional (or
replacement) letter of credit shall comply with all of the provisions of this
Section 5 of
Exhibit F,
and if Tenant fails to comply with the foregoing,
notwithstanding anything to the contrary contained in the Lease, the
same shall constitute an uncurable Default by Tenant. Tenant further
covenants and warrants that it will neither assign nor encumber the Letter
of Credit or any part thereof and that neither Landlord nor its successors
or assigns will be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
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E.
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Nature of Letter of Credit
.
Landlord and Tenant (1)
acknowledge and
agree that in no event or circumstance shall the Letter of Credit or any
renewal thereof or substitute therefor or any proceeds thereof (including
the LC Proceeds Account) be deemed to be or treated as a security
deposit under any Law applicable to security deposits in the commercial
context, including Section 1950.7 of the California Civil Code, as such
section now exist or as may be hereafter amended or succeeded
(
Security Deposit Laws
), (2) acknowledge and agree that the Letter of
Credit (including any renewal thereof or substitute therefor or any
proceeds thereof) is not intended to serve as a security deposit, and the
Security Deposit Laws shall have no applicability or relevancy thereto,
and (3) waive any and all rights, duties and obligations either party may
now or, in the future, will have relating to or arising from the Security
Deposit Laws. Tenant hereby waives the provisions of Section 1950.7 of
the California Civil Code and all other provisions of Law, now or hereafter
in effect, which (i) establish the time frame by which Landlord must
refund a security deposit under a lease, and/or (ii) provide that Landlord
may claim from the Security Deposit only those sums reasonably
necessary to remedy defaults in the payment of rent, to repair damage
caused by Tenant or to clean the Premises, it being agreed that Landlord
may, in addition, claim those sums specified in this Section 8.06 above
and/or those sums reasonably necessary to compensate Landlord for any
loss or damage caused by Tenants breach of this Lease or the acts or
omission of Tenant or any other Tenant Related Parties, including any
damages Landlord suffers following termination of the Lease.
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8.10
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Landlord Work and Shower Facility.
Tenant acknowledges that Landlord has
completed the Landlord Work and the Shower Facility as required under the
Lease and has no further obligations to Tenant under the Work Letter attached
thereto as
Exhibit C.
Landlord acknowledges that the foregoing shall not be
interpreted to limit Landlords obligations to install a lobby directory including
Tenants information, as provided in Paragraph 4 of
Exhibit F
to the Lease, and
to install security card readers in the elevators in the Building pursuant to Section
7.01 (d) of the Lease.
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8.11
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Building Services.
The following is hereby added to the end of Section 7.01 of
the Lease: and (h) Landlord shall ensure that the building ledges visible from
the Premises are maintained periodically so that they remain clean and tidy.
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9.01.
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This Amendment and the attached exhibits, which are hereby incorporated into
and made a part of this Amendment, set forth the entire agreement between the parties
with respect to the matters set forth herein. There have been no additional oral or
written representations or agreements. Under no circumstances shall Tenant be entitled
to any Rent abatement, improvement allowance, leasehold improvements, or other work to
the Premises, or any similar economic incentives that may have been provided Tenant in
connection with entering into the Lease, unless specifically set forth in this
Amendment.
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June 11, 2004
Matter ID Number: 13883
9
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9.02.
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Except as herein modified or amended, the provisions, conditions and terms of the
Lease shall remain unchanged and in full force and effect.
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9.03.
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In the case of any inconsistency between the provisions of the Lease and this
Amendment, the provisions of this Amendment shall govern and control.
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9.04.
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Submission of this Amendment by Landlord is not an offer to enter into this
Amendment. Landlord shall not be bound by this Amendment until Landlord has
executed and delivered the same to Tenant.
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9.05.
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The capitalized terms used in this Amendment shall have the same definitions as
set forth in the Lease to the extent that such capitalized terms are defined therein
and not redefined in this Amendment.
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9.06.
