UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2010
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File No. 001-34628
QuinStreet, Inc.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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77-05121
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(State or Other Jurisdiction of
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(IRS Employer
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Incorporation or Organization)
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Identification No.)
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1051 East Hillsdale Blvd., Suite 800
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94404
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(Address of principal executive offices)
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(Zip Code)
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650-578-7700
Registrants Telephone Number, Including Area Code
Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer
o
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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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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
As
of May 10, 2010, there were 45,063,081 shares of the registrants common stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUINSTREET, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
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March 31,
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June 30,
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2010
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2009
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Assets
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Current assets
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Cash and cash equivalents
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$
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175,318
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$
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25,182
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Accounts receivable, net
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47,334
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33,283
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Deferred tax assets
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5,531
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5,543
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Prepaid expenses and other assets
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8,322
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1,228
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Total current assets
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236,505
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65,236
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Property and equipment, net
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5,351
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4,741
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Goodwill
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145,803
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106,744
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Other intangible assets, net
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45,824
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33,990
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Deferred tax assets, noncurrent
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1,525
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Other assets, noncurrent
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684
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642
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Total assets
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$
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434,167
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$
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212,878
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Liabilities, Convertible Preferred Stock and
Stockholders Equity
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Current liabilities
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Accounts payable
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$
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19,019
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$
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13,408
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Accrued liabilities
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28,011
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21,794
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Deferred revenue
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1,257
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718
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Debt
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18,096
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12,890
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Total current liabilities
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66,383
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48,810
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Deferred revenue, noncurrent
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370
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820
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Debt, noncurrent
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84,636
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44,350
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Other liabilities, noncurrent
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2,405
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2,309
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Total liabilities
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153,794
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96,289
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Commitments
and contingencies (Note 9)
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Convertible preferred stock: $0.001 par value; 5,000,000 and 30,000,000
shares authorized; 0 and 21,176,533 shares issued and outstanding at
March 31, 2010 and June 30, 2009, respectively; liquidation value of $0
and $69,564 at March 31, 2010 and June 30, 2009, respectively
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43,403
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Stockholders equity
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Common stock: $0.001 par value; 100,000,000 and 45,000,000 shares
authorized; 47,237,175 and 15,413,000 shares issued, and 45,059,723 and
13,315,348 shares outstanding at March 31, 2010 and June 30, 2009,
respectively
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47
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15
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Additional paid-in capital
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214,331
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20,634
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Treasury stock, at cost (2,177,452 and 2,097,652 shares at March 31,
2010 and June 30, 2009, respectively)
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(7,779
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)
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(7,064
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)
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Accumulated other comprehensive income
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21
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21
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Retained earnings
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73,753
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59,580
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Total stockholders equity
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280,373
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73,186
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Total liabilities, convertible preferred stock and stockholders equity
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$
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434,167
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$
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212,878
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See accompanying notes to condensed consolidated financial statements.
3
QUINSTREET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended
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Nine Months Ended
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March 31,
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March 31,
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2010
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2009
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2010
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2009
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Net revenue
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$
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90,773
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$
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69,813
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$
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246,288
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$
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192,726
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Cost of revenue
(1)
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66,268
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46,780
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177,872
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135,030
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Gross profit
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24,505
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23,033
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68,416
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57,696
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Operating expenses:
(1)
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Product development
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5,325
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3,512
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14,534
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10,992
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Sales and marketing
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4,575
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3,594
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12,190
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12,017
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General and administrative
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4,467
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2,865
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14,111
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9,772
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Operating income
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10,138
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13,062
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27,581
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24,915
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Interest income
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16
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44
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33
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221
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Interest expense
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(1,302
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)
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(879
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)
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(2,931
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)
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(2,749
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)
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Other income (expense), net
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(64
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)
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(16
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221
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(256
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)
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Income before income taxes
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8,788
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12,211
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24,904
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22,131
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Provision for taxes
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(3,538
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)
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(5,818
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)
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(10,731
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)
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(10,084
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)
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Net income
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$
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5,250
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$
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6,393
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$
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14,173
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$
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12,047
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Net income attributable to common stockholders
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Basic
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$
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3,714
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$
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2,150
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$
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6,371
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$
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3,697
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Diluted
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$
|
3,797
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$
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2,301
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$
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6,790
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$
|
3,981
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Net income per share attributable to common stockholders
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Basic
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$
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0.12
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$
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0.16
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$
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0.33
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$
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0.28
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Diluted
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$
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0.11
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$
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0.15
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$
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0.31
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$
|
0.26
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Weighted average shares used in computing net income per
share attributable to common stockholders
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Basic
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30,795
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13,297
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19,156
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|
|
|
13,287
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Diluted
|
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33,938
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|
|
14,890
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|
|
|
22,008
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|
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|
15,032
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(1)
Cost of revenue and operating expenses include stock-based compensation expense as follows:
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Cost of revenue
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$
|
653
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|
$
|
470
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$
|
2,143
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|
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$
|
1,477
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Product development
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|
686
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|
176
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|
|
1,570
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|
|
494
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Sales and marketing
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|
1,163
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|
455
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2,504
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|
|
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1,352
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General and administrative
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|
624
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|
373
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4,002
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1,061
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See accompanying notes to condensed consolidated financial statements.
4
QUINSTREET, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended
|
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March 31,
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2010
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2009
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Cash flows from operating activities
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Net income
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|
$
|
14,173
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$
|
12,047
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Adjustments to reconcile net income to net cash provided by
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operating activities:
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Depreciation and amortization
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|
13,678
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|
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12,386
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Provision for sales returns and doubtful accounts receivable
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|
|
(234
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)
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|
|
1,363
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Stock-based compensation
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|
|
10,219
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|
|
|
4,384
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|
Excess tax benefits from exercise of stock options
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|
(1,821
|
)
|
|
|
(362
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)
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Other non-cash adjustments, net
|
|
|
567
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|
|
|
560
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|
Changes in assets and liabilities, net of effects of acquisitions:
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|
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|
|
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|
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Accounts receivable
|
|
|
(11,261
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)
|
|
|
(6,463
|
)
|
Prepaid expenses and other assets
|
|
|
(5,251
|
)
|
|
|
386
|
|
Other assets, noncurrent
|
|
|
(22
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)
|
|
|
332
|
|
Deferred tax assets
|
|
|
(123
|
)
|
|
|
18
|
|
Accounts payable
|
|
|
4,338
|
|
|
|
5,643
|
|
Accrued liabilities
|
|
|
5,635
|
|
|
|
(3,722
|
)
|
Deferred revenue
|
|
|
(57
|
)
|
|
|
(627
|
)
|
Deferred tax liabilities
|
|
|
134
|
|
|
|
|
|
Other liabilities, noncurrent
|
|
|
(12
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)
|
|
|
(43
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)
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
29,963
|
|
|
|
25,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
15
|
|
|
|
711
|
|
Proceeds from sales of property and equipment
|
|
|
52
|
|
|
|
|
|
Capital expenditures
|
|
|
(2,159
|
)
|
|
|
(1,276
|
)
|
Business acquisitions, net of notes payable and cash acquired
|
|
|
(52,899
|
)
|
|
|
(19,808
|
)
|
Internal software development costs
|
|
|
(1,009
|
)
|
|
|
(813
|
)
|
Proceeds from sales and maturities of marketable securities
|
|
|
|
|
|
|
2,302
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(56,000
|
)
|
|
|
(18,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
138,076
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|
|
|
|
|
Proceeds from exercise of common stock options
|
|
|
1,550
|
|
|
|
300
|
|
Proceeds from bank debt
|
|
|
43,300
|
|
|
|
8,607
|
|
Principal payments on bank debt
|
|
|
(2,250
|
)
|
|
|
(2,750
|
)
|
Principal payments on acquisition-related notes payable
|
|
|
(5,609
|
)
|
|
|
(6,764
|
)
|
Excess tax benefits from exercise of stock options
|
|
|
1,821
|
|
|
|
362
|
|
Repurchases of common stock
|
|
|
(715
|
)
|
|
|
(1,369
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
176,173
|
|
|
|
(1,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
150,136
|
|
|
|
5,384
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
25,182
|
|
|
|
24,953
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
175,318
|
|
|
$
|
30,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing and financing activities
|
|
|
|
|
|
|
|
|
Accrued stock issuance costs
|
|
|
1,273
|
|
|
|
|
|
Notes payable issued in connection with business acquisitions
|
|
|
10,750
|
|
|
|
5,891
|
|
See accompanying notes to condensed consolidated financial statements.
5
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(
Unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
QuinStreet, Inc. (the Company) is an online media and marketing company. The Company was
incorporated in California on April 16, 1999 and reincorporated in Delaware on December 31, 2009.
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, Connecticut, Massachusetts, Nevada, New York,
North Carolina, Oklahoma, Oregon, India and the United Kingdom.
Initial Public Offering
In connection with the Companys reincorporation in Delaware in December 2009, the Company
increased its authorized number of shares of common and preferred stock to 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. 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, dividend and liquidation rights of Series A
convertible preferred stock were adjusted consistent with the conversion. Common stock and
additional paid-in capital amounts in these financial statements have been adjusted to reflect the
par value of common stock.
In February 2010, the Company completed an initial public offering (IPO) of its common stock
in which it sold and issued 10,000,000 shares of common stock at an issue price of $15.00 per
share. A total of $150,000 in gross proceeds were raised from the IPO or $136,803 in net proceeds
after deducting underwriting discounts and commissions of $10,500 and other offering costs of
$2,697. As of March 31, 2010, $1,273 of offering costs remained unpaid and these costs are expected
to be paid in the Companys fourth fiscal quarter. Upon the closing of the offering, all shares of
the Companys then-outstanding convertible preferred stock automatically converted into 21,176,533
shares of common stock.
After the completion of the IPO in February 2010, the Company amended its certificate of
incorporation and increased its authorized number of shares of common stock to 100,000,000 and
reduced the authorized number of shares of preferred stock to 5,000,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its
subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying condensed consolidated financial statements and the notes to the condensed
consolidated financial statements as of March 31, 2010 and for the three and nine months ended
March 31, 2010 and 2009 are unaudited. These unaudited interim consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States
(GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC)
regarding interim financial reporting. Certain information and note disclosures normally included
in the financial statements prepared in accordance with GAAP have been condensed or omitted
pursuant to such rules and regulations. Accordingly, these interim consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes
thereto contained in the Companys prospectus filed pursuant to Rule 424(b) under the Securities
Act of 1933, as amended, with the SEC on February 11, 2010. The condensed consolidated balance sheet
as of June 30, 2009 included herein was derived from the audited financial statements as of that
date, but does not include all disclosures including notes required by GAAP.
The unaudited interim condensed consolidated financial statements have been prepared on
the same basis as the audited consolidated financial statements and in the opinion of management
include all adjustments (consisting only of normal recurring adjustments) necessary for the fair
presentation of the Companys condensed consolidated balance sheet at March 31, 2010, its
condensed consolidated statements of operations for the three and nine months ended March 31, 2010
and 2009, and its condensed consolidated statements of cash flows for the nine months ended
March 31, 2010 and 2009. The results of operations for the three and nine months ended March 31,
2010 are not necessarily indicative of the results to be expected for the fiscal year ending
June 30, 2010 or any other future period.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and reported amounts of
revenue and expenses during the reporting period. These estimates are based on information
available as of the date of the financial statements; therefore, actual results could differ from
those estimates.
Foreign Currency Translation
The Companys foreign operations are subject to exchange rate fluctuations. The majority of
the Companys sales is denominated in U.S. dollars. The functional currency for the
majority of the Companys foreign subsidiaries is the U.S. dollar. For these 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.
6
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
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. 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.
One client accounted for 18% of total revenue for the three months ended March 31, 2009 and
10% and 19% for the nine months ended March 31, 2010 and 2009, respectively. No client accounted
for 10% or more of the net accounts receivable as of March 31, 2010 and June 30, 2009,
respectively.
Revenue Recognition
The Company derives its revenue from two sources: Direct Marketing Services (DMS) and Direct
Selling Services (DSS). DMS revenue, which constituted 99% of net revenue for each of the three
and nine months ended March 31, 2010 and 2009, 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 occurred at the time a qualified
lead or click is delivered to the client provided that no significant obligations remain.
From
time to time, the Company may agree to credit a client for 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 1% of net revenue for each of the three and nine months ended
March 31, 2010 and 2009, comprises (i) set-up and professional services fees and (ii) usage 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 fees are recognized on a monthly basis as
earned.
Deferred revenue is comprised of contractual billings in excess of recognized revenue and
payments received in advance of revenue recognition.
Fair Value of Financial Instruments
The Companys financial instruments consist principally of cash and cash equivalents, accounts
receivable, accounts payable, acquisition-related notes payable, a term loan and a 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 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 March 31, 2010 as the interest rates on similar financing arrangements available to the
Company at March 31, 2010 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 approximate their recorded amounts at March 31, 2010 as the
interest rates on these instruments are variable and based on market
interest rates.
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 has determined that DMS and DSS constitute two separate reporting units. The
Company performs its annual goodwill impairment review during its fourth fiscal quarter. No
impairment charges were recorded in the periods presented.
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 applies judgment
when assessing the fair value of the assets based on the undiscounted future cash flows the assets
are expected to generate and recognizes an impairment loss if 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. No
impairment charges were recorded in the periods presented.
7
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
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 development 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. Amortization of internal software development costs was $340 and $331 in the three
months ended March 31, 2010 and 2009, respectively, and $941 and $1,195 in the nine months ended
March 31, 2010 and 2009, respectively, and is reflected in cost of revenue.
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 for options
granted prior to the Companys IPO, 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.
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.
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
GAAP 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. Total accumulated other
comprehensive income (loss) is displayed as a separate component of stockholders equity.
As of March 31, 2010 and June 30, 2009, marketable securities were not in unrealized gain or
loss positions.
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.
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 and to changes in
valuation allowances for deferred tax assets and acquired income tax uncertainties arising from
past business combinations. The adoption of the new standard on July 1, 2009 did not have a
material effect on the Companys condensed consolidated financial statements.
In October 2009, the FASB amended the accounting standards for revenue recognition to remove
tangible products containing software components and non-software components that function together
to deliver the products essential functionality from the scope of industry-specific software
revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for
multiple deliverable revenue arrangements to
|
|
|
provide updated guidance on whether multiple deliverables exist, how the
deliverables in an arrangement should be separated, and how the consideration should be
allocated;
|
|
|
|
require an entity to allocate revenue in an arrangement using estimated selling
price (ESP) of deliverables if a vendor does not have vendor-specific objective
evidence (VSOE) of selling price or third-party evidence (TPE) of selling price;
|
|
|
|
and eliminate the use of the residual method and require an entity to allocate
revenue using the relative selling price method.
|
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 that the adoption of these standards
will have a material effect on its condensed consolidated financial statements.
In January 2010, the FASB issued a new fair value accounting standard update. This update
requires additional disclosures about (i) the different classes of assets and liabilities measured
at fair value, (ii) the valuation techniques and inputs used, (iii) the activity in Level 3 fair
value measurements, and (iv) the transfers between Levels 1, 2, and 3. This update is effective for
interim and annual reporting periods beginning after December 15, 2009. The adoption of the new
standard in the third quarter of fiscal 2010 did not have a material effect on the Companys
condensed consolidated financial statements.
In February 2010, the FASB amended its accounting guidance for the accounting and disclosure
of events that occur after the balance sheet date but before financial statements are issued. In
particular, the new amendment sets forth that a registrant is no longer required to disclose the
date through which it has evaluated subsequent events. The amended guidance is effective
immediately and was adopted by the Company in the third quarter of fiscal 2010.
8
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
3. NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS AND NET INCOME PER SHARE
Basic and diluted net income per share attributable to common stockholders is presented in
conformity with the two-class method required for participating securities. In February 2010, all
of the Companys outstanding convertible preferred stock converted into common stock in connection
with the IPO. Prior to the conversion, holders of Series A, Series B and Series C convertible
preferred stock were 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. No such dividends were paid.
For periods prior to the conversion of the convertible preferred stock, net income per
share information is computed using the two-class method. 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 computed by subtracting from
net income the portion of current year-to-date earnings that the preferred stockholders would have
been entitled to receive pursuant to their dividend rights had all of the year-to-date earnings
been distributed. Diluted net income per share 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.
The following table presents the calculation of basic and diluted net income per share
attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
March 31,
|
|
|
Nine
Months Ended
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,250
|
|
|
$
|
6,393
|
|
|
$
|
14,173
|
|
|
$
|
12,047
|
|
8% non-cumulative dividends on convertible preferred stock
|
|
|
(373
|
)
|
|
|
(819
|
)
|
|
|
(2,018
|
)
|
|
|
(2,457
|
)
|
Undistributed earnings allocated to convertible preferred stock
|
|
|
(1,163
|
)
|
|
|
(3,424
|
)
|
|
|
(5,784
|
)
|
|
|
(5,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic
|
|
$
|
3,714
|
|
|
$
|
2,150
|
|
|
$
|
6,371
|
|
|
$
|
3,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders basic
|
|
$
|
3,714
|
|
|
$
|
2,150
|
|
|
$
|
6,371
|
|
|
$
|
3,697
|
|
Undistributed earnings re-allocated to common stock
|
|
|
83
|
|
|
|
151
|
|
|
|
419
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders diluted
|
|
$
|
3,797
|
|
|
$
|
2,301
|
|
|
$
|
6,790
|
|
|
$
|
3,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in
computing basic net income per share
|
|
|
30,795
|
|
|
|
13,297
|
|
|
|
19,156
|
|
|
|
13,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock used in
computing basic net income per share
|
|
|
30,795
|
|
|
|
13,297
|
|
|
|
19,156
|
|
|
|
13,287
|
|
Add weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
3,143
|
|
|
|
1,593
|
|
|
|
2,852
|
|
|
|
1,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock
used in computing diluted net income per share
|
|
|
33,938
|
|
|
|
14,890
|
|
|
|
22,008
|
|
|
|
15,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.16
|
|
|
$
|
0.33
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.15
|
|
|
$
|
0.31
|
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares from options in the amount of 2,494,823 and 4,650,359 for the
three months ended March 31, 2010 and 2009, respectively, and 2,801,310 and 4,384,760 for the nine
months ended March 31, 2010 and 2009, respectively, were excluded from the dilutive shares
outstanding because their effect was anti-dilutive.
9
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
4. 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.
|
As of March 31, 2010 and June 30, 2009, the Company did not hold marketable securities other
than money market funds. Money market funds are classified as cash equivalents on the balance sheet
and are categorized as follows in the fair value hierarchy as of March 31, 2010 and June 30,
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
Active Markets
|
|
|
|
|
|
|
|
for Identical Assets
|
|
|
|
Total
|
|
|
(Level 1)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
8,054
|
|
|
$
|
8,054
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
8,054
|
|
|
$
|
8,054
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
147,078
|
|
|
$
|
147,078
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
$
|
147,078
|
|
|
$
|
147,078
|
|
|
|
|
|
|
|
|
5. ACQUISITIONS
Acquisition of Internet.com
On November 30, 2009, the Company acquired the website business of Internet.com, a
division of WebMediaBrands, Inc., in exchange for $16,000 in cash paid upon closing of the
acquisition and the issuance of a $2,000 non-interest-bearing promissory note payable in one
installment. The results of Internet.coms operations have been included in the consolidated
financial statements since the acquisition date. The Company acquired Internet.com to broaden its
media access and client base in the business-to-business market. The total purchase price recorded
was as follows:
|
|
|
|
|
|
|
Amount
|
|
Cash
|
|
$
|
16,000
|
|
Fair value of debt (net of $46 of imputed interest)
|
|
|
1,954
|
|
|
|
|
|
|
|
$
|
17,954
|
|
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 deductible for tax
purposes. The following table summarizes the preliminary allocation of the purchase price and the
estimated useful lives of the identifiable intangible assets acquired as of the date of the
acquisition:
10
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Tangible assets acquired
|
|
$
|
2,663
|
|
|
|
|
|
Liabilities assumed
|
|
|
(634
|
)
|
|
|
|
|
Customer relationships
|
|
|
1,900
|
|
|
7 years
|
Website/trade/domain names
|
|
|
2,500
|
|
|
5 years
|
Content
|
|
|
4,300
|
|
|
4 years
|
Noncompete agreements
|
|
|
200
|
|
|
2 years
|
Goodwill
|
|
|
7,025
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
$
|
17,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Insure.com
On October 8, 2009, the Company acquired the website business Insure.com, an
Illinois-based online marketing company, in exchange for $15,000 in cash paid upon closing of the
acquisition and the issuance of a $1,000 non-interest-bearing promissory note payable in one
installment. The results of Insure.coms acquired operations have been included in the consolidated
financial statements since the acquisition date. The Company acquired Insure.com for its capacity
to generate online visitors in the financial services market. The total purchase price recorded was
as follows:
|
|
|
|
|
|
|
Amount
|
|
Cash
|
|
$
|
15,000
|
|
Fair value of debt (net of $24 of imputed interest)
|
|
|
976
|
|
|
|
|
|
|
|
$
|
15,976
|
|
|
|
|
|
The acquisition was accounted for as a purchase business combination. The Company
allocated the purchase price to 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 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
|
|
Noncompete agreements
|
|
$
|
900
|
|
|
3 years
|
Website/trade/domain names
|
|
|
1,250
|
|
|
8 years
|
Content
|
|
|
3,900
|
|
|
8 years
|
Goodwill
|
|
|
9,926
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
$
|
15,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Payler Corp. D/B/A HSH Associates Financial Publishers (HSH)
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:
11
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Estimated
|
|
|
|
Fair Value
|
|
|
Useful Life
|
|
Tangible assets acquired
|
|
$
|
50
|
|
|
|
|
|
Liabilities assumed
|
|
|
(1,695
|
)
|
|
|
|
|
Advertiser relationships
|
|
|
1,100
|
|
|
3 years
|
Website/trade/domain names
|
|
|
800
|
|
|
6 years
|
Content
|
|
|
1,400
|
|
|
6 years
|
Goodwill
|
|
|
8,104
|
|
|
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 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
|
Website/trade/domain names
|
|
|
776
|
|
|
5 years
|
Noncompete agreements
|
|
|
124
|
|
|
3 years
|
Content
|
|
|
140
|
|
|
2 years
|
Goodwill
|
|
|
10,677
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
$
|
14,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Acquisitions
During the nine months ended March 31, 2010, in addition to the acquisition of HSH,
Insure.com and Internet.com, the Company acquired operations from 22 other online publishing
businesses in exchange for $14,598 in cash paid upon closing of the acquisitions and $4,356 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
|
|
$
|
14,598
|
|
Fair value of debt (net of $295 in imputed interest)
|
|
|
4,061
|
|
|
|
|
|
|
|
$
|
18,659
|
|
|
|
|
|
12
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
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 $13,014. The following table summarizes the
preliminary allocation of the purchase prices of these other acquisitions during the nine months
ended March 31, 2010 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
|
|
Tangible
assets acquired
|
|
$
|
1
|
|
|
|
|
|
Content
|
|
|
2,526
|
|
|
1-6 years
|
Customer / publisher relationships
|
|
|
687
|
|
|
1-7 years
|
Website/trade/domain names
|
|
|
1,101
|
|
|
5 years
|
Noncompete agreements
|
|
|
141
|
|
|
2-3 years
|
Acquired technology
|
|
|
199
|
|
|
3 years
|
Goodwill
|
|
|
14,004
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
$
|
18,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 these other fiscal year
2009 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
|
|
Liabilities assumed
|
|
$
|
(22
|
)
|
|
|
|
|
Content
|
|
|
2,538
|
|
|
1-6 years
|
Customer/publisher relationships
|
|
|
1,952
|
|
|
1-7 years
|
Website/trade/domain names
|
|
|
2,418
|
|
|
5 years
|
Noncompete agreements
|
|
|
236
|
|
|
5 years
|
Acquired technology
|
|
|
392
|
|
|
3 years
|
Goodwill
|
|
|
11,099
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
$
|
18,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Financial Information
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. The pro forma financial information 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 each period presented. The unaudited 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 each period
presented.
13
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Total revenue
|
|
$
|
91,518
|
|
|
$
|
75,003
|
|
|
$
|
254,277
|
|
|
$
|
208,825
|
|
Net income
|
|
|
5,220
|
|
|
|
4,459
|
|
|
|
15,219
|
|
|
|
9,903
|
|
Basic net income per share
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
0.36
|
|
|
$
|
0.22
|
|
Diluted net income per share
|
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
$
|
0.34
|
|
|
$
|
0.21
|
|
6. INTANGIBLE ASSETS, NET
Intangible assets, net balances, excluding goodwill, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
June 30, 2009
|
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Customer/publisher relationships
|
|
$
|
26,669
|
|
|
$
|
(9,472
|
)
|
|
$
|
17,197
|
|
|
$
|
22,982
|
|
|
$
|
(6,299
|
)
|
|
$
|
16,683
|
|
Content
|
|
|
30,271
|
|
|
|
(15,039
|
)
|
|
|
15,232
|
|
|
|
18,145
|
|
|
|
(10,546
|
)
|
|
|
7,599
|
|
Website/trade/domain names
|
|
|
14,838
|
|
|
|
(4,400
|
)
|
|
|
10,438
|
|
|
|
9,187
|
|
|
|
(2,988
|
)
|
|
|
6,199
|
|
Acquired technology and other
|
|
|
11,474
|
|
|
|
(8,517
|
)
|
|
|
2,957
|
|
|
|
10,034
|
|
|
|
(6,525
|
)
|
|
|
3,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83,252
|
|
|
$
|
(37,428
|
)
|
|
$
|
45,824
|
|
|
$
|
60,348
|
|
|
$
|
(26,358
|
)
|
|
$
|
33,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets was $4,110 and $3,189 in the three months ended March 31,
2010 and 2009, respectively, and $11,070 and $9,584 in the nine months ended March 31, 2010 and
2009, respectively.
Amortization expense for the Companys acquisition-related intangible assets as of March 31,
2010 for each of the next five years and thereafter is as follows:
|
|
|
|
|
Year Ending June 30,
|
|
|
|
|
2010 (remaining three months)
|
|
$
|
5,502
|
|
2011
|
|
|
13,122
|
|
2012
|
|
|
10,594
|
|
2013
|
|
|
7,897
|
|
2014
|
|
|
3,795
|
|
2015
|
|
|
2,578
|
|
Thereafter
|
|
|
2,336
|
|
|
|
|
|
|
|
$
|
45,824
|
|
|
|
|
|
7. GOODWILL
The changes in the carrying amount of goodwill for the nine months ended March 31, 2010
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS
|
|
|
DSS
|
|
|
Total
|
|
Balance at June 30, 2009
|
|
$
|
105,513
|
|
|
$
|
1,231
|
|
|
$
|
106,744
|
|
Additions
|
|
|
39,059
|
|
|
|
|
|
|
|
39,059
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
$
|
144,572
|
|
|
$
|
1,231
|
|
|
$
|
145,803
|
|
|
|
|
|
|
|
|
|
|
|
In the nine months ended March 31, 2010, the additions to goodwill relate to the Companys
acquisitions as described in Note 5, and primarily reflect the value of the synergies expected to
be generated from combining the Companys technology and know-how with the acquired businesses
access to online visitors.
14
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
8. DEBT
Promissory Notes
During the nine months ended March 31, 2010 and fiscal year 2009, the Company issued total
promissory notes for the acquisition of businesses of $10,750 and $8,151, respectively, net of
imputed interest amounts of $606 and $1,117, respectively. The majority of the promissory notes are
non-interest-bearing. For these notes 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.
The Company recorded accretion of notes payable of $15 and $265 for the three months ended March
31, 2010 and 2009, respectively, and $217 and $541 for the nine months ended March 31, 2010 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 September 2008, the Company replaced its existing revolving credit facility of $60,000
with a credit facility totaling $100,000. The new facility consisted of a $30,000 five-year term
loan and a $70,000 revolving credit line.
In
November 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 line from $70,000 to $100,000.
In
January 2010, the Company replaced its existing credit facility with
a new credit facility
with total borrowing capacity of $175,000. The new credit facility consists of a $35,000 four-year term
loan, with principal amortization of 10%, 15%, 35% and 40% annually, and a $140,000 four-year
revolving credit line with an optional increase of $50,000.
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 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 line and from LIBOR + 2.50% to 3.25%
or Prime + 1.00% to 1.50% for the term loan. The revolving
credit line also
requires a quarterly facility fee of
0.375% of the revolving credit line. The credit facility expires in January 2014. The loan and
revolving credit line 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 twelve 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 line exists such that the relevant debt payment could
be 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 twelve months of Adjusted EBITDA.
The credit facility also requires the Company to comply with other nonfinancial covenants. The
Company was in compliance with the financial ratios as of March 31, 2010 and June 30, 2009.
Upfront arrangement fees incurred in connection with credit facilities are deferred and
amortized over the remaining term of the arrangement.
As of March 31, 2010 and June 30, 2009, $35,000 and $28,500 was outstanding under the term
loan and $41,754 and $6,257 was outstanding under the revolving
credit line, respectively.
15
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
Debt Maturities
The maturities of debt as of March 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan and
|
|
|
|
|
|
|
|
revolving
|
|
|
|
Notes
|
|
|
credit
|
|
Year Ending June 30,
|
|
Payable
|
|
|
line
|
|
2010 (remaining three months)
|
|
$
|
2,400
|
|
|
$
|
850
|
|
2011
|
|
|
14,419
|
|
|
|
3,963
|
|
2012
|
|
|
6,204
|
|
|
|
7,000
|
|
2013
|
|
|
2,834
|
|
|
|
12,688
|
|
2014
|
|
|
2,273
|
|
|
|
52,253
|
|
2015
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,630
|
|
|
|
76,754
|
|
Less: imputed interest and unamortized discounts
|
|
|
(1,288
|
)
|
|
|
(1,364
|
)
|
Less: current portion
|
|
|
(14,955
|
)
|
|
|
(3,141
|
)
|
|
|
|
|
|
|
|
Noncurrent portion of debt
|
|
$
|
12,387
|
|
|
$
|
72,249
|
|
|
|
|
|
|
|
|
Letters of Credit
The Company has a $350 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 has a $223 letter of credit agreement with a financial institution that is used as
collateral for the Companys existing corporate headquarters operating lease. The letter of credit
automatically renews annually without amendment unless cancelled by the financial institution
within 30 days of the annual expiration date.
The Company has a $500 letter of credit agreement with a financial institution that is used as
collateral for the Companys new corporate headquarters operating lease. The letter of credit
automatically renews annually without amendment unless cancelled by the financial institution
within 30 days of the annual expiration date.
9. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space and equipment under non-cancelable operating leases with
various expiration dates through 2018. Rent expense for the three months ended March 31, 2010 and
2009 was $787 and $662, respectively, and $2,457 and $1,886 for the nine months ended March 31,
2010 and 2009, respectively. The Company recognizes rent expense on a straight-line basis over the
lease period and accrues for rent expense incurred but not paid.
Future annual minimum lease payments under all noncancelable operating leases as of March 31,
2010 were as follows:
|
|
|
|
|
|
|
Operating
|
|
Year Ending June 30,
|
|
Leases
|
|
2010 (remaining three months)
|
|
$
|
783
|
|
2011
|
|
|
1,459
|
|
2012
|
|
|
1,146
|
|
2013
|
|
|
2,073
|
|
2014
|
|
|
2,332
|
|
2015
|
|
|
2,379
|
|
Thereafter
|
|
|
8,269
|
|
|
|
|
|
|
|
$
|
18,441
|
|
|
|
|
|
16
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
The existing lease for the Companys corporate headquarters located at 1051 Hillsdale
Boulevard, Foster City, California expires in October 2010.
In February, 2010, the Company entered into a new lease agreement for office space located at
950 Tower Lane, Foster City, California. The term of the lease begins on November 1, 2010 and
expires on the last day of the 96th full calendar month commencing on or after November 1, 2010.
The monthly base rent will be abated for the first 12 calendar months under the lease. Thereafter,
the monthly base rent will be $118 through the 24th calendar month of the term of the lease, after which
the monthly base rent will increase to $182 for the subsequent 12 months. In the
following years the monthly base rent will increase approximately 3% after each 12-month
anniversary during the term of the lease, including any extensions under the Companys options to
extend.
The Company has two options to extend the term of the lease for one additional year for each
option following the expiration date of the lease or renewal term, as applicable.
Concurrently with the execution of the lease, the Company delivered to the landlord, as
collateral for the full performance by the Company of all of its obligations under the lease, and
for all losses and damages the landlord may suffer as a result of any default by the Company under
the lease, a letter of credit in the face amount of $500.
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 March 31, 2010 and June 30, 2009, respectively
In the ordinary course of its business, the Company enters into standard indemnification
provisions in its agreements with its clients. Pursuant to these provisions, the Company
indemnifies its clients 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 client. 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 March 31, 2010 and June 30, 2009, respectively.
During fiscal year 2009, the Company settled an indemnity obligation with respect to one
ongoing litigation matter. See discussion below for further details.
17
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
Litigation
In August 2005, the Company was notified by one of its DSS segment 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.
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.
10. EQUITY BENEFIT PLANS
In November 2009, the Companys board of directors adopted the 2010 Equity Incentive Plan (the
2010 Incentive Plan) and the Companys stockholders approved the 2010 Incentive Plan in January
2010. The 2010 Incentive Plan became effective upon the completion of the IPO. Awards granted
after January 2008 but before the adoption of the 2010 Incentive Plan continue to be governed by
the terms of the 2008 Equity Incentive Plan (the 2008 Plan). All outstanding stock awards granted
before January 2008 continue to be governed by the terms of the Companys amended and restated 1999
Equity Incentive Plan (the 1999 Plan).
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. The Company may issue incentive
stock options (ISOs) only to its employees. Non-qualified stock options (NQSOs) and all other
awards may be granted to employees, including officers, nonemployee 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.
Stock options granted to employees generally have a contractual term of seven years and 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.
The aggregate number of shares of the Companys common stock initially reserved for issuance
under the 2010 Incentive Plan was 282,277 and will be increased by any outstanding stock awards
that expire or terminate for any reason prior to their exercise or settlement. The number of shares
of the Companys common stock reserved for issuance may be increased annually from July 1, 2010
through July 1, 2019 by up to five percent of the total number of shares of the Companys common
stock outstanding on the last day of the preceding fiscal year. The maximum number of shares that
may be issued under the 2010 Incentive Plan is 30,000,000.
In November 2009, the Companys board of directors adopted the 2010 Non-Employee Directors
Stock Award Plan (the Directors Plan) and the stockholders approved the Directors Plan in
January 2010. The Directors Plan became effective upon the completion of the Companys IPO. The
Directors Plan provides for the automatic grant of nonstatutory stock options to purchase shares
of the Companys common stock to non-employee directors and also provides for the discretionary
grant of restricted stock units.
An aggregate of 300,000 shares of the Companys common stock are reserved for issuance under
the Directors Plan. This amount may be increased annually, by the sum of 200,000 shares and the
aggregate number of shares of the Companys common stock subject to awards granted under the
Directors Plan during the immediately preceding fiscal year.
The Company estimates the fair value of stock option awards at the date of grant using the
Black-Scholes option-pricing model. Options are granted with an exercise price equal to the fair
value of the common stock as of the date of grant. Compensation expense is amortized net of
estimated forfeitures on a straight-line basis over the requisite service period of the options,
which is generally four years.
The weighted average Black-Scholes model assumptions for the three and nine months ended March
31, 2009 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
March 31,
|
|
March 31,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
Risk-free interest rate
|
|
|
2.43
|
%
|
|
|
1.76
|
%
|
|
|
2.39
|
%
|
|
|
2.81
|
%
|
Expected term (years)
|
|
|
4.6
|
|
|
|
4.6
|
|
|
|
4.6
|
|
|
|
4.6
|
|
Expected volatility
|
|
|
56
|
%
|
|
|
70
|
%
|
|
|
67
|
%
|
|
|
62
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The weighted average grant date fair value of employee stock options granted was $9.18 and
$5.08 during the three months ended March 31, 2010 and 2009, respectively, and $9.52 and $5.28
during the nine months ended March 31, 2010 and 2009, respectively.
18
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
11. STOCKHOLDERS EQUITY
In February 2010, the Company completed its IPO, whereby it sold 10,000,000 shares of common
stock for a price of $15.00 per share. The Company received $136,803 net of offering costs.
Approximately $13,197 in offering costs were incurred and have been deducted from additional
paid-in capital.
Prior to the closing of the IPO, the Company had outstanding three series of convertible
preferred stock. On February 11, 2010, in conjunction with the closing of the IPO, all of the
Companys 21,176,533 outstanding preferred shares automatically converted on a one-for-one basis
into 21,176,533 shares of common stock. At March 31, 2010, the Company had no preferred shares
outstanding.
In the nine months ended March 31, 2010, the Company repurchased 79,800 shares of its
outstanding common stock at a total cost of $715 and an average cost of $8.96 per share.
The following table sets forth the components of comprehensive income for the three and nine
months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net income
|
|
$
|
5,250
|
|
|
$
|
6,393
|
|
|
$
|
14,173
|
|
|
$
|
12,047
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
8
|
|
|
|
(26
|
)
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
5,258
|
|
|
$
|
6,367
|
|
|
$
|
14,173
|
|
|
$
|
12,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12. SEGMENT INFORMATION
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 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 2.
The Company evaluates the performance of its operating segments based on net sales and
operating income before depreciation, amortization and stock-based compensation expense.
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.
19
QUINSTREET, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)
Summarized information by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS
|
|
$
|
90,511
|
|
|
$
|
68,925
|
|
|
$
|
244,841
|
|
|
$
|
190,208
|
|
DSS
|
|
|
262
|
|
|
|
888
|
|
|
|
1,447
|
|
|
|
2,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
|
90,773
|
|
|
|
69,813
|
|
|
|
246,288
|
|
|
|
192,726
|
|
Segment operating income before depreciation, amortization, and stock-based
compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DMS
|
|
|
18,266
|
|
|
|
18,085
|
|
|
|
50,672
|
|
|
|
40,425
|
|
DSS
|
|
|
73
|
|
|
|
486
|
|
|
|
806
|
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income before depreciation, amortization, and stock-based
compensation expense
|
|
|
18,339
|
|
|
|
18,571
|
|
|
|
51,478
|
|
|
|
41,685
|
|
Depreciation and amortization
|
|
|
5,075
|
|
|
|
4,035
|
|
|
|
13,678
|
|
|
|
12,386
|
|
Stock-based compensation expense
|
|
|
3,126
|
|
|
|
1,474
|
|
|
|
10,219
|
|
|
|
4,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
10,138
|
|
|
$
|
13,062
|
|
|
$
|
27,581
|
|
|
$
|
24,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth net revenue, assets and long-lived assets by geographic
area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
90,764
|
|
|
$
|
69,769
|
|
|
$
|
245,754
|
|
|
$
|
192,498
|
|
Europe
|
|
|
9
|
|
|
|
44
|
|
|
|
534
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
90,773
|
|
|
$
|
69,813
|
|
|
$
|
246,288
|
|
|
$
|
192,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Assets:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
433,074
|
|
|
$
|
211,337
|
|
Europe
|
|
|
488
|
|
|
|
927
|
|
Asia/Pacific
|
|
|
605
|
|
|
|
614
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
434,167
|
|
|
$
|
212,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
5,176
|
|
|
$
|
4,485
|
|
Europe
|
|
|
|
|
|
|
35
|
|
Asia/Pacific
|
|
|
175
|
|
|
|
221
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
5,351
|
|
|
$
|
4,741
|
|
|
|
|
|
|
|
|
20
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our condensed consolidated financial statements and related
notes appearing elsewhere in this Quarterly Report on Form 10-Q and our prospectus filed pursuant
to Rule 424(b) under the Securities Act with the SEC on February 11, 2010.
This quarterly report on Form 10-Q contains forward-looking statements that involve risks
and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could
cause our results to differ materially from those expressed or implied by such forward-looking
statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are often identified by the use of words such as, but not limited to,
anticipate, believe, can, continue, could, estimate, expect, intend, may, will,
plan, project, seek, should, target, will, would, and similar expressions or
variations intended to identify forward-looking statements. These statements are based on the
beliefs and assumptions of our management based on information currently available to management.
Such forward-looking statements are subject to risks, uncertainties and other important factors
that could cause actual results and the timing of certain events to differ materially from future
results expressed or implied by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those identified below, and those
discussed in the section titled Risk Factors included in our prospectus filed pursuant to Rule
424(b) under the Securities Act with the Securities and Exchange Commission on February 11, 2010.
Furthermore, such forward-looking statements speak only as of the date of this report. Except as
required by law, we undertake no obligation to update any forward-looking statements to reflect
events or circumstances after the date of such statements.
Management 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 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 provide for 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.
Our Direct Marketing Services, or DMS, business accounted for 99% of our net revenue in each
of the first three and nine months of fiscal year 2010 and 2009. 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 vertical focus, targeted media presence and our technology
platform, we are able to deliver targeted, measurable marketing results to our clients.
Our two largest client verticals are financial services and education. Our education client
vertical represented 42% and 55% of net revenue in the three months ended March 31, 2010 and 2009,
respectively, and 47% and 58% of net revenue in the nine months ended March 31, 2010 and 2009,
respectively. Our financial services client vertical represented 46% and 35% of net revenue in the three months ended March 31,
2010 and 2009, respectively, and 43% and 30% of net revenue in the nine months ended March 31,
2010 and 2009, respectively. Other DMS verticals, consisting primarily of home services,
business-to-business, or B2B, and medical, represented 12% and 10% of net revenue in the three
months ended March 31, 2010 and 2009, respectively, and 10% and 12% of net revenue in the nine
months ended March 31, 2010 and 2009, respectively.
In addition, we derived 1% of our net revenue in each of the three and nine months ended March
31, 2010 and 2009, 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 generated substantially all of our revenue from sales to clients in the United States.
We face an additional challenge with regard to a significant client, which accounted for 18%
of our net revenue in the three months ended March 31, 2009, and 10% and 19% in the nine months
ended March 31, 2010 and 2009, respectively. This client has recently retained an advertising
agency and has reduced its purchases of leads from us. We have been addressing this challenge by
working with this client and the agency to understand their evolving
needs and strategies and understand 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 this client.
Trends Affecting our Business
Seasonality
Our results 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 the second fiscal quarters, there is lower availability of lead supply from some forms
of media during the holiday period on a cost effective basis and some of our clients often request
fewer leads due to holiday staffing. For example, in the quarters ended December 31, 2009 and 2008
net revenue from our education clients declined 10% and 13%, respectively, from the previous
quarter. In our quarters ending March 31 (our third fiscal quarter), 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.