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Tenant hereby represents to Landlord that Tenant has dealt with Wayne Mascia
Associates (
Broker
) as broker in connection with this Amendment. Tenant
agrees to indemnify and hold Landlord and the Landlord Related Parties harmless
from all claims of any brokers other than Broker claiming to have represented
Tenant in connection with this Amendment. Landlord agrees to pay a brokerage
commission to Broker in accordance with the terms of a separate agreement to be
entered into between Landlord and Broker. Landlord hereby represents to Tenant
that Landlord has dealt with no broker in connection with this Amendment.
Landlord agrees to indemnify and hold Tenant and the Tenant Related Parties
harmless from all claims of any brokers claiming to have represented Landlord in
connection with this Amendment.
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Equity Office Properties Management Corp. (
EOPMC
) is an affiliate of Landlord and
represents only the Landlord in this transaction. Any assistance rendered by any agent or
employee of EOPMC in connection with this Amendment or any subsequent amendment or
modification hereto has been or will be made as an accommodation to Tenant solely in
furtherance of consummating the transaction on behalf of Landlord, and not as agent for
Tenant.
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9.07.
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Each signatory of this Amendment represents hereby that he or she has the
authority to execute and deliver the same on behalf of the party hereto for which
such signatory is acting.
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[SIGNATURES ARE ON FOLLOWING PAGE]
June 11, 2004
Matter ID Number: 13883
10
IN WITNESS WHEREOF,
Landlord and Tenant have duly executed this Amendment as of the day and
year first above written.
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LANDLORD:
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CA-PARKSIDE TOWERS LIMITED PARTNERSHIP, a Delaware limited partnership
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By:
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EOM GP, L.L.C., a Delaware limited liability company, its general partner
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By:
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Equity Office Management, L.L.C., a
Delaware limited liability company, its non-member
manager
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By:
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/s/ Mark Geisreiter
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Name:
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Mark Geisreiter
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Title:
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Senior Vice President
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TENANT:
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QUINSTREET, INC., a California-corporation
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By:
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/s/ Douglas J. Valenti
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Name:
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Douglas J. Valenti
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Title:
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President & CEO
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By:
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/s/ Michael McDauvgl
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Name:
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Michael McDauvgl
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Title:
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V.P. and General Counsel
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June 11, 2004
Matter ID Number: 13883
11
EXHIBIT A
OUTLINE AND LOCATION OF EXPANSION SPACE
June 11, 2004
Matter ID Number: 13883
12
EXHIBIT A-1
OUTLINE
AND LOCATION OF
6
TH
FLOOR
REFUSAL SPACE
June 11, 2004
Matter ID Number: 13883
13
EXHIBIT A-2
OUTLINE AND LOCATION OF
7
th
FLOOR REFUSAL SPACE
June 11, 2004
Matter ID Number: 13883
14
EXHIBIT B
EXPANSION SPACE WORK LETTER
As used in this Work Letter, the Premises shall be deemed to mean the Expansion Space, as
initially defined in the attached Amendment.
1.
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Landlord shall perform improvements to the Expansion Space in accordance with the
plans prepared by AP+I Design, Inc. dated June 7, 2004 (the
Expansion Space
Plans),
which are attached hereto as
Exhibit B-1.
The improvements to be performed
by Landlord in accordance with the Expansion Space Plans are hereinafter referred to
as the
Expansion Space Landlord Work.
It is agreed that construction of the
Expansion Space Landlord Work will be completed at Landlords sole cost and expense
(subject to the terms of Section 2 below) using the Building standard methods, materials
and finishes attached hereto as
Exhibit B-2
. If any finishes or materials specified in the
Expansion Space Landlord Work are or become unavailable or have long lead times
that would delay Landlords completion of the Expansion Space Landlord Work,
Landlord and Tenant shall work together in good faith to select alternative finishes or
materials to allow Landlord to complete the Expansion Space Landlord Work in a timely
manner. Landlord shall enter into a direct contract for the Expansion Space Landlord
Work with Venture Builders as general contractor. In addition, Landlord shall have the
right to select and/or approve of any subcontractors used in connection with the
Expansion Space Landlord Work. Subject to Landlords obligations expressly set forth
in Article 5 of the Lease, which Landlord agrees shall apply to the Expansion Space
Landlord Work to the same extent applicable to the Landlord Work set forth in the
original Lease, Landlords supervision or performance of any work for or on behalf of
Tenant shall not be deemed a representation by Landlord that such Expansion Space
Plans or the revisions thereto comply with applicable insurance requirements, building
codes, ordinances, laws or regulations, or that the improvements constructed in
accordance with the Expansion Space Plans and any revisions thereto will be adequate
for Tenants use, it being agreed that Tenant shall be responsible for all elements of the
design of Tenants plans (including, without limitation, compliance with law, functionality
of design, the structural integrity of the design, the configuration of the premises and the
placement of Tenants furniture, appliances and equipment).