21
Acquisitions
Beginning in fiscal year 2008, we increased our level of strategic acquisition activity to
expand 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 September 2009, we acquired Payler Corp. D/B/A HSH Associates Financial Publishers, or HSH,
for $6.0 million in cash and a $4.0 million non-interest-bearing, unsecured promissory note. In
October 2009, we acquired the website business Insure.com from Life Quotes, Inc., or Insure.com,
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.,
or Internet.com, for $16.0 million in cash and a $2.0 million non-interest-bearing, unsecured
promissory note. During the nine months ended March 31, 2010, in addition to the acquisitions of
HSH, Insure.com and Internet.com, we acquired an aggregate of 22 online publishing businesses.
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 affect 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 education client
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. Marketing budgets for clients in
our education vertical are affected 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.
In addition, the education and financial services industries are highly regulated. Changes in
regulations or government actions may negatively affect our clients businesses and marketing
practices 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 12 to our condensed consolidated financial statements.
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 client verticals: education, financial services and other
(which includes home services, B2B and medical).
DSS.
We derived approximately 1% of net revenue from our DSS business in each of the three
and nine months ended March 31, 2010 and 2009, 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.
Costs associated with software incurred in the development phase or obtained for internal use
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 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
22
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, corporate and business development, 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 facility and promissory notes issued in
connection with our acquisitions and includes imputed interest. The outstanding balance of our
credit facility and acquisition-related promissory notes was $76.8 million and $28.6 million,
respectively, as of March 31, 2010. Borrowings
under our credit facility and related interest expense could 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 as a result of the investment of the
net proceeds from the IPO.
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 March 31, 2010, we did not have net operating loss carryforwards for federal income tax
purposes and had approximately $2.8 million in California state 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 March 31, 2010, 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 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.
Critical Accounting Policies, Estimates and Judgments
In presenting our consolidated financial statements in conformity with U.S. generally
accepting accounting principles, 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. There have been no material changes to our critical
accounting policies.
We believe that the following critical accounting policies involve our more significant
judgments, assumptions and estimates:
|
|
|
Revenue recognition;
|
|
|
|
|
Goodwill;
|
|
|
|
|
Long-lived assets;
|
|
|
|
|
Internal software development costs;
|
|
|
|
|
Stock-based compensation; and
|
|
|
|
|
Income taxes.
|
For further information on our critical and other significant accounting policies, see Note 2
to our condensed consolidated financial statements and our prospectus filed pursuant to Rule 424(b)
under the Securities Act with the SEC on February 11, 2010.
23
Results of Operations
The following table sets forth our consolidated statement of operations for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
(In
thousands)
|
Net revenue
|
|
$
|
90,773
|
|
|
|
100.0
|
%
|
|
$
|
69,813
|
|
|
|
100.0
|
%
|
|
$
|
246,288
|
|
|
|
100.0
|
%
|
|
$
|
192,726
|
|
|
|
100.0
|
%
|
Cost of revenue
(1)
|
|
|
66,268
|
|
|
|
73.0
|
|
|
|
46,780
|
|
|
|
67.0
|
|
|
|
177,872
|
|
|
|
72.2
|
|
|
|
135,030
|
|
|
|
70.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
24,505
|
|
|
|
27.0
|
|
|
|
23,033
|
|
|
|
33.0
|
|
|
|
68,416
|
|
|
|
27.8
|
|
|
|
57,696
|
|
|
|
29.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
|
5,325
|
|
|
|
5.9
|
|
|
|
3,512
|
|
|
|
5.0
|
|
|
|
14,534
|
|
|
|
5.9
|
|
|
|
10,992
|
|
|
|
5.7
|
|
Sales and marketing
|
|
|
4,575
|
|
|
|
5.0
|
|
|
|
3,594
|
|
|
|
5.2
|
|
|
|
12,190
|
|
|
|
5.0
|
|
|
|
12,017
|
|
|
|
6.2
|
|
General and administrative
|
|
|
4,467
|
|
|
|
4.9
|
|
|
|
2,865
|
|
|
|
4.1
|
|
|
|
14,111
|
|
|
|
5.7
|
|
|
|
9,772
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
10,138
|
|
|
|
11.2
|
|
|
|
13,062
|
|
|
|
18.7
|
|
|
|
27,581
|
|
|
|
11.2
|
|
|
|
24,915
|
|
|
|
12.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
16
|
|
|
|
0.0
|
|
|
|
44
|
|
|
|
0.1
|
|
|
|
33
|
|
|
|
0.0
|
|
|
|
221
|
|
|
|
0.1
|
|
Interest expense
|
|
|
(1,302
|
)
|
|
|
(1.4
|
)
|
|
|
(879
|
)
|
|
|
(1.3
|
)
|
|
|
(2,931
|
)
|
|
|
(1.2
|
)
|
|
|
(2,749
|
)
|
|
|
(1.4
|
)
|
Other income (expense), net
|
|
|
(64
|
)
|
|
|
(0.1
|
)
|
|
|
(16
|
)
|
|
|
(0.0
|
)
|
|
|
221
|
|
|
|
0.1
|
|
|
|
(256
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
8,788
|
|
|
|
9.7
|
|
|
|
12,211
|
|
|
|
17.5
|
|
|
|
24,904
|
|
|
|
10.1
|
|
|
|
22,131
|
|
|
|
11.5
|
|
Provision for taxes
|
|
|
(3,538
|
)
|
|
|
(3.9
|
)
|
|
|
(5,818
|
)
|
|
|
(8.3
|
)
|
|
|
(10,731
|
)
|
|
|
(4.3
|
)
|
|
|
(10,084
|
)
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,250
|
|
|
|
5.8
|
%
|
|
$
|
6,393
|
|
|
|
9.2
|
%
|
|
$
|
14,173
|
|
|
|
5.8
|
%
|
|
$
|
12,047
|
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Cost of revenue and operating expenses include stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
653
|
|
|
|
|
|
|
$
|
470
|
|
|
|
|
|
|
$
|
2,143
|
|
|
|
|
|
|
$
|
1,477
|
|
Product development
|
|
|
686
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
1,570
|
|
|
|
|
|
|
|
494
|
|
Sales and marketing
|
|
|
1,163
|
|
|
|
|
|
|
|
455
|
|
|
|
|
|
|
|
2,504
|
|
|
|
|
|
|
|
1,352
|
|
General and administrative
|
|
|
624
|
|
|
|
|
|
|
|
373
|
|
|
|
|
|
|
|
4,002
|
|
|
|
|
|
|
|
1,061
|
|
Net Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Three-
|
|
|
Nine-
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
Month
|
|
|
Month
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
90,773
|
|
|
$
|
69,813
|
|
|
$
|
246,288
|
|
|
$
|
192,726
|
|
|
|
30
|
%
|
|
|
28
|
%
|
Cost of revenue
|
|
|
66,268
|
|
|
|
46,780
|
|
|
|
177,872
|
|
|
|
135,030
|
|
|
|
42
|
%
|
|
|
32
|
%
|
Net revenue increased $21.0 million, or 30%, for the three months ended March 31, 2010,
compared to the three months ended March 31, 2009. The majority of this increase was attributable
to an increase in revenue from our financial services client vertical and, to a lesser extent, our
other client verticals. Financial services client vertical revenue increased $17.1 million, or 70%,
for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The
increase in financial services client vertical revenue was driven by lead and click volume
increases at relatively steady prices. Our other client verticals revenue increased $4.2 million,
or 64%, for the three months ended March 31, 2010, compared to the three months ended March 31,
2009. The increase in our other client vertical revenue was primarily affected by growth in our
B2B client vertical revenue resulting from our acquisition of the website business of Internet.com,
a division of WebMediaBrands, Inc., in November 2009 and, to a lesser extent, due to growth in our
home services client vertical due to the improved economic environment. Our education client
vertical revenue remained flat, declining $0.4 million, or 1%, for the three months ended March 31,
2010, compared to the corresponding 2009 period. The slight decline was driven by a decline in
revenue from a significant client, almost entirely offset by revenue growth from other education
clients.
Net revenue increased $53.6 million, or 28%, for the nine months ended March 31, 2010,
compared to the nine months ended March 31, 2009. The majority of this increase was attributable to
an increase in revenue from our financial services client vertical and, to a lesser extent, our
education and other client verticals. Financial services client vertical revenue increased $47.5
million, or 82%, for the nine months ended March 31, 2010 compared to the nine months ended March
31, 2009. The increase in financial services client vertical revenue was driven by lead and click
volume increases at relatively steady prices. Our education client vertical revenue increased $3.0
million, or 3%, for the nine months ended March 31, 2010, compared to the corresponding 2009
period, due to lead volume increases. The increase in our education client vertical revenue was
largely offset by a decline in revenue from a significant client. Our other client verticals
revenue increased $3.1 million, or 13%, for the nine months ended March 31, 2010, compared to the
corresponding 2009 period. The increase in revenue from our other client verticals was primarily
due to the acquisition of the website business of ElderCarelink.com in April 2009 within our medical
client vertical and the acquisition of the website business of Internet.com within our B2B client
vertical in November 2009.
24
Cost of Revenue
Cost of revenue increased $19.5 million, or 42%, for the three months ended March 31,
2010, compared to the three months ended March 31, 2009. The
increase in cost of revenue was driven by a $12.8 million increase in media costs due to lead
and click volume increases and, to a lesser extent, increased personnel costs of $4.2 million due
to a 46% increase in average headcount and related compensation expense increases, as well as
increased amortization of acquisition-related intangible assets of $0.9 million resulting from
acquisitions in the previous twelve months. The increase in average headcount was affected by the acquisition of the website business of
Internet.com, as well as by a reduction in workforce in the third quarter of fiscal year 2009.
Gross margin, which is the difference between net revenue and cost of revenue as a percentage of
net revenue, declined from 33% in the three months ended March 31, 2009 to 27% in the three months
ended March 31, 2010, due to the above-mentioned increase in headcount and related compensation
expense, as well as due to a higher mix of traffic from third parties.
Cost of revenue increased $42.8 million, or 32%, for the nine months ended March 31, 2010,
compared to the nine months ended March 31, 2009. The increase in cost of revenue was driven by a
$31.9 million increase in media costs due to lead and click volume increases and, to a lesser
extent, increased personnel costs of $6.7 million due to a 7% increase in average headcount and
related compensation expense increases, as well as increased amortization of acquisition-related
intangible assets of $1.5 million resulting from acquisitions in
the previous twelve months. The increase in average headcount was affected by
the acquisition of the website business of Internet.com, as well as by a reduction in workforce in
the third quarter of fiscal year 2009. Gross margin declined from 30% in the nine months ended
March 31, 2009 to 28% in the nine months ended March 31, 2010, due to a higher mix of traffic from
third parties. Gross margin was further affected by the above-mentioned increase in headcount and
related compensation expense.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Three-
|
|
|
Nine-
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
Month
|
|
|
Month
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development
|
|
$
|
5,325
|
|
|
$
|
3,512
|
|
|
$
|
14,534
|
|
|
$
|
10,992
|
|
|
|
52
|
%
|
|
|
32
|
%
|
Sales and marketing
|
|
|
4,575
|
|
|
|
3,594
|
|
|
|
12,190
|
|
|
|
12,017
|
|
|
|
27
|
%
|
|
|
1
|
%
|
General and administrative
|
|
|
4,467
|
|
|
|
2,865
|
|
|
|
14,111
|
|
|
|
9,772
|
|
|
|
56
|
%
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
14,367
|
|
|
$
|
9,971
|
|
|
$
|
40,835
|
|
|
$
|
32,781
|
|
|
|
44
|
%
|
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Development Expenses
Product development expenses increased $1.8 million, or 52%, for the three months ended
March 31, 2010, compared to the three months ended
March 31, 2009, due to increased personnel costs.
The increase in personnel costs is attributable primarily to increased compensation expense of $1.0 million and increased stock-based compensation expense of
$510,000. The increase in compensation expense is due to a 38% increase in average headcount
affected by a reduction in workforce in the third quarter of fiscal
year 2009, additional hiring in connection with development projects, increased performance bonus expense due to the achievement of specified financial metrics for
the year-to date period and an increase in the number of individuals eligible for such
bonus.
Product development expenses increased $3.5 million, or 32%, for the nine months ended March
31, 2010, compared to the nine months ended March 31, 2009, due to increased personnel costs and,
to a lesser extent, increased professional services fees. The increase in personnel costs is
attributable to increased compensation expense of $1.7 million and increased
stock-based compensation expense of $1.1 million. The increased performance bonus expense is due
to the achievement of specified financial metrics for the year-to-date period, as well as an
increase in the number of individuals eligible for such bonus. The increase in compensation expense
is due to increased performance bonus expense due to the achievement
of specified financial metrics for the year-to-date period and an
increase in the number of individuals eligible for such bonus, as
well as a 12% increase in average headcount affected by a reduction
in workforce in the third quarter of fiscal 2009 and additional hiring in connection with development projects. Professional services fees increased $394,000 also due to these
development projects.
Sales and Marketing Expenses
Sales and marketing expenses increased $1.0 million, or 27%, for the three months ended
March 31, 2010, compared to the three months ended March 31, 2009 due to increased personnel costs.
The increase in personnel costs is due to increased stock-based compensation expense of $708,000
and, to a lesser extent, increased compensation expense of $295,000. The increase in compensation
expense is due to increased performance bonus and commission expenses associated with the
achievement of specified financial metrics for the year-to-date period, partially offset by a 17%
decline in average headcount.
Sales and marketing expenses increased $173,000, or 1%, for the nine months ended March 31,
2010, compared to the nine months ended March 31, 2009 due to
increased personnel costs. The increase in personnel costs is due to
increased stock-based compensation
expense of $1.2 million, partially offset by a decline in
compensation expense of $0.9 million. The decline in compensation
expense is due to a decrease of 21% in average headcount.
General and Administrative Expenses
General and administrative expenses increased $1.6 million, or 56%, for the three months
ended March 31, 2010, compared to the three months ended March 31, 2009, due to increased
professional service fees of $618,000, increased compensation expense of
$323,000, increased stock-based compensation expense of $251,000 and various smaller increases in
general and administrative expenses. Professional service fees increased due to our continued
investment in corporate infrastructure and related expenses associated with being a public company,
including increased legal, accounting and tax costs, investor relations, higher insurance premiums
and compliance costs. Compensation expense increased due to a 31%
increase in average headcount and increased performance bonus expense
associated with the achievement of specified financial metrics for
the year-to-date period.
General and administrative expenses increased $4.3 million, or 44%, for the nine months ended
March 31, 2010, compared to the nine months ended March 31, 2009, due to increased stock-based
compensation expense of $2.9 million, increased professional services fees of $524,000, increased
compensation expense of $620,000, direct acquisition costs of $281,000 and
various smaller increases in general and administrative expenses, partially offset by a
25
decline in legal expenses of $544,000. The increase in stock-based compensation expense was
driven by the grant of fully-vested options to certain members of our board of directors in
conjunction with an increase in the fair value our common stock. Professional services fees
increased due to our continued investment in corporate infrastructure and related expenses
associated with being a public company, including increased accounting and tax costs, investor
relations, higher insurance premiums and compliance costs. The increase in compensation expense is due to a 13% increase in average headcount due to our continued
investment in corporate infrastructure, as well as increased
performance bonus expense associated with
the achievement of specified financial metrics for the year-to-date period. The decline in legal
expense is due to the settlement of an ongoing legal matter in the fourth quarter of fiscal year
2009.
Interest and Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Three-
|
|
|
Nine-
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
Month
|
|
|
Month
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
16
|
|
|
$
|
44
|
|
|
$
|
33
|
|
|
$
|
221
|
|
|
|
(64)
|
%
|
|
|
(85
|
)%
|
Interest expense
|
|
|
(1,302
|
)
|
|
|
(879
|
)
|
|
|
(2,931
|
)
|
|
|
(2,749
|
)
|
|
|
48
|
%
|
|
|
7
|
%
|
Other income (expense), net
|
|
|
(64
|
)
|
|
|
(16
|
)
|
|
|
221
|
|
|
|
(256
|
)
|
|
|
(300)
|
%
|
|
|
186
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,350
|
)
|
|
$
|
(851
|
)
|
|
$
|
(2,677
|
)
|
|
$
|
(2,784
|
)
|
|
|
(59)
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other income (expense), net declined $499,000, or 59%, for the three months ended
March 31, 2010, compared to the three months ended March 31, 2009, due to the draw down on our
credit facility.
Interest and other income (expense), net increased $107,000, or 4%, for the nine months ended
March 31, 2010, compared to the nine months ended March 31, 2009, due to an increase in other
income (expense) of $477,000, partially offset by an increase in interest expense of $182,000 and a
decline in interest income of $188,000. Other income (expense), net increased due to a legal
settlement payment received in the second quarter of fiscal year 2010, as well as foreign exchange
gains recorded in connection with the weakening of the U.S. dollar against the Canadian dollar. The
decline in interest income is attributable to lower interest rates on investments.
The increase in interest expense is attributable to the draw down on our credit facility,
partially offset by lower non-cash imputed interest on acquisition-related notes payable.
Provision for Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Provision for taxes
|
|
$
|
3,538
|
|
|
$
|
5,818
|
|
|
$
|
10,731
|
|
|
$
|
10,084
|
|
Effective tax rate
|
|
|
40
|
%
|
|
|
48
|
%
|
|
|
43
|
%
|
|
|
46
|
%
|
The
decrease in our effective tax rate for the three and nine months ended March 31, 2010
compared to the three and nine months ended March 31, 2009, was driven by a decrease in our
deferred tax assets in fiscal 2009 due to state tax law changes and
the release of tax-related reserves in fiscal 2010.
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.
Our principal sources of liquidity as of March 31, 2010, consisted of cash and cash
equivalents of $175.3 million and our revolving credit facility which had $98.2 million available
for borrowing. We believe that our existing cash, cash equivalents, available borrowings under the
credit facility and cash generated from operations will be sufficient to satisfy our currently
anticipated cash requirements through at least the next 12 months.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $30.0 million and $25.9 million in the nine
months ended March 31, 2010 and 2009, respectively. Our net cash provided by operating activities
is primarily the result of our net income adjusted by non-cash expenses such as depreciation and
amortization, stock-based compensation expense 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 nine months ended March 31, 2010, was due to
net income of $14.2 million, non-cash depreciation, amortization and stock-based compensation
expense of $23.9 million and an increase in accounts payable and accrued liabilities of $10.0
million, partially offset by an increase in accounts receivable of $11.3 million, an increase in
prepaid expenses and other assets of $5.3 million and an increase in excess tax benefits from the
exercise of stock options of $1.8 million. The increase in accounts receivable and accrued
liabilities, which include accrued media costs, is attributable to increased revenue, as well as
timing of receipts. The increase in prepaid expenses and other
assets and accounts payable are
primarily due to timing of payments.
Net cash provided by operating activities in the nine months ended March 31, 2009 was driven
by net income of $12.0 million, non-cash depreciation, amortization and stock-based compensation
expense of $16.8 million, a net increase in accounts payable and
accrued liabilities of $1.9
million and an increase in our provision for sales returns and doubtful accounts receivable of $1.4
million, partially offset by an increase in accounts receivable of $6.5 million. The increase in
26
accounts receivable is attributable to increased revenue, as well as timing of receipts.
The net increase in accounts payable and accrued liabilities is due to timing of payments. The
increase in our provision for sales returns is due to the adverse market conditions during the
second half of fiscal year 2009.
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 $56.0 million and $18.9 million in the
nine months ended March 31, 2010 and 2009, respectively.
Cash used in investing activities in the nine months ended March 31, 2010 was primarily due to
our acquisitions of Internet.com, Insure.com and HSH. We acquired the website business of the
Internet.com division of WebMediaBrands, Inc. for an initial $16.0 million cash payment. We
acquired the website business of Insure.com from LifeQuotes, Inc., an Illinois-based online
insurance quote service and brokerage business, for an initial $15.0 million cash payment. We
acquired HSH, a New Jersey-based online company providing comprehensive mortgage rate information,
for an initial $6.0 million cash payment. Cash used in investing activities in the nine months
ended March 31, 2010 was also affected by purchases of the operations of 22 other website
publishing businesses for an aggregate of $14.6 million in cash payments, which included $4.5
million of contingent consideration related to the acquisition of Surehits in fiscal year 2008.
Cash used in investing activities in the nine months ended March 31, 2009 was affected by the
acquisition of U.S. Citizens for Fair Credit Card Terms, Inc, or CardRatings, an Arkansas-based
online marketing company, for an initial cash payment of $10.4 million, as well as purchases of the
operations of 25 other website publishing businesses for $10.1 million in cash payments. Sales and
maturities of marketable securities contributed $2.3 million to cash flows from investing
activities in the nine months ended March 31, 2009.
Capital expenditures and internal software development costs totaled $3.2 million and $2.1
million in the nine months ended December 31, 2010 and 2009, respectively.
Net Cash Provided by or Used in Financing Activities
Cash provided by financing activities was $176.2 million in the nine months ended March 31, 2010,
compared to $1.6 million of cash used in financing activities in nine months ended March 31, 2009.
Cash provided by financing activities in the nine months ended March 31, 2010 was primarily due to
proceeds from our IPO, net of issuance costs, of $138.1 million and the draw-down of our credit
facility of $43.3 million, partially offset by $7.9 million in principal payments on
acquisition-related notes payable and our term loan.