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2.
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If Tenant shall request any revisions to the Expansion Space Plans, Landlord shall have
such revisions prepared at Tenants sole cost and expense and Tenant shall reimburse
Landlord for the cost of preparing any such revisions to the Expansion Space Plans,
plus any applicable state sales or use tax thereon, upon demand. Promptly upon
completion of the revisions, Landlord shall notify Tenant in writing of the increased cost
in the Expansion Space Landlord Work, if any, resulting from such revisions to the
Expansion Space Plans. Tenant, within three (3) Business Days, shall notify Landlord in
writing whether it desires to proceed with such revisions. In the absence of such written
authorization, Landlord shall have the option to continue work on the Expansion Space
disregarding the requested revision. Tenant shall be responsible for any Tenant Delay
in completion of the Expansion Space resulting from any revision to the Expansion
Space Plans. If such revisions result in an increase in the cost of Expansion Space
Landlord Work, such increased costs, plus any applicable state sales or use tax
thereon, shall be payable by Tenant upon demand. Notwithstanding anything herein to
the contrary, all revisions to the Expansion Space Plans shall be subject to the approval
of Landlord; provided, however, that if Landlord does not disapprove Tenants requested
revisions to the Expansion Plans prior to having such revisions prepared, then if
Landlord proceeds with preparation of the revised Expansion Plans and thereafter
disapproves the revisions for reasons other than (a) a violation of applicable fire or
building codes, or of other Laws, (b) the triggering of a legal requirement for upgrades
or alterations to the Premises or other parts of the Building, or (3) incompatibility or
conflicts with Building systems, then Tenant shall not be obligated to reimburse Landlord
for the cost of preparation of the revised Plans.
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3.
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This Expansion Space Work Letter shall not be deemed applicable to any additional
space added to the Premises at any time or from time to time, whether by any options
under the Lease (as amended hereby) or otherwise, or to any portion of the original
Premises or any additions to the Premises in the event of a renewal or extension of the
original Term of the Lease, whether by any options under the Lease (as amended
hereby) or otherwise, unless expressly so provided in the Lease (as amended hereby)
or any amendment or supplement to the Lease (as amended hereby).
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June 11,
2004
Matter ID Number: 13883
15
EXHIBIT B-1
EXPANSION SPACE PLANS
June 11, 2004
Matter ID Number: 13883
16
EXHIBIT B-2
BUILDING STANDARDS
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AP+I DESIGN, INC. | Architecture
Planning
Interior Design
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May 24, 2004
Job No. 04158
Venture Builders
1509 Industrial Road
San Carlos, CA 94070
Attention: Leslie Noonan
Subject: Quinstreet Pricing Information
Dear Leslie:
The following is a list of standards that will be required for the Quinstreet space on the
seventh floor at Parkside Towers. The tenant improvement standards will be duplications of
the standards on the eighth floor as follows:
QUINSTREET
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Full height insulated walls at all enclosed rooms.
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T-Bar ceiling with parabolic fixtures at all enclosed rooms.
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At all open office locations ceiling will be exposed with a system in place for
cable management. Landlord has asked the installing contractor to do a mockup of the proposed
ceiling to review with all parties. Until that time Landlord is willing to commit to
providing
a ceiling that is mutually agreeable for both parties.
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Ceiling will be exposed, therefore all overhead cabling, ductwork, etc. must be
clean and installed in an organized neat manner.
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Pendant hung strip fixtures used in open office areas to match standard on eighth floor.
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Doors will be natural maple veneer (3-0 x 9-0) with brushed aluminum
sidelights (2-6 x 9-0). Door hardware-polished chrome.