Cash used in financing activities in the nine months ended March 31, 2009 was due to $9.5
million in principal payments on acquisition-related notes payable and our term loan, as well as
$1.4 million paid to repurchase our common stock, offset by proceeds from a draw-down of our credit
facility of $8.6 million.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined under SEC rules, such as relationships with
unconsolidated entities or financial partnerships, which are often referred to as structured
finance or special purpose entities, established for the purpose of facilitating financing
transactions that are not required to be reflected on our balance sheet.
Contractual Obligations
Our contractual obligations relate primarily to borrowings under credit facilities, notes
payables, operating leases and purchase obligations.
New
Credit Facility
In January 2010, we replaced our existing credit facility with a credit facility totaling
$175.0 million. The new facility consist 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
line with an optional increase of $50.0 million. Borrowings under the credit facility are
collateralized by our 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 + 2.125% to 2.875% or Prime + 1.00% to 1.50% for the
revolving credit line and from LIBOR + 2.50% to 3.25% or Prime + 1.00% to 1.50% for the term
loan. The revolving credit line also requires a quarterly facility fee of 0.375% of the revolving credit
line. The credit facility expires in January 2014. The loan and
revolving credit line
agreement restricts our ability to raise additional debt financing and pay dividends. In addition,
we are 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 twelve 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 line exists such that the relevant debt payment could
be 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 twelve months of Adjusted EBITDA.
The credit facility also requires us to comply with other non-financial covenants. We were in
compliance with the financial ratios as of March 31, 2010 and June 30, 2009.
New Lease
As the existing lease for our corporate headquarters located at 1051 Hillsdale Boulevard,
Foster City, California expires in October 2010, we entered into a new lease agreement in February
2010 for approximately 63,998 square feet of office space located at 950 Tower Lane, Foster City,
California. The term of the lease begins on November 1, 2010 and expires on the last day of the
96th full calendar month commencing on or after November 1, 2010. The monthly base rent will be
abated for the first 12 calendar months under the lease. Thereafter the base rent will be $118,000
through the 24th calendar month of the term of the lease, after which the monthly base rent will
increase to $182,000 for the subsequent 12 months. In the following years the monthly base
rent will increase approximately 3% after each 12-month anniversary during the term of the lease,
including any extensions under our options to extend.
27
We have two options to extend the term of the lease for one additional year for each option
following the expiration date of the lease or renewal term, as applicable.
ITEM 3. 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 had a material impact on our consolidated financial condition or results of
operations for the nine months ended March 31, 2010 and the year ended June 30, 2009.
Interest Rate Risk
We invest our cash, cash equivalents and short-term investments primarily in money market
funds and short-term deposits with original maturities of less than three months. The unrestricted
cash, cash equivalents and short-term investments are held for working capital purposes and
acquisition 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 would reduce future investment income. However, a
hypothetical decline of 1% in the interest rate on our cash, cash equivalents and short-term
investments would not have a material effect on our consolidated financial condition or results of
operations.
As
of March 31, 2010, we had an outstanding credit facility with a total borrowing capacity of
$175.0 million. Interest on borrowings under the credit facility is payable quarterly at specified
margins above either LIBOR or the Prime Rate. Our exposure to interest rate risk under the credit
facility will depend on the extent to which we utilize such facility. As of March 31, 2010, we had
$76.8 million outstanding under our credit facility. A hypothetical increase of 1% in the
LIBOR-based interest rate on our credit facility would result in an increase in our quarterly
interest expense of $0.2 million, assuming consistent borrowing levels.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of
March 31, 2010. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the companys management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31,
2010, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in connection
with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred
during the period covered by this report that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
Investing in our common stock involves a high degree of risk. You should carefully
consider the risks described below and the other information in this Quarterly Report on
Form 10-Q
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If any of such risks actually occur, our business, operating results or financial condition could
be adversely affected. In those cases, the trading price of our common stock could decline and you
may lose all or part of your investment.
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:
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maintain and expand client relationships;
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sustain and increase the number of visitors to our websites;
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sustain and grow relationships with third-party website publishers and other sources of web visitors;
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manage our expanding operations and implement and improve our operational, financial and management controls;
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raise capital at attractive costs, or at all;
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acquire and integrate websites and other businesses;
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successfully expand our footprint in our existing client verticals and enter new client verticals;
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respond effectively to competition and potential negative effects of competition on profit margins;
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attract and retain qualified management, employees and independent service providers;
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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, key vendors 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
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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. Throughout the years 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 or cause us to incur
additional costs. 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. 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.
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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difficulties integrating and supporting acquired products or technologies;
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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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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 24% of our net revenue for the fiscal year 2009 and the
nine-month period ended March 31, 2010, respectively. Our clients can generally terminate their
contracts with us at any time, with limited prior notice or penalty. DeVry Inc., one of our large
clients, 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 and a half, education marketing spending has
remained relatively stable, but this stability may not continue. Marketing budgets for clients in
our education vertical are affected 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.
The United States Higher Education Act, administered by the U.S. Department of Education,
provides that to be eligible to participate in Federal student
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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 to any individual or entity engaged in recruiting or
admission activities any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments.
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. From November 2009 until January 2010, the U.S. Department of Education
engaged in a negotiated rulemaking process during which it suggested repealing all existing safe
harbors regarding incentive compensation in recruiting, including the Internet safe harbor.
Because the negotiated rulemaking did not reach consensus on proposed regulations, the Department
of Education has announced that it will be issuing proposed regulations on incentive compensation
and other matters. The statutory deadline for publication of final regulations is November 1,
2010. While we do not believe that compensation for our services constitutes incentive
compensation under the Higher Education Act, the elimination of the safe harbors 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 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.
Members of our management team have also become, or will
soon become, substantively vested in their stock option grants.
Management team members may be more likely to leave as a result of
the recent establishment of a public market for our common stock.
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 as a result of the recent 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.
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 March 31, 2010, we had an outstanding term loan with a principal balance of $35.0
million and a revolving credit line pursuant to which we can borrow up to an additional $140.0
million. As of such date, we had drawn $41.8 million from our
revolving credit line. As of March
31, 2010, we also had outstanding notes to sellers arising from numerous acquisitions in the total
principal amount of $28.6 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,
potential insolvency of one or more countries globally, high 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 specifically. Clients in particular
verticals such as financial services, particularly mortgage, credit
cards and deposits, small- and
medium-sized business customers and home services are facing very difficult conditions
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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- and
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 that our existing cash and cash equivalents, 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 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 certain equity
financings 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.
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 affect 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 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.
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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.
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 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 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
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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 to any individual or entity engaged in recruiting or admission activities any commission,
bonus, or other incentive payment based directly or indirectly on success in securing enrollments.
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. From November 2009 to January 2010,
the U.S. Department of Education engaged in a
negotiated rulemaking process in which it suggested repealing all existing safe harbors regarding
incentive compensation in recruiting, including the Internet safe harbor. Because the negotiated
rulemaking did not reach consensus on proposed regulations, the Department of Education has
announced it will be issuing proposed regulations on incentive compensation and other matters. The
statutory deadline for publication of final regulations is November 1, 2010. 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, deceptive advertising, 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 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, 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 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 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 incur significant 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 incur significant accounting, legal and other expenses that we did not
incur as a private company. We incur costs associated with our
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public company reporting requirements. We also 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 continue 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 continue 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 statements on a timely basis, which could adversely affect our ability to
operate our business and could result in regulatory action.
Risks Related to the 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 our initial public offering there was no public market for shares of our common
stock, and an active public market for our shares may not develop or be sustained. The trading
price of our common stock 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 Quarterly Report on Form 10-Q 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. 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 is influenced by the research and reports that
industry or securities analysts publish about us or our business. 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 ceases 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 have
substantial control over us and could delay or prevent a change in corporate control.
As of March 31, 2010, our directors, executive officers and holders of more than 5% of our
common stock, together with their affiliates, beneficially owned, in the aggregate the majority of
our outstanding common stock. As a result, these stockholders, acting together, 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, 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 pertaining to our public
offering, which period expires in August 2010, the trading price of our common stock could
decline significantly. Based on shares outstanding as of March 31, 2010, we have outstanding
45,059,723 shares of common stock. Of these shares, only the 10,000,000 shares of common sold in
the initial public offering stock are freely tradable, without restriction, in the public market.
The underwriters of our initial public offering 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 our common stock expire in August 2010 and based on
shares outstanding as of March 31, 2010, the remaining 35,059,723 shares will be eligible for sale
in the public market. In addition, (i) the 11,661,764 shares subject to outstanding options under
our equity incentive plans as of March 31, 2010 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.
We have broad discretion to determine how to use the funds raised in our initial public offering
and may use them in ways that may not enhance our operating results or the price of our common
stock.
Our management has broad discretion over the use of proceeds from our initial public offering,
and we could spend the proceeds from the initial public offering in ways our stockholders may not
agree with or that do not yield a favorable return. We have been using and intend to continue to
use the net proceeds from our initial public offering for working capital, capital expenditures and
other general corporate purposes. We may also use and continue to 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 our initial public 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 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 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 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
On February 4, 2010, prior to our initial public offering, we granted options to purchase
322,300 shares of our common stock under our 2008 Equity Incentive Plan with an exercise price of
$19.00. From January 1, 2010 to March 17, 2010, the date we filed a Registration Statement on
Form S-8 with regard to such plan, certain of our employees exercised options to purchase 137,126
shares of our common stock pursuant to options issued under the Companys 2008 Equity Incentive
Plan at an average purchase price of $2.08 per share for an aggregate purchase price of $284,820.
These issuances were exempt from registration under the Securities Act of 1933, as amended,
pursuant to the exemption provided in Rule 701 or Section 4(2) of the Securities Act of 1933, as
amended.
Use of Proceeds
On February 10, 2010, our registration statement on Form S-1 (File No. 333-163228) was
declared effective for our initial public offering, pursuant to which we registered the offering
and sale of 10,000,000 shares of common stock at a public offering price of $15.00 per share. The
underwriters were Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce Fenner & Smith
Incorporated and J.P. Morgan Securities Inc. The offering was completed on February 17, 2010.
38
As a result of the offering, we received net proceeds of $150.0 million, less underwriting
discounts and commissions of $10.5 million and other offering costs of approximately $2.7 million,
of which a portion remains unpaid. None of such payments was a direct or indirect payment to any of
our directors or officers or their associates, to persons owning ten percent or more of our common
stock or any of our other affiliates.
39
ITEM 6. EXHIBITS
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Exhibit
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Number
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|
Description of Document
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3.1(1)
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Amended and restated certificate of incorporation.
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3.2(1)
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Amended and restated bylaws.
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4.1(1)
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Form of common stock certificate.
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4.2(1)
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Second Amended and Restated Investor Rights Agreement, by and between the registrant, Douglas Valenti and the investors listed
on Schedule 1 thereto, dated May 28, 2003.
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10.1
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Office Lease Metro Center, dated as of February 24, 2010, between the registrant and CA-Metro Center Limited Partnership.
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21.1(1)
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List of subsidiaries.
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31.1
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Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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(1)
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Previously filed as an exhibit to the registrants registration statement on Form S-1 (File No.
333-163228) and incorporated by reference herein.
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40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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QUINSTREET, INC.
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/s/ Kenneth Hahn
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Kenneth Hahn
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Chief Financial Officer
(Principal Financial Officer and duly authorized signatory)
Date: May 12, 2010
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41
INDEX TO EXHIBITS
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Exhibit
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|
Number
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|
Description of Document
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3.1(1)
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Amended and restated certificate of incorporation.
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3.2(1)
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Amended and restated bylaws.
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4.1(1)
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Form of common stock certificate.
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4.2(1)
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Second Amended and Restated Investor Rights Agreement, by and between the registrant, Douglas Valenti and the investors listed
on Schedule 1 thereto, dated May 28, 2003.
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10.1
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Office Lease Metro Center, dated as of February 24, 2010, between the registrant and CA-Metro Center Limited Partnership.
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21.1(1)
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List of subsidiaries.
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31.1
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Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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(1)
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Previously filed as an exhibit to the registrants registration statement on Form S-1
(File No. 333-163228) and incorporated by reference herein.
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42
Exhibit 10.1
OFFICE LEASE
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
Between
CA-METRO CENTER LIMITED PARTNERSHIP, a Delaware limited partnership
as Landlord,
and
QUINSTREET, INC., a Delaware corporation
as Tenant
1
OFFICE LEASE
This Office Lease (this
Lease
), dated as of the date set forth in
Section 1.1
, is
made by and between
CA-METRO CENTER LIMITED PARTNERSHIP, a Delaware limited partnership
(
Landlord
), and
QUINSTREET, INC., a Delaware corporation
(
Tenant
). The following exhibits are
incorporated herein and made a part hereof:
Exhibit A
(Outline of Premises);
Exhibit
A-1
(Outline of Reserved Parking Space);
Exhibit B
(Work Letter);
Exhibit C
(Form of Confirmation Letter);
Exhibit D
(Rules and Regulations);
Exhibit E
(Judicial Reference);
Exhibit F
(Additional Provisions);
Exhibit G
(Asbestos
Notification);
Exhibit H
(Outdoor Patios);
Exhibit I
(Letter of Credit);
Exhibit J
(Suite 700 Offering Space);
Exhibit K
(Suite 730 Offering Space);
Exhibit L
(Suite 750 Offering Space);
Exhibit M
(Suite 770 Offering Space);
Exhibit N
(Suite 780 Offering Space);
Exhibit O
(Suite 790 Offering Space);
Exhibit P
(Suite 800 Offering Space);
Exhibit Q
(Suite 870 Offering Space); and
Exhibit R
(Suite 888 Offering Space).
1 BASIC LEASE INFORMATION
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1.1
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Date:
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February 25, 2010
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1.2
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Premises.
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1.2.1
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Building
:
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950 Tower Lane, Foster City,
California, commonly known as
Metro Center Tower.
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1.2.2
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Premises
:
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Subject to
Section 2.1.1
, 63,998
rentable square feet of space
located on the 4
th
,
5
th
, and
6
th
floors of the
Building and described as: (i)
Suite 400 consisting of
approximately 10,011 rentable
square feet; (ii) Suite 450
consisting of approximately
9,431 rentable square feet;
(iii) Suite 500 consisting of
approximately 21,958 rentable
square feet; and (iv) Suite 600
consisting of approximately
22,598 rentable square feet, the
outline and location of which is
set forth in
Exhibit A
. If the
Premises includes any floor in
its entirety, all corridors and
restroom facilities located on
such floor shall be considered
part of the Premises.
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1.2.3
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Property
:
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The Building, the parcel(s) of
land upon which it is located,
and, at Landlords discretion,
any parking facilities and other
improvements serving the
Building and the parcel(s) of
land upon which such parking
facilities and other
improvements are located.
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1.2.4
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Project
:
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The Property or, at Landlords
discretion, any project
containing the Property and any
other land, buildings or other
improvements.
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1.3
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Term
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1.3.1
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Term:
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The term of this Lease (the
Term
) shall commence on the
Commencement Date and end on the
Expiration Date (or any earlier
date on which this Lease is
terminated as provided herein).
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1.3.2
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Commencement Date
:
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November 1, 2010; provided,
however, that if Landlord fails
to deliver the Premises to
Tenant pursuant to this Lease on
or before such date as a result
of any holdover or unlawful
possession by another party or
otherwise, the Commencement Date
shall be the date on which
Landlord delivers possession of
the Premises to Tenant pursuant
to this Lease free from
occupancy by any party.
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1.3.3
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Expiration Date
:
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|
The last day of the 96th full
calendar month commencing on or
after the Commencement Date.
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1
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Monthly Base Rent
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Per Rentable Square
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Annual Base Rent
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|
Foot (rounded to
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Monthly
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Period During
|
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Per Rentable Square
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the nearest 100th
|
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Installment
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Term
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Foot
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of a dollar)
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of Base Rent
|
Commencement Date
|
|
$30.00
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|
$2.50
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$159,995.00
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through last day of
12th full calendar
month of Term
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13th through 24th
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|
$22.20
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|
$1.85
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$118,396.30
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full calendar
months of Term
|
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25th through 36th
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|
$34.20
|
|
$2.85
|
|
$182,394.30
|
full calendar
months of Term
|
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37th through 48th
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|
$35.40
|
|
$2.95
|
|
$188,794.10
|
full calendar
months of Term
|
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49th through 60th
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|
$36.60
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|
$3.05
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|
$195,193.90
|
full calendar
months of Term
|
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61st through 72nd
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|
$37.80
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|
$3.15
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$201,593.70
|
full calendar
months of Term
|
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73rd through 84th
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|
$39.00
|
|
$3.25
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$207,993.50
|
full calendar
months of Term
|
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85th full calendar
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|
$40.20
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|
$3.35
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|
$214,393.30
|
month of Term
through Expiration
Date
|
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Notwithstanding the foregoing, so long as no Default (defined in
Section 19.1
)
exists, Tenant shall be entitled to an abatement of Base Rent, in the amount of $159,995.00
per month, for the first 12 full calendar months of the Term.
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1.5
|
|
Base Year
for Expenses:
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|
Calendar year 2011.
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Base Year
for Taxes:
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|
Calendar year 2011.
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1.6
|
|
Tenants Share
:
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|
15.8793% (based upon a total of 403,029 rentable square
feet in the Building), subject to
Section 2.1.1
.
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1.7
|
|
Permitted Use
:
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General office use consistent with a first-class office
building; provided that in no event shall the Premises,
or any portion of the Premises, be used for the
operation of an eye surgery center and/or a laser eye
surgery center nor a hair salon.
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1.8.
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|
Security Deposit
:
|
|
None.
|
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|
|
|
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Prepaid Base Rent:
|
|
$118,396.30, as more particularly described in Section 3.
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1.9
|
|
Parking:
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|
211 unreserved parking spaces, at the rate of $0 per
space per month. If additional rentable square feet are
added to the Premises pursuant to
Section 9
of
Exhibit F
hereto, the number of unreserved parking spaces set
forth above shall increase by an amount equal to 3.2
unreserved parking spaces for every 1,000 rentable
square feet of such additional space.
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One (1) reserved parking space, at the rate of $0 per
space per month.
|
2
|
|
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1.10
|
|
Address of Tenant:
|
|
Before the Commencement Date
:
|
|
|
|
|
|
|
|
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|
Quinstreet, Inc.
1051 Hillsdale Blvd., 8
th
Floor
Foster City, CA 94404
Attn: CFO
With a copy to:
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|
Cooley Godward Kronish LLP
101 California Street, 5
th
Floor
San Francisco, CA 94111
Attn: Anna B. Pope, Esq.
From and after the Commencement Date
: the Premises.
|
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|
With a copy to:
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|
Cooley Godward Kronish LLP
101 California Street, 5
th
Floor
San Francisco, CA 94111
Attn: Anna B. Pope, Esq.
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1.11
|
|
Address of Landlord:
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|
Equity Office
2655 Campus Drive
Suite 100
San Mateo, California 94403
Attn: Building manager
with copies to:
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|
Equity Office
2655 Campus Drive
Suite 100
San Mateo, California 94403
Attn: Managing Counsel
and
|
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|
|
|
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|
Equity Office
Two North Riverside Plaza
Suite 2100
Chicago, IL 60606
Attn: Lease Administration
|
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|
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|
1.12
|
|
Broker(s):
|
|
Colliers Parrish International (
Tenants Broker
),
representing Tenant, and NaiBT Commercial (
Landlords
Broker
), representing Landlord.
|
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|
1.13
|
|
Building Hours and Holidays:
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|
Building Hours
mean 7:00 a.m. to 6:00
p.m.
,
Monday through Friday, excluding the
day of observation of New Years Day, Presidents Day,
Memorial Day, Independence Day, Labor Day, Thanksgiving
Day, Christmas Day, and, at Landlords discretion, any
other locally or nationally recognized holiday that is
observed by other buildings comparable to and in the
vicinity of the Building (collectively,
Holidays
).
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1.14
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|
Transfer Radius
:
|
|
None.
|
|
|
|
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1.15
|
|
Tenant Improvements
:
|
|
Defined in
Exhibit B
, if any.
|
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|
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|
1.16
|
|
Guarantor
:
|
|
As of the date hereof, there is no Guarantor.
|
|
|
|
|
|
1.17
|
|
Letter of Credit
:
|
|
$500,000.00, as more fully described in
Section 4
of
Exhibit F
.
|
3
2 PREMISES AND COMMON AREAS.
2.1
The Premises
.
2.1.1 Subject to the terms hereof, Landlord hereby leases the Premises to Tenant and Tenant
hereby leases the Premises from Landlord. Landlord and Tenant acknowledge that the rentable square
footage of the Premises is as set forth in
Section 1.2.2
and the rentable square footage of
the Building is as set forth in
Section 1.6
. At any time Landlord may deliver to Tenant a
notice substantially in the form of
Exhibit C
, as a confirmation of the information set
forth therein. Tenant shall execute and return (or, by notice to Landlord, reasonably object to)
such notice within ten (10) days after receiving it, and if Tenant fails to do so, Tenant shall be
deemed to have executed and returned it without exception.
2.1.2 Except as expressly provided in this Lease, the Premises is accepted by Tenant in its
condition and configuration existing on the date hereof, without any obligation of Landlord to
perform or pay for any alterations to the Premises, and without any representation or warranty
regarding the condition of the Premises, the Building or the Project or their suitability for
Tenants business. By taking possession of the Premises pursuant to this Lease, Tenant
acknowledges that the Premises and the Building are then in the condition and configuration
required hereunder.