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Carpet: In open office areas Bigelow Camden. In closed teaming/conference
areas Bigelow Cyberweave. Rubber base Burke.
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VCT: In server room, storage room and breakroom Armstrong.
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Provide upper and lower cabinets in breakroom w/ dishwasher and garbage disposal.
Upper and lower cabinets in copy/mail area.
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Electrical requirements:
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Conference rooms and teaming rooms two power/two phone/data
Conference rooms floor power/data/phone in center of room
Phone rooms 1 power 1 phone/data
Server room refer to eight floor TI
All other electrical requirements refer to eighth floor Quinstreet tenant
improvement standards.
200
Blossom Lane, Mountain View, CA 94041 | main 650.254.1444 | fax 650.254.1411 | www.apidesign.com
June 11,
2004
Matter ID Number: 13883
17
Venture Builders
May 26, 2004
Page Two
ELEVATOR LOBBY
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Provide building standard stone tile at elevator lobby floor. Provide stone tile base.
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Provide painted walls, ceiling and painted elevator doors and trims.
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Provide wall sconces to match bldg. standard.
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Provide 2-0 soffit at perimeter of ceiling.
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Provide building standard can lights at ceiling.
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Please give me a call with questions or comments.
Thank you.
Very truly yours,
Jennifer Morse
Principal
4157quin.ltr
200 Blossom Lane, Mountain View, CA 94041 | main 650.254.1444 | fax 650.254.1411 | www.apidesign.com
SECOND AMENDMENT
THIS
SECOND AMENDMENT
(the
Amendment
) is made and
entered into as of March 7, 2005, by and
between
CA-PARKSIDE TOWERS LIMITED PARTNERSHIP, a Delaware limited partnership
(Landlord)
and
QUINSTREET, INC., a California corporation (Tenant)
.
RECITALS
A.
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Landlord and Tenant are parties to that certain lease dated June 2, 2003, which lease has
been previously amended by that certain First Amendment dated June 24, 2004 (the
First Amendment
) (collectively, the
Lease
). Pursuant to the Lease, Landlord has
leased to Tenant space currently containing approximately
53,877
rentable square feet
(the
Premises
) described as Suite Nos. 700 and 800 on the 7
th
and 8
th
floors,
respectively, of the building commonly known as Parkside Tower East located at 1051
East Hillsdale Boulevard, Foster City, California (the
Building
).
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B.
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Tenant and Landlord mutually desire that the Lease be amended on and subject to the
following terms and conditions.
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NOW, THEREFORE,
in consideration of the above recitals which by this reference are
incorporated herein, the mutual covenants and conditions contained herein and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant
agree as follows:
1.
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Amendment.
Effective as of the date hereof, Landlord and Tenant agree that
the Lease shall be amended in accordance with the following terms and conditions:
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1.01.
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Temporary Fitness Center Space.
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A.
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As of February 28, 2005, the Lease shall terminate with respect to
the Fitness Center Space, as set forth in Section 8.08 of the First Amendment,
and Tenant shall surrender the Fitness Center Space to Landlord pursuant to
Section 25 of the Lease. During the period beginning on March 1, 2005 and ending
on March 31, 2005 (such period being referred to herein as the
Temporary Fitness Center Space Term
), Landlord shall allow Tenant to use approximately 3,000
rentable square feet of space located on the 4
th
floor of the Building
as shown on
Exhibit A
of this Amendment (the
Temporary Fitness Center Space
)
for the placing of exercise equipment and use as a fitness center by Tenants
employees only, all at Tenants sole risk and Tenants sole cost and expense. THE
TEMPORARY FITNESS CENTER SPACE TERM SHALL AUTOMATICALLY RENEW FOR CONSECUTIVE
PERIODS OF 1 MONTH EACH UNTIL TERMINATED BY EITHER PARTY BY THE DELIVERY OF NOT
LESS THAN 30 DAYS PRIOR WRITTEN NOTICE TO THE OTHER PARTY. Such Temporary Fitness
Center Space shall be accepted by Tenant in its as-is condition and
configuration, it being agreed that Landlord shall be under no obligation to
perform any work in the Temporary Fitness Center Space or to incur any costs in
connection with Tenants move in, move out or occupancy of the Temporary Fitness
Center Space. Tenant acknowledges that it shall be entitled to use and occupy the
Temporary Fitness Center Space at its sole cost, expense and risk. Tenant shall
not construct any improvements or make any alterations of any type to the
Temporary Fitness Center Space unless Tenant has first complied with all
requirements of Section 9 of the Lease. All costs in connection with making the
Temporary Fitness Center Space ready for occupancy by Tenant shall be the sole
responsibility of Tenant. As a condition of Tenants use of the Temporary Fitness
Center Space, and prior to the use of the Temporary Fitness Center Space by and
of Tenants employees, Tenant shall comply with the requirements contained in the
email from the Foster City Fire Marshal, attached hereto as
Exhibit B
(the
Foster City Fire Marshal Requirements
). Tenants failure to comply with the
Foster City Fire Marshal Requirements shall automatically terminate any rights
granted to Tenant to use the Temporary Fitness Center Space.