2.2
Common Areas
. Tenant may use, in common with Landlord and other parties and
subject to the Rules and Regulations (defined in
Exhibit D
), any portions of the Property
that are designated from time to time by Landlord for such use (the
Common Areas
).
3 RENT
. Tenant shall pay all Base Rent and Additional Rent (defined below) (collectively,
Rent
)
to Landlord or Landlords agent, without prior notice or demand or any setoff or deduction, at the
place Landlord may designate from time to time. As used herein,
Additional Rent
means all
amounts, other than Base Rent, that Tenant is required to pay Landlord hereunder. Monthly payments
of Base Rent and monthly payments of Additional Rent for Expenses (defined in
Section
4.2.2
), Taxes (defined in
Section 4.2.3
) and parking (collectively,
Monthly Rent
)
shall be paid in advance on or before the first day of each calendar month during the Term;
provided, however, that the installment of Base Rent for the first full calendar month for which
Base Rent is payable hereunder shall be paid upon Tenants execution and delivery hereof. Except
as otherwise provided herein, all other items of Additional Rent shall be paid within 30 days after
Landlords request for payment. Rent for any partial calendar month shall be prorated based on the
actual number of days in such month. Without limiting Landlords other rights or remedies, (a) if
any installment of Rent is not received by Landlord or its designee within five (5) business days
after its due date, Tenant shall pay Landlord a late charge equal to 5% of the overdue amount; and
(b) any Rent that is not paid within 10 days after its due date shall bear interest, from its due
date until paid, at the lesser of 10% per annum or the highest rate permitted by Law (defined in
Section 5
). Tenants covenant to pay Rent is independent of every other covenant herein.
4 EXPENSES AND TAXES.
4.1
General Terms
. In addition to Base Rent, Tenant shall pay, in accordance with
Section 4.4
, for each Expense Year (defined in
Section 4.2.1
), an amount equal to
the sum of (a) Tenants Share of any amount (the
Expense Excess
) by which Expenses for such
Expense Year exceed Expenses for the Base Year, plus (b) Tenants Share of any amount (the
Tax
Excess
) by which Taxes for such Expense Year exceed Taxes for the Base Year. No decrease in
Expenses or Taxes for any Expense Year below the corresponding amount for the Base Year shall
entitle Tenant to any decrease in Base Rent or any credit against amounts due hereunder. Tenants
Share of the Expense Excess and Tenants Share of the Tax Excess for any partial Expense Year shall
be prorated based on the number of days in such Expense Year.
4.2
Definitions
. As used herein, the following terms have the following meanings:
4.2.1
Expense Year
means each calendar year, other than the Base Year, in which any portion
of the Term occurs.
4.2.2
Expenses
means all expenses, costs and amounts that Landlord pays or accrues during
the Base Year or any Expense Year because of or in connection with the ownership, management,
maintenance, security, repair, replacement, restoration or operation of the Property. Landlord
shall act in a reasonable manner in incurring Expenses. Expenses shall include (i) the cost of
supplying all utilities, the cost of operating, repairing, maintaining and renovating the utility,
telephone, mechanical, sanitary, storm-drainage, and elevator systems, and the cost of maintenance
and service contracts in connection therewith; (ii) the cost of licenses, certificates, permits and
inspections, the cost of contesting any Laws that may affect Expenses, and the costs of complying
with any governmentally-mandated transportation-management or similar program; (iii) the cost of
all insurance premiums and deductibles; (iv) the cost of landscaping and relamping; (v) the cost of
parking-area operation, repair, restoration, and maintenance; (vi) fees and other costs, including
management and/or incentive fees, consulting fees, legal fees and accounting fees, of all
contractors and consultants in connection with the management, operation, maintenance and repair of
the Property; (vii) payments under any equipment-rental agreements and the
fair rental value of any management office space; (viii) wages, salaries and other
compensation, expenses
4
and benefits, including taxes levied thereon, of all persons engaged in the
operation, maintenance and security of the Property, and costs of training, uniforms, and employee
enrichment for such persons; (ix) the costs of operation, repair, maintenance and replacement of
all systems and equipment (and components thereof) of the Property; (x) the cost of janitorial,
alarm, security and other services, replacement of wall and floor coverings, ceiling tiles and
fixtures in Common Areas, maintenance and replacement of curbs and walkways, repair to roofs and
re-roofing; (xi) rental or acquisition costs of supplies, tools, equipment, materials and personal
property used in the maintenance, operation and repair of the Property; (xii) the cost of capital
improvements or any other items that are (A) intended to effect economies in the operation or
maintenance of the Property, reduce current or future Expenses, enhance the safety or security of
the Property or its occupants, or enhance the environmental sustainability of the Propertys
operations, (B) replacements or modifications of nonstructural items located in the Base Building
(defined in
Section 7
) or Common Areas that are required to keep the Base Building or
Common Areas in good condition, or (C) required under any Law; (xiii) the cost of tenant-relation
programs reasonably established by Landlord; (xiv) payments under any existing or future reciprocal
easement agreement, transportation management agreement, cost-sharing agreement or other covenant,
condition, restriction or similar instrument affecting the Property; and (xv) any fees or other
charges (other than taxes) imposed by any governmental or quasi-governmental agency in connection
with the Parking Facility.
Notwithstanding the foregoing, Expenses shall not include: (a) capital expenditures not
described in clauses (xi) or (xii) above (in addition, any capital expenditure shall be included in
Expenses only if paid or accrued after the Base Year and shall be amortized (including actual or
imputed interest on the amortized cost) over the lesser of (i) the useful life of the applicable
item, as reasonably determined by Landlord, or (ii) the period of time that Landlord reasonably
estimates will be required for any cost savings resulting from such item to equal the cost of such
item); (b) depreciation; (c) principal payments of mortgage or other non-operating debts of
Landlord; (d) costs of repairs to the extent Landlord is reimbursed by insurance or condemnation
proceeds; (e) except as provided in clause (xiii) above, costs of leasing space in the Building,
including brokerage commissions, lease concessions, rental abatements and construction allowances
granted to specific tenants; (f) costs of selling, financing or refinancing the Building; (g)
fines, penalties or interest resulting from late payment of Taxes or Expenses; (h) organizational
expenses of creating or operating the entity that constitutes Landlord; (i) damages paid to Tenant
hereunder or to other tenants of the Building under their respective leases; (j) amounts (other
than management fees) paid to Landlords affiliates for services, but only to the extent such
amounts exceed the prices charged for such services by parties having similar skill and experience;
(k) fines or penalties resulting from any violations of Law, negligence or willful misconduct of
Landlord or its employees, agents or contractors; (l) advertising and promotional expenses; (m)
Landlords charitable and political contributions; (n) ground lease rental; (o) attorneys fees and
other expenses incurred in connection with negotiations or disputes with tenants or other occupants
of the Building; (p) costs of services or benefits made available to other tenants of the Building
but not to Tenant; (q) costs of purchasing or leasing major sculptures, paintings or other artwork
(as opposed to decorations purchased or leased by Landlord for display in the Common Areas of the
Building); (r) any expense for which Landlord has received actual reimbursement (other than from a
tenant of the Building pursuant to its lease); (s) costs of curing defects in design or original
construction of the Property; (t) costs that Landlord is entitled to recover under a warranty,
except to the extent it would not be fiscally prudent to pursue legal action to recover such costs;
(u) reserves; (v) bad debt expenses; (w) wages, salaries, fees or fringe benefits (
Labor Costs
)
paid to executive personnel or officers or partners of Landlord (provided, however, that if such
individuals provide services directly related to the operation, maintenance or ownership of the
Property that, if provided directly by a general manager or property manager or his or her general
support staff, would normally be chargeable as an operating expense of a comparable office
building, then the Labor Costs of such individuals may be included in Expenses to the extent of the
percentage of their time that is spent providing such services to the Property) or (x) costs of
cleaning up Hazardous Materials, except for routine cleanup performed as part of the ordinary
operation and maintenance of the Property (as used herein,
Hazardous Materials
means any material
now or hereafter defined or regulated by any Law or governmental authority as radioactive, toxic,
hazardous, or waste, or a chemical known to the state of California to cause cancer or reproductive
toxicity, including (1) petroleum and any of its constituents or byproducts, (2) radioactive
materials, (3) asbestos in any form or condition, and (4) materials regulated by any of the
following, as amended from time to time, and any rules promulgated thereunder: the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. §§9601 et seq.; the
Resource Conservation and Recovery Act, 42 U.S.C. §§6901, et seq.; the Toxic Substances Control
Act, 15 U.S.C. §§2601, et seq.; the Clean Water Act, 33 U.S.C. §§1251 et seq; the Clean Air Act, 42
U.S.C. §§7401 et seq.;The California Health and Safety Code; The California Water Code; The
California Labor Code; The California Public Resources Code; and The California Fish and Game
Code.).
If, in the Base Year or any Expense Year, the Property is not 100% occupied (or a service
provided by Landlord to tenants of the Building generally is not provided by Landlord to a tenant
that provides such service itself, or any tenant of the Building is entitled to free rent, rent
abatement or the like), Expenses for such year shall be determined as if the Property had been 100%
occupied (and all services provided by Landlord to tenants of the Building generally had been
provided by Landlord to all
5
tenants, and no tenant of the Building had been entitled to free rent, rent abatement or the
like) throughout such year. Notwithstanding any contrary provision hereof, Expenses for the Base
Year shall exclude (a) any market-wide cost increases resulting from extraordinary circumstances,
including Force Majeure (defined in
Section 25.2
), boycotts, strikes, conservation
surcharges, embargoes or shortages, and (b) at Landlords option, the cost of any repair or
replacement resulting from extraordinary circumstances.
Landlord shall keep its books and records relating to Expenses in accordance with generally
accepted accounting principles, consistently applied.
4.2.3
Taxes
means all federal, state, county or local governmental or municipal taxes, fees,
charges, assessments, levies, licenses or other impositions, whether general, special, ordinary or
extraordinary, that are paid or accrued during the Base Year or any Expense Year (without regard to
any different fiscal year used by such governmental or municipal authority) because of or in
connection with the ownership, leasing or operation of the Property. Taxes shall include (a) real
estate taxes; (b) general and special assessments; (c) transit taxes; (d) leasehold taxes; (e)
personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, systems,
appurtenances, furniture and other personal property used in connection with the Property; (f) any
tax on the rent, right to rent or other income from any portion of the Property or as against the
business of leasing any portion of the Property; (g) any assessment, tax, fee, levy or charge
imposed by any governmental agency, or by any non-governmental entity pursuant to any private
cost-sharing agreement, in order to fund the provision or enhancement of any fire-protection,
street-, sidewalk- or road-maintenance, refuse-removal or other service that is (or, before the
enactment of Proposition 13, was) normally provided by governmental agencies to property owners or
occupants without charge (other than through real property taxes); (h) any assessment, tax, fee,
levy or charge allocable or measured by the area of the Premises or by the Rent payable hereunder,
including any business, gross income, gross receipts, sales or excise tax with respect to the
receipt of such Rent and (i) any taxes imposed by any governmental or quasi-governmental agency in
connection with the Parking Facility. Any costs and expenses (including reasonable attorneys and
consultants fees) incurred in attempting to protest, reduce or minimize Taxes shall be included in
Taxes for the year in which they are incurred. Notwithstanding any contrary provision hereof,
Taxes shall be determined without regard to any green building credit and shall exclude (i) all
excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession
taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to
Landlords general or net income (as opposed to rents, receipts or income attributable to
operations at the Property), (ii) any Expenses, and (iii) any items required to be paid by Tenant
under
Section 4.5
.
4.3
Allocation
. Landlord, in its reasonable discretion, may equitably allocate
Expenses among office, retail or other portions or occupants of the Property. If Landlord incurs
Expenses or Taxes for the Property together with another property, Landlord, in its reasonable
discretion, shall equitably allocate such shared amounts between the Property and such other
property.
4.4
Calculation and Payment of Expense Excess and Tax Excess
.
4.4.1
Statement of Actual Expenses and Taxes; Payment by Tenant
. Landlord shall give
to Tenant, after the end of each Expense Year, a statement (the
Statement
) setting forth the
actual Expenses, Taxes, Expense Excess and Tax Excess for such Expense Year. If the amount paid by
Tenant for such Expense Year pursuant to
Section 4.4.2
is less or more than the sum of
Tenants Share of the actual Expense Excess plus Tenants Share of the actual Tax Excess (as such
amounts are set forth in such Statement), Tenant shall pay Landlord the amount of such
underpayment, or receive a credit in the amount of such overpayment, with or against the Rent then
or next due hereunder; provided, however, that if this Lease has expired or terminated and Tenant
has vacated the Premises, Tenant shall pay Landlord the amount of such underpayment, or Landlord
shall pay Tenant the amount of such overpayment (less any Rent due), within 30 days after delivery
of such Statement. Landlord shall use reasonable efforts to deliver the Statement on or before
June 1 of the calendar year immediately following the Expense Year to which it applies. Any
failure of Landlord to timely deliver the Statement for any Expense Year shall not diminish either
partys rights under this
Section 4
.
4.4.2
Statement of Estimated Expenses and Taxes
. Landlord shall give to Tenant, for
each Expense Year, a statement (the
Estimate Statement
) setting forth Landlords reasonable
estimates of the Expenses, Taxes, Expense Excess (the
Estimated Expense Excess
) and Tax Excess
(the
Estimated Tax Excess
) for such Expense Year. Upon receiving an Estimate Statement, Tenant
shall pay, with its next installment of Base Rent, an amount equal to the excess of (a) the amount
obtained by multiplying (i) the sum of Tenants Share of the Estimated Expense Excess plus Tenants
Share of the Estimated Tax Excess (as such amounts are set forth in such Estimate Statement), by
(ii) a fraction, the numerator of which is the number of months that have elapsed in the applicable
Expense Year (including the month of such payment) and the denominator of which is 12, over (b) any
amount previously paid by Tenant for such Expense Year pursuant to this
Section 4.4.2
(the
Catch-up Payment
). Notwithstanding the foregoing, if an Estimated Statement is delivered with
respect to a particular Expense Year after April 1 of such year, and the amount of the Catch-up
Payment exceeds $10,000.00, then the Tenant shall be entitled to pay such Catch-up Payment in equal
monthly installments over the shorter
6
period of (x) six (6) months and (y) the remainder of the Lease Term. Until Landlord delivers
a new Estimate Statement, Tenant shall pay monthly, with the monthly Base Rent installments, an
amount equal to one-twelfth (1/12) of the sum of Tenants Share of the Estimated Expense Excess
plus Tenants Share of the Estimated Tax Excess, as such amounts are set forth in the previous
Estimate Statement. Landlord shall use reasonable efforts to deliver an Estimate Statement for
each Expense Year on or before January 1 of such Expense Year. Any failure of Landlord to timely
deliver any Estimate Statement shall not diminish Landlords rights to receive payments and revise
any previous Estimate Statement under this
Section 4
.
4.4.3
Retroactive Adjustment of Taxes
. Notwithstanding any contrary provision hereof,
if, after Landlords delivery of any Statement, an increase or decrease in Taxes occurs for the
applicable Expense Year or for the Base Year (whether by reason of reassessment, error, or
otherwise), Taxes for such Expense Year or the Base Year, as the case may be, and the Tax Excess
for such Expense Year shall be retroactively adjusted. If, as a result of such adjustment, it is
determined that Tenant has under- or overpaid Tenants Share of such Tax Excess, Tenant shall pay
Landlord the amount of such underpayment, or receive a credit in the amount of such overpayment,
with or against the Rent then or next due hereunder; provided, however, that if this Lease has
expired or terminated and Tenant has vacated the Premises, Tenant shall pay Landlord the amount of
such underpayment, or Landlord shall pay Tenant the amount of such overpayment (less any Rent due),
within 30 days after such adjustment is made.
4.5
Charges for Which Tenant Is Directly Responsible
.
Tenant shall pay, 10 days
before delinquency, any taxes levied against Tenants equipment, furniture, fixtures and other
personal property located in or about the Premises. If any such taxes are levied against Landlord
or its property (or if the assessed value of Landlords property is increased by the inclusion
therein of a value placed upon such equipment, furniture, fixtures or other personal property of
Tenant), Landlord may pay such taxes (or such increased assessment) regardless of their (or its)
validity, in which event Tenant, upon demand, shall repay to Landlord the amount so paid. If the
Leasehold Improvements (defined in
Section 7.1
) are assessed for real property tax purposes
at a valuation higher than the valuation at which tenant improvements conforming to Landlords
building standard in other space in the Building are assessed, the Taxes levied against Landlord
or the Property by reason of such excess assessed valuation shall be deemed taxes levied against
Tenants personal property for purposes of this
Section 4.5
. Notwithstanding any contrary
provision hereof, Tenant shall pay, 10 days before delinquency, (i) any rent tax, sales tax,
service tax, transfer tax or value added tax, or any other tax respecting the rent or services
described herein or otherwise respecting this transaction or this Lease; and (ii) any taxes
assessed upon the possession, leasing, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of any portion of the Property.
4.6
Books and Records
. Within 60 days after receiving any Statement (the
Review
Notice Period
), Tenant may give Landlord notice (
Review Notice
) stating that Tenant elects to
review Landlords calculation of the Expense Excess and/or Tax Excess for the Expense Year to which
such Statement applies and identifying with reasonable specificity the records of Landlord
reasonably relating to such matters that Tenant desires to review. Within a reasonable time after
receiving a timely Review Notice (and, at Landlords option, an executed confidentiality agreement
as described below), Landlord shall deliver to Tenant, or make available for inspection at a
location reasonably designated by Landlord, copies of such records. Within 60 days after such
records are made available to Tenant (the
Objection Period
), Tenant may deliver to Landlord
notice (an
Objection Notice
) stating with reasonable specificity any objections to the Statement,
in which event Landlord and Tenant shall work together in good faith to resolve Tenants
objections. Tenant may not deliver more than one Review Notice or more than one Objection Notice
with respect to any Expense Year. If Tenant fails to give Landlord a Review Notice before the
expiration of the Review Notice Period or fails to give Landlord an Objection Notice before the
expiration of the Objection Period, Tenant shall be deemed to have approved the Statement.
Notwithstanding any contrary provision hereof, Landlord shall not be required to deliver or make
available to Tenant records relating to the Base Year, and Tenant may not object to Expenses or
Taxes for the Base Year, other than in connection with the first review for an Expense Year
performed by Tenant pursuant to this
Section 4.6
. If Tenant retains an agent to review
Landlords records, the agent must be with a CPA firm licensed to do business in the State of
California and its fees shall not be contingent, in whole or in part, upon the outcome of the
review. Tenant shall be responsible for all costs of such review; provided, however, that if
Landlord and Tenant determine that the sum of Expenses and Taxes for the Expense Year in question
was overstated by more than 5%, Landlord, within 30 days after receiving paid invoices therefor
from Tenant, shall reimburse Tenant for the reasonable amounts paid by Tenant to third parties in
connection with such review. The records and any related information obtained from Landlord shall
be treated as confidential, and as applicable only to the Premises, by Tenant, its auditors,
consultants, and any other parties reviewing the same on behalf of Tenant (collectively,
Tenants
Auditors
). Before making any records available for review, Landlord may require Tenant and
Tenants Auditors to execute a reasonable confidentiality agreement, in which event Tenant shall
cause the same to be executed and delivered to Landlord within 30 days after receiving it from
Landlord, and if Tenant fails to do so, the Objection Period shall be reduced by one day for each
day by which such execution and delivery follows the expiration of such 30-day period.
Notwithstanding any contrary provision hereof,
7
Tenant may not examine Landlords records or dispute any Statement if any Rent remains unpaid
past its due date. If, for any Expense Year, Landlord and Tenant determine that the sum of
Tenants Share of the actual Expense Excess plus Tenants Share of the actual Tax Excess is less or
more than the amount reported, Tenant shall receive a credit in the amount of its overpayment
against Rent then or next due hereunder, or pay Landlord the amount of its underpayment with the
Rent next due hereunder; provided, however, that if this Lease has expired or terminated and Tenant
has vacated the Premises, Landlord shall pay Tenant the amount of its overpayment (less any Rent
due), or Tenant shall pay Landlord the amount of its underpayment, within 30 days after such
determination.
5 USE; COMPLIANCE WITH LAWS.
5.1 Tenant shall not (a) use the Premises for any purpose other than the Permitted Use, or (b)
do anything in or about the Premises that violates any of the Rules and Regulations, damages the
reputation of the Project, interferes with, injures or unreasonably annoys other occupants of the
Building, or constitutes a nuisance. Tenant, at its expense, shall comply with all Laws relating
to (i) the operation of its business at the Project, or (ii) the use, occupancy and, other than
with respect to elements of the Base Building, the condition and configuration of the Premises.
If, in order to comply with any such Law, Tenant must obtain or deliver any permit, certificate or
other document evidencing such compliance, Tenant shall provide a copy of such document to Landlord
promptly after obtaining or delivering it. If a change to the Common Areas or any component of the
Base Building becomes required under Law because any Tenant-Insured Improvement (defined in
Section 10.2.2
) is not a type customarily required for general office use or because any
use of the Premises is not general office use, Tenant, upon demand, shall (x) at Landlords option,
either make such change at Tenants cost or pay Landlord the cost of making such change, and (y)
pay Landlord a coordination fee equal to 5% of the cost of such change . Notwithstanding the
foregoing, the aforementioned 5% coordination fee shall not be due hereunder unless both of the
following conditions are satisfied: (1) Landlord has performed the change to the Common Areas or a
component of the Base Building in accordance with the foregoing sentence, and (2) Tenant is in
Default of its obligations under this
Section 5
. As used herein,
Law
means any existing
or future law, ordinance, regulation or requirement of any governmental authority having
jurisdiction over the Project or the parties.
5.2 Landlord, at its expense (subject to
Section 4
), shall cause the Base Building and
the Common Areas to comply with all Laws (including the Americans with Disabilities Act (ADA)) to
the extent that (a) such compliance is necessary for Tenant to use the Premises for general office
use in a normal and customary manner and for Tenants employees and visitors to have reasonably
safe access to and from the Premises, or (b) Landlords failure to cause such compliance would
impose liability upon Tenant under Law; provided, however, that Landlord shall not be required to
cause such compliance to the extent non-compliance (x) is triggered by any matter that is Tenants
responsibility under
Section 5.1
or
7.3
or any other provision hereof, or (y)
arises under any provision of the ADA other than Title III thereof. Notwithstanding the foregoing,
Landlord may contest any alleged violation in good faith, including by applying for and obtaining a
waiver or deferment of compliance, asserting any defense allowed by Law, and appealing any order or
judgment to the extent permitted by Law; provided, however, that, after exhausting any rights to
contest or appeal, Landlord shall perform any work necessary to comply with any final order or
judgment.
6 SERVICES.
6.1
Standard Services
. Landlord shall provide the following services on all days
(unless otherwise stated below): (a) subject to limitations imposed by Law, customary heating,
ventilation and air conditioning (
HVAC
) in season during Building Hours; (b) electricity supplied
by the applicable public utility, stubbed to the Premises; (c) water supplied by the applicable
public utility (i) for use in lavatories and any drinking facilities located in Common Areas within
the Building, and (ii) stubbed to the Building core for use in any plumbing fixtures located in the
Premises; (d) janitorial services to the Premises, except on weekends and Holidays; and (e)
elevator service (subject to scheduling by Landlord, and payment of Landlords standard usage fee,
for any freight service). Notwithstanding the foregoing, Landlord shall waive all freight elevator
charges in connection with Tenants move into the Premises.
6.2
Above-Standard Use
. Landlord shall provide HVAC service outside Building Hours if
Tenant gives Landlord such prior notice and pays Landlord such hourly cost per zone as Landlord may
require. The parties acknowledge that, as of the date hereof, Landlords charge for HVAC service
outside Building Hours is $60.00 per hour per zone, subject to change from time to time. Tenant
shall not, without Landlords prior consent, use equipment that may affect the temperature
maintained by the air conditioning system or consume above-Building-standard amounts of any water
furnished for the Premises by Landlord pursuant to
Section 6.1
. If Tenants consumption of
electricity or water exceeds the rate Landlord reasonably deems to be standard for the Building,
Tenant shall pay Landlord, upon billing, the cost of such excess consumption, including any costs
of installing, operating and maintaining any equipment that is installed in order to supply or
measure such excess electricity or water. The
8
connected electrical load of Tenants incidental-use equipment shall not exceed the
Building-standard electrical design load, and Tenants electrical usage shall not exceed the
capacity of the feeders to the Project or the risers or wiring installation. For purposes hereof,
the Building electrical standard is 3.5 watts per usable square foot of connected load to the
Premises, exclusive of Base Building HVAC.
6.3
Interruption
. Any failure to furnish, delay in furnishing, or diminution in the
quality or quantity of any service resulting from any application of Law, failure of equipment,
performance of maintenance, repairs, improvements or alterations, utility interruption, or event of
Force Majeure (each, a
Service Interruption
) shall not render Landlord liable to Tenant,
constitute a constructive eviction, or excuse Tenant from any obligation hereunder.
Notwithstanding the foregoing, if all or a material portion of the Premises is made untenantable or
inaccessible for more than three (3) consecutive business days after notice from Tenant to Landlord
by a Service Interruption that Landlord can correct through reasonable efforts, then, as Tenants
sole remedy, Monthly Rent shall abate for the period beginning on the day immediately following
such 3-business-day period and ending on the day such Service Interruption ends, but only in
proportion to the percentage of the rentable square footage of the Premises made untenantable or
inaccessible.
7 REPAIRS AND ALTERATIONS.
7.1
Repairs
. Tenant, at its expense, shall perform all maintenance and repairs
(including replacements) to the Premises that are not Landlords express responsibility hereunder,
and shall keep the Premises in good condition and repair, reasonable wear and tear and damage due
to Casualty or Taking excepted. Tenants maintenance and repair obligations shall include (a) all
leasehold improvements in the Premises, whenever and by whomever installed or paid for, including
any Tenant Improvements, any Alterations (defined in
Section 7.2
), and any leasehold
improvements installed pursuant to any prior lease, but excluding the Base Building (the
Leasehold
Improvements
); (b) all supplemental heating, ventilation and air conditioning units, kitchens
(including hot water heaters, dishwashers, garbage disposals, insta-hot dispensers, and plumbing)
and similar facilities exclusively serving Tenant, whether located inside or outside of the
Premises, and whenever and by whomever installed or paid for; and (c) all Lines (defined in
Section 23
). Notwithstanding the foregoing, if Tenant is in Default or in the case of an
emergency, Landlord may, at its option, perform such maintenance and repairs on Tenants behalf, in
which case Tenant shall pay Landlord, upon demand, the cost of such work plus a coordination fee
equal to 5% of such cost. Landlord shall perform all maintenance and repairs to (i) the roof and
exterior walls, exterior doors and windows of the Building, (ii) the Base Building, and (iii) the
Common Areas. As used herein,
Base Building
means the structural portions of the Building,
together with all mechanical (including HVAC), electrical, plumbing and fire/life-safety systems
serving the Building in general, whether located inside or outside of the Premises.
7.2
Alterations
. Tenant may not make any improvement, alteration, addition or change
to the Premises or to any mechanical, plumbing or HVAC facilities or other systems serving the
Premises (an
Alteration
) without Landlords prior consent, which consent shall be requested by
Tenant not less than 15 days before commencement of work and shall not be unreasonably withheld by
Landlord. Notwithstanding anything to the contrary contained herein, Landlords prior consent
shall not be required for any Alteration that is decorative only (
e.g.,
carpet installation or
painting) provided that Landlord receives 10 business days prior notice. For any Alteration, (a)
Tenant, before commencing work, shall deliver to Landlord, and obtain Landlords approval of, plans
and specifications; (b) Landlord, in its discretion, may require Tenant to obtain security for
performance satisfactory to Landlord for a proposed Alteration the cost of which is anticipated to
be $50,000.00 or more; (c) Tenant shall deliver to Landlord as built drawings (in CAD format, if
requested by Landlord), completion affidavits, full and final lien waivers, and all governmental
approvals; and (d) Tenant shall pay Landlord upon demand (i) Landlords reasonable out-of-pocket
expenses incurred in reviewing the work, and (ii) a coordination fee equal to 3% of the cost of the
work; provided, however, that this clause (d) shall not apply to any Tenant Improvements.
7.3
Tenant Work
. Before commencing any repair or Alteration (
Tenant Work
), Tenant
shall deliver to Landlord, and obtain Landlords approval of, (a) names of contractors,
subcontractors, mechanics, laborers and materialmen; (b) evidence of contractors and
subcontractors insurance; and (c) any required governmental permits. Tenant shall perform all
Tenant Work (i) in a good and workmanlike manner using materials of a quality reasonably approved
by Landlord; (ii) in compliance with any approved plans and specifications, all Laws, the National
Electric Code, and Landlords construction rules and regulations; and (iii) in a manner that does
not impair the Base Building. If, as a result of any Tenant Work, Landlord becomes required under
Law to perform any inspection, give any notice, or cause such Tenant Work to be performed in any
particular manner, Tenant shall comply with such requirement and promptly provide Landlord with
reasonable documentation of such compliance. Landlords approval of Tenants plans and
specifications shall not relieve Tenant from any obligation under this
Section 7.3
. In
performing any Tenant Work, Tenant shall not use contractors, services, labor, materials or
equipment that, in Landlords reasonable judgment, would disturb labor harmony with any workforce
or trades engaged in performing other work or services at the Project.
9
8 LANDLORDS PROPERTY.
All Leasehold Improvements shall become Landlords property upon
installation and without compensation to Tenant. Notwithstanding the foregoing, unless otherwise
notified by Landlord, Tenant, at its expense and before the expiration or earlier termination
hereof, shall (a) remove any Tenant-Insured Improvements, (b) repair any resulting damage to the
Premises or Building, and (c) restore the affected portion of the Premises to its condition
existing before the installation of such Tenant-Insured Improvements. If, when it requests
Landlords approval of any Tenant Improvements or Alterations, Tenant specifically requests that
Landlord identify any such Tenant Improvements or Alterations that will not be required to be
removed pursuant to the preceding sentence, Landlord shall do so when it provides such approval.
If Tenant fails to complete any removal, repair or restoration when required under this
Section
8
, Landlord may do so at Tenants expense. Notwithstanding the foregoing, Tenant shall have
no obligation to remove any improvements existing in the Premises as of the date Tenant takes
possession thereof.
9 LIENS.
Tenant shall keep the Project free from any lien arising out of any work performed,
material furnished or obligation incurred by or on behalf of Tenant. Tenant shall remove any such
lien within 10 business days after notice from Landlord, and if Tenant fails to do so, Landlord,
without limiting its remedies, may pay the amount necessary to cause such removal, whether or not
such lien is valid. The amount so paid, together with reasonable attorneys fees and expenses,
shall be reimbursed by Tenant upon demand.
10 INDEMNIFICATION; INSURANCE.
10.1
Waiver and Indemnification
.
Tenant waives all claims against Landlord, its
Security Holders (defined in
Section 17
), Landlords managing agent(s), their (direct or
indirect) owners, and the beneficiaries, trustees, officers, directors, employees and agents of
each of the foregoing (including Landlord, the
Landlord Parties
) for (i) any damage to person or
property (or resulting from the loss of use thereof), except to the extent such damage is caused by
the negligence or willful misconduct of any Landlord Party, or (ii) any failure to prevent or
control any criminal or otherwise wrongful conduct by any third party or to apprehend any third
party who has engaged in such conduct. Tenant shall indemnify, defend, protect, and hold the
Landlord Parties harmless from any obligation, loss, claim, action, liability, penalty, damage,
cost or expense (including reasonable attorneys and consultants fees and expenses) (each, a
Claim
) that is imposed or asserted by any third party and arises from (a) occupancy of the
Premises by, or any negligence or willful misconduct of, Tenant, any party claiming by, through or
under Tenant, their (direct or indirect) owners, or any of their respective beneficiaries,
trustees, officers, directors, employees, agents, contractors, licensees or invitees, or (b) any
breach by Tenant of any representation, covenant or other term contained herein, except to the
extent such Claim arises from the negligence or willful misconduct of any Landlord Party. Landlord
shall indemnify, defend, protect, and hold Tenant, its (direct or indirect) owners, and their
respective beneficiaries, trustees, officers, directors, employees and agents (including Tenant,
the
Tenant Parties
) harmless from any Claim that is imposed or asserted by any third party and
arises from (a) any negligence or willful misconduct of any Landlord Party, or (b) any breach by
Landlord of any representation, covenant or other term contained herein, except to the extent such
Claim arises from the negligence or willful misconduct of any Tenant Party.
10.2
Tenants Insurance
.
Tenant shall maintain the following coverages in the
following amounts:
10.2.1 Commercial General Liability Insurance covering claims of bodily injury, personal
injury and property damage arising out of Tenants operations and contractual liabilities,
including coverage formerly known as broad form, on an occurrence basis, with minimum primary
limits of $1,000,000 each occurrence and $2,000,000 annual aggregate (and not more than $25,000
self-insured retention) and a minimum excess/umbrella limit of $2,000,000.
10.2.2 Property Insurance covering (i) all office furniture, business and trade fixtures,
office equipment, free-standing cabinet work, movable partitions, merchandise and all other items
of Tenants property in the Premises installed by, for, or at the expense of Tenant, and (ii) any
Leasehold Improvements installed by or for the benefit of Tenant pursuant to this Lease
(
Tenant-Insured Improvements
). Such insurance shall be written on an all risks of physical
loss or damage basis, for the full replacement cost value (subject to reasonable deductible
amounts) new without deduction for depreciation of the covered items and in amounts that meet any
co-insurance clauses of the policies of insurance, and shall include coverage for damage or other
loss caused by fire or other peril, including vandalism and malicious mischief, theft, water damage
of any type, including sprinkler leakage, bursting or stoppage of pipes, and explosion, and
providing business interruption coverage for a period of one year.
10.2.3 Workers Compensation and Employers Liability or other similar insurance to the extent
required by Law.
10.3
Form of Policies
. The minimum limits of insurance required to be carried by
Tenant shall not limit Tenants liability. Such insurance shall be issued by an insurance company
that has an A.M. Best rating of not less than A-VIII and shall be in form and content reasonably acceptable to
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Landlord. Tenants Commercial General Liability Insurance shall (a) name the Landlord Parties
(
Additional Insured Parties
) as additional insureds; and (b) be primary insurance as to all
claims thereunder and provide that any insurance carried by Landlord is excess and non-contributing
with Tenants insurance. Landlord shall be designated as a loss payee with respect to Tenants
Property Insurance on any Tenant-Insured Improvements. Tenant shall deliver to Landlord, on or
before the Commencement Date and at least 15 days before the expiration dates thereof, certificates
from Tenants insurance company on the forms currently designated ACORD 28 (Evidence of
Commercial Property Insurance) and ACORD 25-S (Certificate of Liability Insurance) or the
equivalent. Attached to the ACORD 25-S (or equivalent) there shall be an endorsement naming the
Additional Insured Parties as additional insureds which shall be binding on Tenants insurance
company. Upon Landlords request, Tenant shall deliver to Landlord, in lieu of such certificates,
copies of the policies of insurance required to be carried under
Section 10.2
showing that
the Additional Insured Parties are named as additional insureds.
10.4
Subrogation
. Each party waives, and shall cause its insurance carrier to waive,
any right of recovery against the other party, any of its (direct or indirect) owners, or any of
their respective beneficiaries, trustees, officers, directors, employees or agents for any loss of
or damage to property which loss or damage is (or, if the insurance required hereunder had been
carried, would have been) covered by insurance. For purposes of this
Section 10.4
only,
(a) any deductible with respect to a partys insurance shall be deemed covered by, and recoverable
by such party under, valid and collectable policies of insurance, and (b) any contractor retained
by Landlord to install, maintain or monitor a fire or security alarm for the Building shall be
deemed an agent of Landlord.
10.5
Additional Insurance Obligations
. Tenant shall maintain such increased amounts
of the insurance required to be carried by Tenant under this
Section 10
, and such other
types and amounts of insurance covering the Premises and Tenants operations therein, as may be
reasonably requested by Landlord (not more than once in any 36-month period), but not in excess of
the amounts and types of insurance then being required by landlords of buildings comparable to and
in the vicinity of the Building.
11 CASUALTY DAMAGE.
With reasonable promptness after discovering any damage to the Premises, or to
the Common Areas necessary for access to the Premises, resulting from any fire or other casualty (a
Casualty
), Landlord shall notify Tenant of Landlords reasonable estimate of the time required to
substantially complete repair of such damage (the
Landlord Repairs
). If, according to such
estimate, the Landlord Repairs cannot be substantially completed within 210 days after they are
commenced, either party may terminate this Lease upon 60 days notice to the other party delivered
within 10 days after Landlords delivery of such estimate. Within 90 days after discovering any
damage to the Project resulting from any Casualty, Landlord may, whether or not the Premises is
affected, terminate this Lease by notifying Tenant if (i) any Security Holder terminates any ground
lease or requires that any insurance proceeds be used to pay any mortgage debt; (ii) any damage to
Landlords property is not fully covered by Landlords insurance policies; (iii) Landlord decides
to rebuild the Building or Common Areas so that it or they will be substantially different
structurally or architecturally; (iv) the damage occurs during the last 12 months of the Term; or
(v) any owner, other than Landlord, of any damaged portion of the Project does not intend to repair
such damage. If this Lease is not terminated pursuant to this
Section 11
, Landlord shall
promptly and diligently perform the Landlord Repairs, subject to reasonable delays for insurance
adjustment and other events of Force Majeure. The Landlord Repairs shall restore the Premises and
the Common Areas necessary for access to the Premises to substantially the same condition that
existed when the Casualty occurred, except for (a) any modifications required by Law or any
Security Holder, and (b) any modifications to the Common Areas that are deemed desirable by
Landlord, are consistent with the character of the Project, and do not materially impair use of or
access to the Premises. Notwithstanding
Section 10.4
, Tenant shall assign to Landlord (or
its designee) all insurance proceeds payable to Tenant under Tenants insurance required under
Section 10.2
with respect to any Tenant-Insured Improvements, and if the estimated or
actual cost of restoring any Tenant-Insured Improvements exceeds the insurance proceeds received by
Landlord from Tenants insurance carrier, Tenant shall pay such excess to Landlord within 15 days
after Landlords demand. No Casualty and no restoration performed as required hereunder shall
render Landlord liable to Tenant, constitute a constructive eviction, or excuse Tenant from any
obligation hereunder; provided, however, that if the Premises or any Common Area necessary for
Tenants access to the Premises is damaged by a Casualty, then, during any time that, as a result
of such damage, any portion of the Premises is untenantable or inaccessible and is not occupied by
Tenant, Monthly Rent shall be abated in proportion to the rentable square footage of such portion
of the Premises. If Landlord does not substantially complete the Landlord Repairs on or
before the Outside Restoration Date (defined below), then, provided that the Casualty was not
caused by the negligence or willful misconduct of Tenant or any party claiming by, through or under
Tenant, Tenant may terminate this Lease by notifying Landlord within 15 days after the Outside
Restoration Date. As used herein,
Outside Restoration Date
means the date occurring 60 days
after the expiration of the time set forth in Landlords estimate described in the first sentence
of this Section 11; provided, however, that the Outside Restoration Date shall be extended to the
extent of (i) any delay caused by the insurance adjustment process; (ii) any other delay caused
by
events of Force Majeure (up to 90 days), and (iii) any delay caused by Tenant or any party claiming
by, through or under Tenant. Notwithstanding the foregoing, if Landlord determines in good faith
that it will be unable to substantially
11
complete the Landlord Repairs on or before the Outside Restoration Date, Landlord may cease its
performance of the Landlord Repairs and provide Tenant with notice (the
Restoration Date Extension
Notice
) stating such inability and identifying the date on which Landlord reasonably believes such
substantial completion will occur, in which event Tenant may terminate this Lease by notifying
Landlord within five (5) business days after receiving the Restoration Date Extension Notice. If
Tenant does not terminate this Lease within such 5-business day period, the Outside Restoration
Date shall be automatically amended to be the date identified in the Restoration Date Extension
Notice.
12 NONWAIVER.
No provision hereof shall be deemed waived by either party unless it is waived by
such party expressly and in writing, and no waiver of any breach of any provision hereof shall be
deemed a waiver of any subsequent breach of such provision or any other provision hereof.
Landlords acceptance of Rent shall not be deemed a waiver of any preceding breach of any provision
hereof, other than Tenants failure to pay the particular Rent so accepted, regardless of
Landlords knowledge of such preceding breach at the time of such acceptance. No acceptance of
payment of an amount less than the Rent due hereunder shall be deemed a waiver of Landlords right
to receive the full amount of Rent due, whether or not any endorsement or statement accompanying
such payment purports to effect an accord and satisfaction. No receipt of monies by Landlord from
Tenant after the giving of any notice, the commencement of any suit, the issuance of any final
judgment, or the termination hereof shall affect such notice, suit or judgment, or reinstate or
extend the Term or Tenants right of possession hereunder.
13 CONDEMNATION.
If any part of the Premises, Building or Project is taken for any public or
quasi-public use by power of eminent domain or by private purchase in lieu thereof (a
Taking
) for
more than 180 consecutive days, Landlord may terminate this Lease. If more than 25% of the
rentable square footage of the Premises is Taken, or access to the Premises is substantially
impaired as a result of a Taking, for more than 180 consecutive days, Tenant may terminate this
Lease. Any such termination shall be effective as of the date possession must be surrendered to
the authority, and the terminating party shall provide termination notice to the other party within
45 days after receiving written notice of such surrender date. Except as provided above in this
Section 13
, neither party may terminate this Lease as a result of a Taking. Tenant shall
not assert any claim for compensation because of any Taking; provided, however, that Tenant may
file a separate claim for any Taking of Tenants personal property or any fixtures that Tenant is
entitled to remove upon the expiration hereof, and for moving expenses, so long as such claim does
not diminish the award available to Landlord or any Security Holder and is payable separately to
Tenant. If this Lease is terminated pursuant to this
Section 13
, all Rent shall be
apportioned as of the date of such termination. If a Taking occurs and this Lease is not so
terminated, Monthly Rent shall be abated for the period of such Taking in proportion to the
percentage of the rentable square footage of the Premises, if any, that is subject to, or rendered
inaccessible by, such Taking.