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2/28/2005
Matter ID #: 18445
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B.
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During the Temporary Fitness Center Space Term, the Temporary
Fitness Center Space shall be subject to the terms and conditions of the
Lease, including, without limitation, Section 13 (Indemnity and Waiver of
Claims), Section 14 (Insurance) and Section 15 (Subrogation), except as
expressly modified herein and except that (i) Tenant shall not be entitled to
receive any allowances, abatement or other financial concession in
connection with the Temporary Fitness Center Space which was granted
with respect to the Premises unless such concessions are expressly
provided for herein with respect to the Temporary Fitness Center Space,
(ii) the Temporary Fitness Center Space shall not be subject to any
renewal or expansion rights of Tenant under the Lease, (iii) Tenant shall
not be required to pay Base Rent for the Temporary Space during the
Temporary Fitness Center Space Term, and (iv) Tenant shall not be
required to pay Tenants Pro Rata Share of Expenses and Taxes for the
Temporary Fitness Center Space during the Temporary Fitness Center
Space Term.
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C.
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Upon termination of the Temporary Fitness Center Space Term, Tenant
shall vacate the Temporary Fitness Center Space and deliver the same
to Landlord in the same condition that the Temporary Fitness Center
Space was delivered to Tenant, ordinary wear and tear excepted. At the
expiration or earlier termination of the Temporary Fitness Center Space
Term, Tenant shall remove all debris, all items of Tenants personalty,
and any trade fixtures of Tenant from the Temporary Fitness Center
Space. Tenant shall be fully liable for all damage Tenant or Tenants
agents, employees, contractors, or subcontractors cause to the
Temporary Fitness Center Space.
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D.
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Tenant shall have no right to hold over or otherwise occupy the
Temporary Fitness Center Space at any time following the expiration or
earlier termination of the Temporary Fitness Center Space Term, and in
the event of such holdover, Landlord shall immediately be entitled to
institute dispossessory proceedings to recover possession of the
Temporary Fitness Center Space, without first providing notice thereof to
Tenant. In the event of holding over by Tenant after expiration or
termination of the Temporary Fitness Center Space Term without the
written authorization of Landlord, Tenant shall pay, for such holding over,
$6,150.00 for each month or partial month of holdover, plus all
consequential damages that Landlord incurs as a result of the Tenants
hold over. During any such holdover, Tenants occupancy of the
Temporary Fitness Center Space shall be deemed that of a tenant at
sufferance, and in no event, either during the Temporary Fitness Center
Space Term or during any holdover by Tenant, shall Tenant be
determined to be a tenant-at-will under applicable law. While Tenant is
occupying the Temporary Fitness Center Space, Landlord or Landlords
authorized agents shall be entitled to enter the Temporary Fitness Center
Space, upon reasonable notice, to display the Temporary Fitness Center
Space to prospective tenants.
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1.02.
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Landlords Notice Address.
The Landlords Notice Address as set forth in the
Basic Lease Information of the Lease is hereby deleted in its entirety and replaced
with the following:
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ADDRESS OF LANDLORD:
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With a copy to:
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CA-Parkside Towers Limited Partnership
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Equity Office
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c/o Equity Office
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One Market, Spear Tower,
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950 Tower Lane, Suite 950
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Suite 600
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Foster City, California 94404
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San Francisco, California 94105
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Attention: Property Manager
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Attention: Regional Counsel
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San Francisco Region
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Notwithstanding anything to the contrary contained in the Lease, as amended hereby, Rent
shall be made payable to the entity, and sent to the address, Landlord designates and shall
be made by good and sufficient check or by other means acceptable to Landlord.
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2/28/2005
Matter ID #: 18445
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2.01.
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This Amendment and the attached exhibits, which are hereby incorporated into
and made a part of this Amendment, set forth the entire agreement between the
parties with respect to the matters set forth herein. There have been no additional
oral or written representations or agreements. Under no circumstances shall
Tenant be entitled to any Rent abatement, improvement allowance, leasehold
improvements, or other work to the Premises, or any similar economic incentives
that may have been provided Tenant in connection with entering into the Lease,
unless specifically set forth in this Amendment.
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2.02.
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Except as herein modified or amended, the provisions, conditions and terms of the
Lease shall remain unchanged and in full force and effect.
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2.03.
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In the case of any inconsistency between the provisions of the Lease and this
Amendment, the provisions of this Amendment shall govern and control.
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2.04.
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Submission of this Amendment by Landlord is not an offer to enter into this
Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall
not be bound by this Amendment until Landlord has executed and delivered the same to Tenant.
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2.05.
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The capitalized terms used in this Amendment shall have the same definitions as
set forth in the Lease to the extent that such capitalized terms are defined therein
and not redefined in this Amendment.
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2.06.
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Tenant hereby represents to Landlord that Tenant has dealt with no broker in
connection with this Amendment. Tenant agrees to indemnify and hold Landlord
and the Landlord Related Parties harmless from all claims of any brokers claiming
to have represented Tenant in connection with this Amendment. Landlord hereby
represents to Tenant that Landlord has dealt with no broker in connection with this
Amendment. Landlord agrees to indemnify and hold Tenant and the Tenant
Related Parties harmless from all claims of any brokers claiming to have
represented Landlord in connection with this Amendment.
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2.07.
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Each signatory of this Amendment represents hereby that he or she has the
authority to execute and deliver the same on behalf of the party hereto for which such signatory is acting.
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[SIGNATURES ARE ON FOLLOWING PAGE]
2/28/2005
Matter ID #: 18445
IN WITNESS
WHEREOF
, Landlord and Tenant have duly executed this Amendment as of the day and
year first above written.
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LANDLORD:
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CA-PARKSIDE TOWERS LIMITED PARTNERSHIP, a Delaware limited partnership
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By:
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EOM GP, L.L.C., a Delaware limited liability
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company, its general partner
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By:
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Equity Office Management, L.L.C., a Delaware limited liability company, its non-member manager
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By:
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/s/ Kenneth Young
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Name:
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Kenneth Young
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Title:
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Managing Director, Leasing
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TENANT:
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QUINSTREET, INC., a California
corporation
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By:
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/s/ Michael McDonough
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Name:
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Michael McDonough
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Title:
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V.P. Secretary & General Counsel
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By:
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/s/ Bronwyn Syiek
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Name:
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Bronwyn Syiek
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Title:
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COO
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2/28/2005
Matter ID #: 18445
EXHIBIT A
OUTLINE AND LOCATION OF TEMPORARY FITNESS CENTER SPACE
This Exhibit is attached to and made a part of the Amendment by and between
CA-PARKSIDE TOWERS LIMITED PARTNERSHIP, a Delaware limited
partnership
(Landlord) and
QUINSTREET, INC.,
a California corporation (Tenant) for space
in the Building located at 1051 East Hillsdale Boulevard, Foster City, California.
2/28/2005
Matter ID #: 18445
EXHIBIT B
FOSTER CITY FIRE MARSHAL REQUIREMENTS
This Exhibit is attached to and made a part of the Amendment by and between
CA-PARKSIDE TOWERS LIMITED PARTNERSHIP, a Delaware limited partnership
(Landlord)
and
QUINSTREET, INC., a California corporation
(Tenant) for space in the Building
located at 1051 East Hillsdale Boulevard, Foster City, California.