14 ASSIGNMENT AND SUBLETTING.
14.1
Transfers
. Tenant shall not, without Landlords prior consent (except in
connection with a Permitted Transfer as defined in
Section 14.8
below), assign, mortgage,
pledge, hypothecate, encumber, permit any lien to attach to, or otherwise transfer this Lease or
any interest hereunder, permit any assignment or other transfer hereof or any interest hereunder by
operation of law, enter into any sublease or license agreement, otherwise permit the occupancy or
use of any part of the Premises by any persons other than Tenant and its employees and contractors,
or permit a Change of Control (defined in
Section 14.6
) to occur (each, a
Transfer
). If
Tenant desires Landlords consent to any Transfer, Tenant shall provide Landlord with (i) notice of
the terms of the proposed Transfer, including its proposed effective date (the
Contemplated
Effective Date
), a description of the portion of the Premises to be transferred (the
Contemplated
Transfer Space
), a calculation of the Transfer Premium (defined in
Section 14.3
), and a
copy of all existing executed and/or proposed documentation pertaining to the proposed Transfer,
and (ii) current financial statements of the proposed transferee (or, in the case of a Change of
Control, of the proposed new controlling party(ies)) certified by an officer or owner thereof and
any other information reasonably required by Landlord in order to evaluate the proposed Transfer
(collectively, the
Transfer Notice
). Within 30 days after receiving the Transfer Notice,
Landlord shall notify Tenant of (a) its consent to the proposed Transfer, (b) its refusal to
consent to the proposed Transfer, or (c) its exercise of its rights under
Section 14.4
.
Any Transfer (other than a Permitted Transfer) made without Landlords prior consent shall, at
Landlords option, be void and shall, at Landlords option, constitute a Default (defined in
Section 19
). Tenant shall pay Landlord a fee of $1,500.00 for Landlords review of any
proposed Transfer (other than a Permitted Transfer), whether or not Landlord consents to it.
14.2
Landlords Consent
. Subject to
Section 14.4
, Landlord shall not
unreasonably withhold, condition or delay its consent to any proposed Transfer. Without limiting
other reasonable grounds for withholding consent, it shall be deemed reasonable for Landlord to
withhold consent to a proposed Transfer if:
14.2.1 The proposed transferee is not a party of reasonable financial strength in light of the
responsibilities to be undertaken in connection with the Transfer on the date the Transfer Notice
is received; or
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14.2.2 The proposed transferee has a character or reputation or is engaged in a business that
is not consistent with the quality of the Building or the Project; or
14.2.3 The proposed transferee is a governmental entity or a nonprofit organization; or
14.2.4 In the case of a proposed sublease, license or other occupancy agreement, the rent or
occupancy fee charged by Tenant to the transferee during the term of such agreement, calculated
using a present value analysis, is less than 95% of the rent being quoted by Landlord or its
Affiliate (defined in
Section 14.8
) at the time of such Transfer for comparable space in
the Project for a comparable term, calculated using a present value analysis; or
14.2.5 Both (i) the proposed transferee or any of its Affiliates, on the date the Transfer
Notice is received, leases or occupies (or, at any time during the 6-month period ending on the
date the Transfer Notice is received, has negotiated with Landlord to lease) space in the Project
and (ii) on or about the Contemplated Effective Date, Landlord shall have space for lease in the
Complex that is comparable to the Contemplated Transfer Space. As used herein, the term
Complex
shall mean, collectively, the Building, the building located at 919 East Hillsdale Boulevard,
Foster City, California and the building located at 989 East Hillsdale Boulevard, Foster City,
California.
Notwithstanding any contrary provision hereof, (a) if Landlord consents to any Transfer
pursuant to this
Section 14.2
but Tenant does not enter into such Transfer within six (6)
months thereafter, such consent shall no longer apply and such Transfer shall not be permitted
unless Tenant again obtains Landlords consent thereto pursuant and subject to the terms of this
Section 14
; and (b) if Landlord unreasonably withholds its consent under this
Section
14.2
, Tenants sole remedies shall be contract damages (subject to
Section 20
) or
specific performance, and Tenant waives all other remedies, including any right to terminate this
Lease.
14.3
Transfer Premium
. If Landlord consents to a Transfer, Tenant shall pay Landlord
an amount equal to 50% of any Transfer Premium (defined below). As used herein,
Transfer Premium
means (a) in the case of an assignment, any consideration (including payment for Leasehold
Improvements) paid by the assignee for such assignment, less any reasonable and customary expenses
directly incurred by Tenant on account of such assignment, including brokerage fees, legal fees,
and Landlords review fee; (b) in the case of a sublease, license or other occupancy agreement, the
amount by which all rent and other consideration paid by the transferee to Tenant pursuant to such
agreement (less all reasonable and customary expenses directly incurred by Tenant on account of
such agreement, including brokerage fees, legal fees, construction costs and Landlords review fee)
exceeds the Monthly Rent payable by Tenant hereunder with respect to the Contemplated Transfer
Space for the term of such agreement; and (c) in the case of a Change of Control, any consideration
(including payment for Leasehold Improvements) paid by the new controlling party(ies) to the prior
controlling party(ies) solely on account of this Lease. Payment of Landlords share of the
Transfer Premium shall be made (x) in the case of an assignment or a Change of Control, within 10
days after Tenant or the prior controlling party(ies), as the case may be, receive(s) the
consideration described above, and (y) in the case of a sublease, license or other occupancy
agreement, on the first day of each month during the term of such agreement, in the amount of 50%
of the amount by which the rent and other consideration paid by the transferee to Tenant under such
agreement for such month (less all reasonable and customary expenses directly incurred by Tenant on
account of such agreement, including brokerage fees, legal fees, construction costs and Landlords
review fee, as amortized on a monthly, straight-line basis over the term of such agreement) exceeds
the Monthly Rent payable by Tenant hereunder with respect to the Contemplated Transfer Space for
such month.
14.4
Landlords Right to Recapture
. Notwithstanding any contrary provision hereof,
except in the case of a Permitted Transfer, Landlord, by notifying Tenant within 15 days after
receiving the Transfer Notice, may terminate this Lease with respect to the Contemplated Transfer
Space as of the Contemplated Effective Date; provided, however, that such termination shall not be
effective if Tenant, by notifying Landlord within five (5) days after receiving Landlords notice
of termination, withdraws the Transfer Notice. If Tenant does not withdraw the Transfer Notice,
and if the Contemplated Transfer Space is less than the entire Premises, then Base Rent, Tenants
Share, and the number of parking spaces to which Tenant is entitled under Section 1.9 shall be
deemed adjusted on the basis of the percentage of the rentable square footage of the Premises
retained by Tenant. Upon request of either party, the parties shall execute a written agreement
prepared by Landlord memorializing such termination.
14.5
Effect of Consent
. If Landlord consents to a Transfer, (i) such consent shall
not be deemed a consent to any further Transfer, (ii) Tenant shall deliver to Landlord, promptly
after execution, an executed copy of all documentation pertaining to the Transfer in form
reasonably acceptable to Landlord, and (iii) Tenant shall deliver to Landlord, upon Landlords
request, a complete statement, certified by an independent CPA or Tenants chief financial officer,
setting forth in detail the computation of any Transfer Premium. In the case of an assignment, the
assignee shall assume in writing, for Landlords benefit, all of Tenants obligations hereunder.
No Transfer, with or without Landlords consent, shall relieve Tenant or any guarantor hereof from
any liability hereunder.
13
14.6
Change of Control
. As used herein,
Change of Control
means (a) if Tenant is a
closely held professional service firm, the withdrawal or change (whether voluntary, involuntary or
by operation of law) of 50% or more of its equity owners within a 12-month period; and (b) in all
other cases, any transaction(s) resulting in the acquisition of a Controlling Interest (defined
below) by one or more parties that did not own a Controlling Interest immediately before such
transaction(s). As used herein,
Controlling Interest
means any direct or indirect equity or
beneficial ownership interest in Tenant that confers upon its holder(s) the direct or indirect
power to direct the ordinary management and policies of Tenant, whether through the ownership of
voting securities, by contract or otherwise (but not through the ownership of voting securities
listed on a recognized securities exchange).
14.7
Effect of Default
. If Tenant is in Default, Landlord is irrevocably authorized,
as Tenants agent and attorney-in-fact, to direct any transferee under any sublease, license or
other occupancy agreement to make all payments under such agreement directly to Landlord (which
Landlord shall apply towards Tenants obligations hereunder) until such Default is cured. Such
transferee shall rely upon any representation by Landlord that Tenant is in Default, whether or not
confirmed by Tenant.
14.8
Permitted Transfers
. Notwithstanding any contrary provision hereof, if Tenant is
not in Default, Tenant may, without Landlords consent pursuant to
Section 14.1
, permit a
Change of Control to occur, sublease any portion of the Premises to an Affiliate of Tenant or
assign this Lease to (a) an Affiliate of Tenant, (b) a successor to Tenant by merger or
consolidation, or (c) a successor to Tenant by purchase of all or substantially all of Tenants
assets (a
Permitted Transfer
), provided that (i) at least 10 business days before the Permitted
Transfer, Tenant notifies Landlord of such Permitted Transfer and delivers to Landlord any
documents or information reasonably requested by Landlord relating thereto (provided that if
advanced notice is prohibited by a confidentiality agreement or Law, then Tenant shall give
Landlord written notice and deliver such documents within 10 days after the effective date of the
proposed Permitted Transfer), including reasonable documentation that the Permitted Transfer
satisfies the requirements of this
Section 14.8
; (ii) in the case of a sublease, the
subtenant executes and delivers to Landlord, at least 10 business days before taking occupancy, an
agreement reasonably acceptable to Landlord which (A) requires the subtenant to assume all of
Tenants indemnity and insurance obligations hereunder with respect to the Contemplated Transfer
Space and to be bound by each provision hereof that limits the liability of any Landlord Party, and
(B) provides that if either a Landlord Party or the subtenant institutes a suit against the other
for violation of or to enforce such agreement, or in connection with any matter relating to the
sublease or the subtenants occupancy of the Contemplated Transfer Space, the prevailing party
shall be entitled to all of its costs and expenses, including reasonable attorneys fees; (iii) in
the case of an assignment pursuant to clause (a) or (c) above, the assignee executes and delivers
to Landlord, at least 10 business days before the assignment(provided that if advanced notice is
prohibited by a confidentiality agreement or Law, then Tenant shall deliver to Landlord within 10
days after the effective date of the proposed Permitted Transfer), a commercially reasonable
instrument pursuant to which the assignee assumes, for Landlords benefit, all of Tenants
obligations hereunder; (iv) in the case of an assignment pursuant to clause (b) above, (A) the
successor entity has a net worth (as determined in accordance with GAAP, but excluding intellectual
property and any other intangible assets (
Net Worth
)) immediately after the Permitted Transfer
that is not less than the Net Worth of Tenant immediately before the Permitted Transfer, and (B) if
Tenant is a closely held professional service firm, at least 50% of its equity owners existing 12
months before the Transfer are also equity owners of the successor entity; (v) except in the case
of a Change of Control, the transferee is qualified to conduct business in the State of California;
(vi) in the case of a Change of Control, (a) Tenant is not a closely held professional service
firm, and (b) the Tenants Net Worth immediately after the Change of Control is not less then its
Net Worth immediately before the change of Control; and (vii) the Permitted Transfer is made for a
good faith operating business purpose and not in order to evade the requirements of this
Section 14
. As used herein,
Affiliate
means, with respect to any party, a person or
entity that controls, is under common control with, or is controlled by such party.
15 SURRENDER.
Upon the expiration or earlier termination hereof, and subject to
Section 8
hereof,
Sections 2.2.1
and
2.2.2
of
Exhibit B
hereto and this
Section
15
, Tenant shall surrender possession of the Premises to Landlord in as good condition as when
Tenant took possession and as thereafter improved by Landlord and/or Tenant, except for reasonable
wear and tear and repairs that are Landlords express responsibility hereunder. Before such
expiration or termination, Tenant, without expense to Landlord, shall (a) remove from the Premises
all debris and rubbish and all furniture, equipment, business and trade fixtures, Lines,
free-standing cabinet work, movable partitions and other articles of personal property that are
owned or placed in the Premises by Tenant or any party claiming by, through or under Tenant (except
for any Lines not required to be removed under
Section 23
), and (b) repair all damage to
the Premises and Building resulting from such removal. If Tenant fails to timely perform such
removal and repair, Landlord may do so at Tenants expense (including storage costs). If Tenant
fails to remove such property from the Premises, or from storage, within 30 days after notice from
Landlord, any part of such property shall be deemed, at Landlords option, either (x) conveyed to
Landlord without compensation, or (y) abandoned.
16 HOLDOVER.
If Tenant fails to surrender the Premises upon the expiration or earlier termination
hereof, Tenants tenancy shall be subject to the terms and conditions hereof; provided, however,
that such
14
tenancy shall be a tenancy at sufferance only, for the entire Premises, and Tenant shall pay
Monthly Rent (on a per-month basis without reduction for any partial month) at a rate equal to 150%
of the Monthly Rent applicable during the last calendar month of the Term. Nothing in this
Section 16
shall limit Landlords rights or remedies or be deemed a consent to any
holdover. 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, Tenant shall be liable for
all resulting damages, including lost profits, incurred by Landlord.
17 SUBORDINATION; ESTOPPEL CERTIFICATES.
17.1 This Lease shall be subject and subordinate to all existing and future ground or
underlying leases, mortgages, trust deeds and other encumbrances against the Building or Project,
all renewals, extensions, modifications, consolidations and replacements thereof (each, a
Security
Agreement
), and all advances made upon the security of such mortgages or trust deeds, unless in
each case the holder of such Security Agreement (each, a
Security Holder
) requires in writing
that this Lease be superior thereto. Upon any termination or foreclosure (or any delivery of a
deed in lieu of foreclosure) of any Security Agreement, Tenant, upon request, shall attorn, without
deduction or set-off, to the Security Holder or purchaser or any successor thereto and shall
recognize such party as the lessor hereunder provided that such party agrees not to disturb
Tenants occupancy so long as Tenant timely pays the Rent and otherwise performs its obligations
hereunder. Within 10 days after request by Landlord, Tenant shall execute such further instruments
as Landlord may reasonably deem necessary to evidence the subordination or superiority of this
Lease to any Security Agreement. Tenant waives any right it may have under Law to terminate or
otherwise adversely affect this Lease or Tenants obligations hereunder upon a foreclosure. Within
10 business days after Landlords request, Tenant shall execute and deliver to Landlord a
commercially reasonable estoppel certificate in favor of such parties as Landlord may reasonably
designate, including current and prospective Security Holders and prospective purchasers.
Notwithstanding any provision herein to the contrary, if, within 10 days after the date of this
Lease, a non-disturbance, subordination and attornment agreement is not executed and delivered by
Landlord, Tenant and Mortgagee (as hereinafter defined), then Tenant shall have the right to
terminate this Lease by delivery of written notice to Landlord prior to the date that is the
earlier to occur of (i) the date upon which such non-disturbance, subordination and attornment
agreement is fully executed and delivered by such parties, and (ii) the date that is 5 days after
the expiration of such 10 day period. If Tenant timely delivers such termination notice to
Landlord, this Lease shall terminate effective as of the date such notice is delivered to Landlord;
provided, however, that (w)
Sections 8, 20, 25.1, 25.5, 25.6, 25.7, 25.9
and
Exhibit
E
shall survive such termination; (x) if Landlord has received any security deposit, other
collateral or prepaid Rent from Tenant pursuant to this Lease, Landlord shall promptly return the
same to Tenant; and (y) if Tenant has entered the Premises pursuant to this Lease for any reason,
the provisions hereof governing such entry shall, with respect to such entry, survive such
termination to the same extent as if this Lease had expired in accordance with its terms. Tenant
shall be responsible for any fee or review costs charged by the Mortgagee in connection with such
non-disturbance, subordination and attornment agreement between Landlord, Tenant and Mortgagee. As
used herein, the term
Mortgagee
shall mean the holder of a mortgage or deed of trust recorded
against the Property as of the date hereof.
17.2 Notwithstanding
Section 17.1
, Tenants agreement to subordinate this Lease to a
future Security Agreement shall not be effective unless Landlord has provided Tenant with a
commercially reasonable non-disturbance agreement from the Security Holder. For purposes of the
preceding sentence, a non-disturbance agreement shall not be deemed commercially reasonable unless
it provides that: (a) so long as no Default exists, this Lease and Tenants right to possession
hereunder shall remain in full force and effect; (b) the Security Holder shall have additional time
(not to exceed 90 days after written notice from Tenant) to cure any default of Landlord; and (c)
neither the Security Holder nor any successor in interest shall be (i) bound by (A) any payment of
Rent for more than one (1) month in advance, or (B) any amendment of this Lease made without the
written consent of the Security Holder or such successor in interest; (ii) liable for (A) the
return of any security deposit, letter of credit or other collateral, except to the extent it was
received by the Security Holder, or (B) any act, omission, representation, warranty or default of
any prior landlord (including Landlord); or (iii) subject to any offset or defense that Tenant
might have against any prior landlord (including Landlord).
18 ENTRY BY LANDLORD.
At all reasonable times and upon no less than 24 hours prior notice to
Tenant, Landlord may enter the Premises to (i) inspect the Premises; (ii) show the Premises to
prospective purchasers, current or prospective Security Holders or insurers, or, during the last 9
months of the Term (or while an uncured Default exists), prospective tenants; (iii) post notices of
non-responsibility; or (iv) perform maintenance, repairs or alterations. Notwithstanding the
foregoing, at any time and without notice to Tenant, (a) Landlord may enter the Premises to perform
required services (provided, however, that Landlord shall provide Tenant with 24 hours prior notice
(which notice, notwithstanding
Section 25.1
, may be delivered by e-mail, fax, telephone or
orally and in person) of any entry to perform a service that is not performed on a monthly or more
frequent basis) and (b) Landlord may enter the Premises in the case of an emergency to inspect the
Premises and/or to perform maintenance, repairs or alterations in connection with such emergency.
If reasonably necessary, Landlord may temporarily close any portion of the Premises to perform
maintenance, repairs or alterations. In an emergency, Landlord may use any
15
means it deems proper to open doors to and in the Premises. Except in an emergency, Landlord shall
use reasonable efforts to minimize interference with Tenants use of the Premises. Except in an
emergency, Tenant may have one of its employees accompany Landlord if Tenant makes such employee
available when Landlord enters the Premises. No entry into or closure of any portion of the
Premises pursuant to this
Section 18
shall render Landlord liable to Tenant, constitute a
constructive eviction, or excuse Tenant from any obligation hereunder.
19 DEFAULTS; REMEDIES.
19.1
Events of Default
. The occurrence of any of the following shall constitute a
Default
:
19.1.1 Any failure by Tenant to pay any Rent when due unless such failure is cured within five
(5) business days after notice; or
19.1.2 Except where a specific time period is otherwise set forth for Tenants performance
herein (in which event the failure to perform by Tenant within such time period shall be a
Default), and except as otherwise provided in this
Section 19.1
, any failure by Tenant to
observe or perform any other provision, covenant or condition hereof where such failure continues
for 30 days after notice from Landlord; provided that if such failure cannot reasonably be cured
within such 30-day period, Tenant shall not be in Default as a result of such failure if Tenant
diligently commences such cure within such period, thereafter diligently pursues such cure, and
completes such cure within 60 days after Landlords notice (or within such longer period as may be
reasonably required provided that such failure can be cured and Tenant diligently pursues such
cure); or
19.1.3 Abandonment of all or a substantial portion of the Premises by Tenant; or
19.1.4 Any failure by Tenant to observe or perform the provisions of
Sections 5
,
14
,
17
or
18
where such failure continues for more than two (2) business
days after notice from Landlord; or
19.1.5 Tenant becomes in breach of
Section 25.3
.
If Tenant breaches a particular material provision hereof (other than a provision requiring
payment of Rent) on three (3) separate occasions during any 12-month period, Tenants subsequent
breach of such provision shall be, at Landlords option, an incurable Default. The notice periods
provided herein are in lieu of, and not in addition to, any notice periods provided by Law, and
Landlord shall not be required to give any additional notice in order to be entitled to commence an
unlawful detainer proceeding.
19.2
Remedies Upon Default
. Upon any Default, Landlord shall have, in addition to any
other remedies available to Landlord at law or in equity (which shall be cumulative and
nonexclusive), the option to pursue any one or more of the following remedies (which shall be
cumulative and nonexclusive) without any notice or demand:
19.2.1 Landlord may terminate this Lease, in which event Tenant shall immediately surrender
the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any
other remedy it may have for possession or arrearages in Rent, enter upon and take possession of
the Premises and expel or remove Tenant and any other person who may be occupying the Premises or
any part thereof, without being liable for prosecution or any claim or damages therefor; and
Landlord may recover from Tenant the following:
(a) The worth at the time of award of the unpaid Rent which has been earned at the time of
such termination; plus
(b) 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 rental loss that
Tenant proves could have been reasonably avoided; plus
(c) 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 proves could have
been reasonably avoided; plus
(d) Any other amount necessary to compensate Landlord for all the detriment proximately caused
by Tenants failure to perform its obligations hereunder or which in the ordinary course of things
would be likely to result therefrom, including brokerage commissions, advertising expenses,
expenses of remodeling any portion of the Premises for a new tenant (whether for the same or a
different use), and any special concessions made to obtain a new tenant; plus
(e) At Landlords option, such other amounts in addition to or in lieu of the foregoing as may
be permitted from time to time by Law.
16
As used in
Sections 19.2.1(a)
and
(b)
, the
worth at the time of award
shall
be computed by allowing interest at a rate per annum equal to the lesser of (i) the annual Bank
Prime Loan rate cited in the Federal Reserve Statistical Release Publication G.13(415), published
on the first Tuesday of each calendar month (or such other comparable index as Landlord shall
reasonably designate if such rate ceases to be published) plus two (2) percentage points, or (ii)
the highest rate permitted by Law. As used in
Section 19.2.1(c)
, the
worth at the time of
award
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%.