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The work will need to be approved by the City of Foster City.
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The work will need to be permitted.
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John Mapes <jmapes@fostercity.org>
01/31/2005 10:26 AM
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To
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<David_Weinstein@equityoffice.com>, Chuck Haney
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<chaney@fostercity.org>
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cc
<Bsonntag@Quinstreet.Com>
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Subject
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RE: Quinstreet Gym
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David,
The Building Official and I visited the site today 1/31/05. The only issues I have are:
1. Providing sufficient emergency lighting so that the exit pathways are visible at all times
(Building Permit required for all electrical work)
2. Covering or clearly identifying the existing trip hazards in the floor
3. Providing a 2A10BC dry chemical fire extinguisher for the area
The building emergency systems and exit signs are existing and must be active at all times (they appear to be.)
John Mapes
Fire Marshal
FCFD
Chuck Haney
Chief Building Offical
2/28/2005
Matter ID #: 18445
THIRD AMENDMENT TO LEASE
(Lease Extension)
THIS THIRD AMENDMENT TO LEASE (the Amendment) is made and entered into as of September 9,
2008, by and between PARKSIDE TOWERS, L.P., a Delaware limited partnership (Landlord), and
QUINSTREET, INC., a California corporation (Tenant).
RECITALS
A. CA-Parkside Towers Limited Partnership, a Delaware limited partnership,
predecessor-in-interest to Landlord, and Tenant entered into that certain Office Lease
Agreement
dated as of June 2, 2003 (the Original Lease), as amended by that certain First Amendment
dated as of June 24, 2004 (the First Amendment) and by that certain Second Amendment dated
as of March 7, 2005 (the Second Amendment), pursuant to which Tenant leases from Landlord
certain premises commonly known as Suites 700 and 800 (the Premises) on the seventh
(7
th
)
and eighth (8
th
) floors of the building commonly known as Parkside Tower East
located at 1051
East Hillsdale Boulevard in Foster City, California, which Premises contain an aggregate of
approximately 53,877 rentable square feet. The Original Lease, as amended by the First
Amendment and the Second Amendment, is herein referred to collectively as the Lease. The
Lease is scheduled to expire on October 31, 2009.
B. Landlord
and Tenant presently desire to amend the Lease to, among other things, extend the Term of the Lease, as more fully set forth below.
C. Capitalized
terms not otherwise defined herein shall have the respective meanings given to them in the Lease.
NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual covenants, terms
and conditions herein contained, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
AGREEMENT
1.
Term; Rental
.
The Term of the Lease for the Premises is hereby extended for a
period of one (1) year (the One-Year Extension Term) commencing on November 1, 2009 and
terminating on October 31, 2010. Tenant shall pay to Landlord throughout the One-Year Extension
Term, at such place as Landlord may designate, without deduction, offset, prior notice or demand,
Base Rent for the Premises in lawful money of the United States in the following amounts:
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Months
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Monthly Base Rent Rate
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Monthly Base Rent
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November 1, 2009 October 31, 2010
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$2.65 psf
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$142,774.05
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Nothing herein shall be construed to limit or alter Tenants obligation to pay Tenants Pro Rata
Share of Expense Excess and Tax Excess as provided in Exhibit B to the Original Lease, throughout
the One-Year Extension Term. The Base Year shall remain calendar year 2004.
1
2.
Condition of Premises
. Tenant shall accept the Premises in its AS IS
condition effective as of the commencement of the One-Year Extension Term. Tenant
acknowledges that Landlord shall have no obligation to make or to pay for any improvements to
the Premises or otherwise prepare the Premises for Tenants occupancy during the One-Year
Extension Term. Subject to the terms of the Lease, as amended hereby, all Building operating
systems shall be in good condition and repair as of the commencement date of the One-Year
Extension Term.
3.
Modifications to Lease
. Effective as of the date hereof:
3.1
Notices to Landlord
. Landlords addresses for receipt of notices under
the Lease are as follows:
c/o Harvest Properties, Inc.
6475 Christie Avenue, Suite 550
Emeryville, CA 94608
Attention: Parkside Towers Property Manager
Telephone: (510) 594-2050
Facsimile: (510) 594-2049
With a copy to:
c/o Invesco Real Estate
500 Three Galleria Tower
13155 Noel Road
Dallas, Texas 75240
Attention: Parkside Towers Asset Manager
Telephone: (972) 715-7497
Facsimile: (972) 715-5816
3.2
Renewal Option
. Tenants Renewal Option set forth in Section 1 of
Exhibit F to the Original Lease shall be for a period of four (4) years (rather than five (5)
years) in accordance with the terms of Section 8.02 of the First Amendment.
4.
Brokers
. Landlord and Tenant each warrants that it has had no dealings with any
broker or agent in connection with the negotiation or execution of this Amendment other than
Colliers Parrish International, Inc., representing Tenant, whose commission, if any, shall be paid
solely by Tenant, and Harvest Properties, representing Landlord, whose commission, if any,
shall be paid solely by Landlord. Landlord and Tenant each agrees to indemnify, defend and hold the
other harmless from and against any claims by any other broker, agent or other person claiming a
commission or other form of compensation by virtue of having dealt with such party with regard
to this leasing transaction.
5.
Ratification
. This Amendment contains the entire understanding between the
parties with respect to the matters contained herein. Except as modified by this Amendment, the
Lease and all the terms, covenants, conditions and agreements thereof are hereby in all
respects ratified, confirmed and approved. No representations, warranties, covenants or agreements have
2
been made concerning or affecting the subject matter of this Amendment, except as are contained
herein and in the Lease. Tenant hereby affirms that on the date hereof no breach or default by
either Landlord or Tenant has occurred, and that the Lease, and all of its terms, conditions,
covenants, agreements and provisions, except as hereby modified, are in full force and effect with
no defenses or offsets thereto.
6.
Authority
. Tenant hereby represents and warrants to Landlord that (a) Tenant is
in good standing under the laws of the State of California, (b) Tenant has full corporate power
and authority to enter into this Amendment and to perform all of the Tenants obligations
under the Lease, as amended by this Amendment, and (c) each person (and all of the persons if
more than one signs) signing this Amendment on behalf of Tenant is duly and validly authorized
to do so.
7.
Successors and Assigns
. This Amendment, and each and every provision hereof,
shall bind and inure to the benefit of the parties hereto and their respective successors and
assigns.
8.
Governing Law
. This Amendment shall be construed, interpreted and enforced,
and the rights and obligations of the parties hereto determined, in accordance with the laws of the
State of California.
9.
Headings and Captions
. The headings and captions of the paragraphs of this
Amendment are for convenience and reference only and in no way define, describe or limit the
scope or intent of this Amendment or any of the provisions hereof.
10.
Counterparts
. This Amendment may be executed in any number of identical
counterparts each of which shall be deemed to be an original and all, when taken together, shall
constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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11.
No Offer
. Submission of this instrument for examination and signature by Tenant
does not constitute an offer to lease or a reservation of or option for lease, and this
instrument is not effective as a lease amendment or otherwise until executed and delivered by
each of Landlord and Tenant.
IN WITNESS WHEREOF, the parties hereto have executed this instrument effective as of the day
and year first above written.
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LANDLORD:
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TENANT:
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PARKSIDE TOWERS, L.P.,
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QUINSTREET, INC.,
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a Delaware limited partnership
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a California corporation
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By:
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Harvest Parkside Investors, LLC,
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By:
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/s/ Daniel E. Caul
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a Delaware limited liability company,
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Name:
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Daniel E. Caul,
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its General Partner
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Title:
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Senior Vice President,
General
Counsel &
Secretary
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By:
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/s/ Joss Hanna
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By:
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/s/ Kenneth Hahn
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Name:
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JOSS HANNA
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Name:
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KENNETH HAHN
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Title:
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VP
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Title:
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SVP FINANCE & CFO
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[If
Tenant is a corporation, Tenant should have one
officer from
each
of the following categories sign for Tenant: (a) a president, vice president or
chairman of the board
and
(b) a secretary, assistant secretary, chief financial
officer or assistant treasurer (unless the Amendment is returned accompanied by a corporate
resolution identifying a single authorized signatory).]
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