19.2.2 Landlord shall have the remedy described in California Civil Code § 1951.4 (lessor may
continue lease in effect after lessees breach and abandonment and recover Rent as it becomes due,
if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly,
if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord
may, from time to time, without terminating this Lease, enforce all of its rights and remedies
hereunder, including the right to recover all Rent as it becomes due.
19.2.3 Landlord shall at all times have the rights and remedies (which shall be cumulative
with each other and cumulative and in addition to those rights and remedies available under
Sections 19.2.1
and
19.2.2
, or any Law or other provision hereof), without prior
demand or notice except as required by Law, to seek any declaratory, injunctive or other equitable
relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any
provision hereof.
19.3
Efforts to Relet
. Unless Landlord provides Tenant with express notice to the
contrary, no re-entry, repossession, repair, maintenance, change, alteration, addition, reletting,
appointment of a receiver or other action or omission by Landlord shall (a) be construed as an
election by Landlord to terminate this Lease or Tenants right to possession, or to accept a
surrender of the Premises, or (b) operate to release Tenant from any of its obligations hereunder.
Tenant waives, for Tenant and for all those claiming by, through or under Tenant, California Civil
Code § 3275 and California Code of Civil Procedure §§ 1174(c) and 1179 and any existing or future
rights to redeem or reinstate, by order or judgment of any court or by any legal process or writ,
this Lease or Tenants right of occupancy of the Premises after any termination hereof.
19.4
Landlord Default
. Landlord shall not be in default hereunder unless it fails to
begin within 30 days after notice from Tenant, or fails to pursue with reasonable diligence
thereafter, the cure of any failure of Landlord to meet its obligations hereunder. Before
exercising any remedies for a default by Landlord, Tenant shall give notice and a reasonable time
to cure to any Security Holder of which Tenant has been notified.
20 LANDLORD EXCULPATION.
Notwithstanding any contrary provision hereof, (a) the liability of the
Landlord Parties to Tenant shall be limited to an amount equal Landlords interest in the Building;
(b) Tenant shall look solely to Landlords interest in the Building for the recovery of any
judgment or award against any Landlord Party; (c) no Landlord Party shall have any personal
liability for any judgment or deficiency, and Tenant waives and releases such personal liability on
behalf of itself and all parties claiming by, through or under Tenant; and (d) no Landlord Party
shall be liable for any injury or damage to, or interference with, Tenants business, including
loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or
loss of use, or for any form of special or consequential damage.
21 INTENTIONALLY OMITTED
.
22 INTENTIONALLY OMITTED
.
23 COMMUNICATIONS AND COMPUTER LINES.
All Lines installed pursuant to this Lease shall be (a)
installed in accordance with
Section 7
; and (b) clearly marked with adhesive plastic labels
(or plastic tags attached to such Lines with wire) to show Tenants name, suite number, and the
purpose of such Lines (i) every six (6) feet outside the Premises (including the electrical room
risers and any Common Areas), and (ii) at their termination points. Landlord may designate
specific contractors for work relating to vertical Lines. Sufficient spare cables and space for
additional cables shall be maintained for other occupants, as reasonably determined by Landlord.
Unless otherwise notified by Landlord, Tenant, at its expense and before the expiration or earlier
termination hereof, shall remove all Lines and repair any resulting damage. As used herein,
Lines
means all communications or computer wires and cables serving the Premises, whenever and by
whomever installed or paid for, including any such wires or cables installed pursuant to any prior
lease.
24 PARKING.
Tenant may park in the Buildings parking facilities (the
Parking Facility
), in
common with other tenants of the Building, upon the following terms and conditions. Tenant shall
not use more than the number of unreserved and/or reserved parking spaces set forth in
Section
1.9
. The reserved parking space shall be located on the fourth level of the Parking Facility
in the location shown on
Exhibit A-1
hereto. Landlord shall not be liable to Tenant, nor
shall this Lease be affected, if any parking is impaired by (or any parking charges are imposed as
a result of) any Law. Tenant shall comply with all rules and regulations established by Landlord
from time to time for the orderly operation and use of the
17
Parking Facility, including any sticker or other identification system and the prohibition of
vehicle repair and maintenance activities in the Parking Facility. Landlord may, in its
discretion, allocate and assign parking passes among Tenant and the other tenants in the Building.
Tenants use of the Parking Facility shall be at Tenants sole risk, and Landlord shall have no
liability for any personal injury or damage to or theft of any vehicles or other property occurring
in the Parking Facility or otherwise in connection with any use of the Parking Facility by Tenant,
its employees or invitees. Landlord may alter the size, configuration, design, layout or any other
aspect of the Parking Facility, and, in connection therewith, temporarily deny or restrict access
to the Parking Facility, in each case without abatement of Rent or liability to Tenant. Landlord
may delegate its responsibilities hereunder to a parking operator, in which case (i) such parking
operator shall have all the rights of control reserved herein by Landlord, (ii) Tenant shall enter
into a parking agreement with such parking operator, and (iii) Landlord shall have no liability for
claims arising through acts or omissions of such parking operator except to the extent caused by
Landlords gross negligence or willful misconduct. Tenants parking rights under this
Section
24
are solely for the benefit of Tenants employees and such rights may not be transferred
without Landlords prior consent, except pursuant to a Transfer permitted under
Section 14
.
25 MISCELLANEOUS.
25.1
Notices
. Except as provided in Section 18, no notice, demand, statement,
designation, request, consent, approval, election or other communication given hereunder (
Notice
)
shall be binding upon either party unless (a) it is in writing; (b) it is (i) sent by certified or
registered mail, postage prepaid, return receipt requested, (ii) delivered by a nationally
recognized courier service, or (iii) delivered personally; and (c) it is sent or delivered to the
address set forth in
Section 1.10
or
1.11
, as applicable, or to such other place
(other than a P.O. box) as the recipient may from time to time designate in a Notice to the other
party. Any Notice shall be deemed received on the earlier of the date of actual delivery or the
date on which delivery is refused, or, if Tenant is the recipient and has vacated its notice
address without providing a new notice address, three (3) days after the date the Notice is
deposited in the U.S. mail or with a courier service as described above.
25.2
Force Majeure
. If either party is prevented from performing any obligation
hereunder by any strike, act of God, war, terrorist act, shortage of labor or materials,
governmental action, civil commotion or other cause beyond such partys reasonable control (
Force
Majeure
), such obligation shall be excused during (and any time period for the performance of such
obligation shall be extended by) the period of such prevention; provided, however, that this
Section 25.2
shall not (a) permit Tenant to hold over in the Premises after the expiration
or earlier termination hereof, or (b) excuse any of Tenants obligations under
Sections 3
,
4
,
5
,
21
or
25.3
or any of Tenants obligations whose
nonperformance would interfere with another occupants use, occupancy or enjoyment of its premises
or the Project.
25.3
Representations and Covenants
. Tenant represents, warrants and covenants that
(a) Tenant is, and at all times during the Term will remain, duly organized, validly existing and
in good standing under the Laws of the state of its formation and qualified to do business in the
state of California; (b) neither Tenants execution of nor its performance under this Lease will
cause Tenant to be in violation of any agreement or Law; (c) Tenant (and any guarantor hereof) has
not, and at no time during the Term will have, (i) made a general assignment for the benefit of
creditors, (ii) filed a voluntary petition in bankruptcy or suffered the filing of an involuntary
petition by creditors (in the later case which is not dismissed within 30 days), (iii) suffered the
appointment of a receiver to take possession of all or substantially all of its assets (which is
not dismissed within 30 days), (iv) suffered the attachment or other judicial seizure of all or
substantially all of its assets (which is not dismissed within 30 days), (v) admitted in writing
its inability to pay its debts as they come due, or (vi) made an offer of settlement, extension or
composition to its creditors generally; and (d) each party that (other than through the passive
ownership of interests traded on a recognized securities exchange) constitutes, owns, controls, or
is owned or controlled by Tenant, any guarantor hereof or any subtenant of Tenant is not, and at no
time during the Term will be, (i) in violation of any Laws relating to terrorism or money
laundering, or (ii) among the parties identified on any list compiled pursuant to Executive Order
13224 for the purpose of identifying suspected terrorists or on the most current list published by
the U.S. Treasury Department Office of Foreign Assets Control at its official website,
http://www.treas.gov/ofac/tllsdn.pdf or any replacement website or other replacement official
publication of such list.
25.4
Signs
. Landlord shall include Tenants name in any tenant directory located in
the main lobby on the first floor of the Building and in the parking garage elevator lobby on the
first floor of the Building. If any part of the Premises is located on a multi-tenant floor,
Landlord, at Tenants cost, shall provide identifying suite signage for Tenant comparable to that
provided by Landlord on similar floors in the Building. Tenant may not install (a) any signs
outside the Premises, or (b) without Landlords prior consent in its sole and absolute discretion,
any signs, window coverings, blinds or similar items that are visible from outside the Premises.
25.5
Attorneys Fees
. In any action or proceeding between the parties, including any
appellate or alternative dispute resolution proceeding, the prevailing party may recover from the
other party all of its costs and expenses in connection therewith, including reasonable attorneys
fees and costs. Tenant shall
18
pay all reasonable attorneys fees and other fees and costs that Landlord incurs in
interpreting or enforcing this Lease or otherwise protecting its rights hereunder (a) where Tenant
has failed to pay Rent when due, or (b) in any bankruptcy case, assignment for the benefit of
creditors, or other insolvency, liquidation or reorganization proceeding involving Tenant or this
Lease.
25.6
Brokers
. Tenant represents to Landlord that it has dealt only with Tenants
Broker as its broker in connection with this Lease. Tenant shall indemnify, defend, and hold
Landlord harmless from all claims of any brokers, other than Tenants Broker, claiming to have
represented Tenant in connection with this Lease. Landlord shall indemnify, defend and hold Tenant
harmless from all claims of any brokers, including Landlords Broker, claiming to have represented
Landlord in connection with this Lease. Tenant acknowledges that any Affiliate of Landlord that is
involved in the negotiation of this Lease is representing only Landlord, and that any assistance
rendered by any agent or employee of such Affiliate in connection with this Lease or any subsequent
amendment or other document related hereto has been or will be rendered as an accommodation to
Tenant solely in furtherance of consummating the transaction on behalf of Landlord, and not as
agent for Tenant. Landlord shall pay a brokerage commission to Tenants Broker subject to the
terms of a separate written agreement entered into between Landlord and Tenants Broker.
25.7
Governing Law; WAIVER OF TRIAL BY JURY
.
This Lease shall be construed and
enforced in accordance with the Laws of the State of California. THE PARTIES WAIVE, TO THE FULLEST
EXTENT PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY IN ANY LITIGATION ARISING OUT OF OR RELATING TO
THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANTS USE OR OCCUPANCY OF THE PREMISES,
AND/OR ANY CLAIM FOR INJURY OR DAMAGE OR ANY EMERGENCY OR STATUTORY REMEDY.
25.8
Waiver of Statutory Provisions
. Each party waives California Civil Code §§
1932(2) and 1933(4). Tenant waives (a) any rights under (i) California Civil Code §§ 1932(1),
1941, 1942, 1950.7 or any similar Law, or (ii) California Code of Civil Procedure § 1265.130; and
(b) any right to terminate this Lease under California Civil Code § 1995.310.
25.9
Interpretation
. As used herein, the capitalized term Section refers to a
section hereof unless otherwise specifically provided herein. As used in this Lease, the terms
herein, hereof, hereto and hereunder refer to this Lease and the term include and its
derivatives are not limiting. Any reference herein to any part or any portion of the Premises,
the Property or any other property shall be construed to refer to all or any part of such property.
Wherever this Lease requires Tenant to comply with any Law, rule, regulation, procedure or other
requirement or prohibits Tenant from engaging in any particular conduct, this Lease shall be deemed
also to require Tenant to cause each of its employees, licensees, invitees and subtenants, and any
other party claiming by, through or under Tenant, to comply with such requirement or refrain from
engaging in such conduct, as the case may be. Wherever this Lease requires Landlord to provide a
customary service or to act in a reasonable manner (whether in incurring an expense, establishing a
rule or regulation, providing an approval or consent, or performing any other act), this Lease
shall be deemed also to provide that whether such service is customary or such conduct is
reasonable shall be determined by reference to the practices of owners of buildings that (i) are
comparable to the Building in size, age, class, quality and location, and (ii) at Landlords
option, have been, or are being prepared to be, certified under the U.S. Green Building Councils
Leadership in Energy and Environmental Design (LEED) rating system or a similar rating system.
Tenant waives the benefit of any rule that a written agreement shall be construed against the
drafting party.
25.10
Entire Agreement
. This Lease sets forth the entire agreement between the
parties relating to the subject matter hereof and supersedes any previous agreements (none of which
shall be used to interpret this Lease). Tenant acknowledges that in entering into this Lease it
has not relied upon any representation, warranty or statement, whether oral or written, not
expressly set forth herein. This Lease can be modified only by a written agreement signed by both
parties.
25.11
Other
. Landlord, at its option, may cure any Default, without waiving any right
or remedy or releasing Tenant from any obligation, in which event Tenant shall pay Landlord, upon
demand, the cost of such cure. If any provision hereof is void or unenforceable, no other
provision shall be affected. Submission of this instrument for examination or signature by Tenant
does not constitute an option or offer to lease, and this instrument is not binding until it has
been executed and delivered by both parties. If Tenant is comprised of two or more parties, their
obligations shall be joint and several. Time is of the essence with respect to the performance of
every provision hereof in which time of performance is a factor. So long as Tenant performs its
obligations hereunder, Tenant shall have peaceful and quiet possession of the Premises against any
party claiming by, through or under Landlord, subject to the terms hereof. Landlord may transfer
its interest herein, in which event Landlord shall be released from, and Tenant shall look solely
to the transferee for the performance of, and the transferee shall be deemed to have assumed, all
of Landlords obligations arising hereunder after the date of such transfer, but only to the extent
the transferee has assumed such obligations (whether by agreement or by operation of Law), and
Tenant shall attorn to the transferee. Landlord reserves all rights not expressly granted to
Tenant hereunder, including the right to make alterations to the Project. No rights to any view or
to light or air
19
over any property are granted to Tenant hereunder. The expiration or termination hereof shall
not relieve either party of any obligation that accrued before, or continues to accrue after, such
expiration or termination.
[SIGNATURES ARE ON THE FOLLOWING PAGE]
20
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the day and date
first above written.
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LANDLORD
:
CA-METRO CENTER LIMITED PARTNERSHIP,
a Delaware limited partnership
By:
EOP Owner GP L.L.C., a Delaware limited liability company, its general
partner
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By:
|
/s/
John C. Moe
|
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Name:
|
John C. Moe
|
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Title:
|
Marketing
Managing Director
|
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TENANT
:
QUINSTREET, INC., a Delaware corporation
|
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By:
|
/s/
Daniel E. Caul
|
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Name:
|
Daniel E. Caul
|
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|
|
Title:
|
SVP
& General Counsel
|
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[chairman][president][vice-president]
|
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By:
|
/s/
Kenneth
Hahn
|
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Name:
|
Kenneth
Hahn
|
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Title:
|
CFO
|
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[secretary][assistant secretary][chief
financial officer][assistant treasurer]
|
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21
EXHIBIT A
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
OUTLINE OF PREMISES
SUITE 400
1
EXHIBIT A
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
OUTLINE OF PREMISES
SUITE 500
Exhibit A
1
EXHIBIT A
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
OUTLINE OF PREMISES
SUITE 600
Exhibit A
2
EXHIBIT A-1
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
OUTLINE OF RESERVED PARKING SPACE
See Attached
Exhibit A
3
EXHIBIT B
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
WORK LETTER
As used in this
Exhibit B
(this
Work Letter
), the following terms shall have the
following meanings:
Agreement
means the lease of which this Work Letter is a part.
Tenant
Improvements
means the initial Alterations performed by Tenant in order to prepare the Premises
for occupancy.
Tenant Improvement Work
means the construction of the Tenant Improvements,
together with any related work (including demolition) that is necessary to construct the Tenant
Improvements.
1 ALLOWANCE.
1.1
Allowance
.
Tenant shall be entitled to a one-time tenant improvement allowance
(the
Allowance
) in the amount of $4,159,870.00 to be applied toward the Allowance Items (defined
in
Section 1.2
below). Tenant shall be responsible for all costs associated with the
Tenant Improvement Work, including the costs of the Allowance Items, to the extent such costs
exceed the lesser of (a) the Allowance, or (b) the aggregate amount that Landlord is required to
disburse for such purpose pursuant to this Work Letter. Notwithstanding any contrary provision
hereof, if Tenant fails to use the entire Allowance by April 30, 2011, the unused amount shall
revert to Landlord and Tenant shall have no further rights with respect thereto.
1.2
Disbursement
.
1.2.1
Allowance Items
. Except as otherwise provided in this Work Letter, the
Allowance shall be disbursed by Landlord only for the following items (the
Allowance Items
): (a)
the fees of Tenants architect and engineers, if any, and any fees reasonably incurred by Landlord
for review of Tenants plans and specifications (the
Plans
) by Landlords third party
consultants; (b) plan-check, permit and license fees relating to performance of the Tenant
Improvement Work; (c) the cost of performing the Tenant Improvement Work, including after hours
charges, testing and inspection costs, hoisting and trash removal costs, construction management
fees, and contractors fees and general conditions; (d) the cost of any change to the base, shell
or core of the Premises or Building required by the Plans (including if such change is due to the
fact that such work is prepared on an unoccupied basis), including all direct architectural and/or
engineering fees and expenses incurred in connection therewith; (e) the cost of any change to the
Plans or Tenant Improvement Work required by Law; (f) sales and use taxes; and (g) all other costs
expended by Landlord in connection with the performance of the Tenant Improvement Work.
1.2.2
Disbursement
.
:
1.2.2.1
Monthly Disbursements
. Not more frequently than once per calendar month,
Tenant may deliver to Landlord: (i) a request for payment of Tenants contractor, approved by
Tenant, in AIA G-702/G-703 format or another format reasonably requested by Landlord, showing the
schedule of values, by trade, of percentage of completion of the Tenant Improvement Work, detailing
the portion of the work completed and the portion not completed (which approved request shall be
deemed Tenants approval and acceptance of the work and materials described therein); (ii) invoices
from all parties providing labor or materials to the Premises; (iii) executed conditional
mechanics lien releases from all parties providing labor or materials to the Premises (along with
unconditional mechanics lien releases for any prior payments made pursuant to this paragraph)
satisfying California Civil Code § 3262(d); and (iv) all other information reasonably requested by
Landlord. Within 30 days after receiving such materials, Landlord shall deliver a check to Tenant,
payable jointly to Tenant and its contractor, in the amount of the lesser of (a) the amount
requested by Tenant pursuant to the preceding sentence, less a 10% retention (the aggregate amount
of such retentions shall be referred to in this Work Letter as the
Final Retention
), or (b) the
amount of any remaining portion of the Allowance (not including the Final Retention). Landlords
payment of such amounts shall not be deemed Landlords approval or acceptance of the work or
materials described in Tenants payment request.
1.2.2.2
Final Retention
. Subject to the terms hereof, Landlord shall deliver to
Tenant a check for the Final Retention within 30 days after the latest of (a) the completion of the
Tenant Improvement Work in accordance with the approved plans and specifications; (b) Landlords
receipt of (i) paid invoices from all parties providing labor or materials to the Premises; (ii)
executed unconditional mechanics lien releases satisfying California Civil Code §§ 3262(d) and
3262(d)(4); (iii) a certificate
Exhibit B
1
from Tenants architect, in a form reasonably acceptable to Landlord, certifying that the
Tenant Improvement Work has been substantially completed; (iv) evidence that all governmental
approvals required for Tenant to legally occupy the Premises have been obtained; and (v) any other
information reasonably requested by Landlord; (c) Tenants delivery to Landlord of as built
drawings (in CAD format, if requested by Landlord); or (d) Tenants compliance with Landlords
standard close-out requirements regarding city approvals, closeout tasks, Tenants contractor,
financial close-out matters, and Tenants vendors. Landlords payment of the Final Retention shall
not be deemed Landlords approval or acceptance of the work or materials described in Tenants
payment requests.
2
MISCELLANEOUS.
2.1
Applicable Lease Provisions
.
The Tenant Improvement Work shall be subject to
Sections 7.2
and
7.3
of this Agreement.
2.2
Plans and Specifications
. Landlord shall provide Tenant with notice approving or
disapproving any proposed plans and specifications for the Tenant Improvement Work within the
Required Period (defined below) after the later of Landlords receipt thereof from Tenant or the
mutual execution and delivery of this Agreement. As used herein,
Required Period
means (a) 15
business days in the case of construction drawings, and (b) 10 business days in the case of any
other plans and specifications (including a space plan). Any such notice of disapproval shall
describe with reasonable specificity the basis of disapproval and the changes that would be
necessary to resolve Landlords objections. Provided that Tenants written request for approval of
the construction drawings for the Tenant Improvement Work (or, as the case may be, other plans and
specifications thereto), provides as follows in 14 point bold type on the top of the first page of
such written request:
LANDLORDS FAILURE TO RESPOND WITHIN [15][10] BUSINESS DAYS TO THIS
REQUEST FOR APPROVAL SHALL BE DEEMED APPROVAL OF THE ALTERATIONS PROPOSED HEREIN
, then
Landlords failure to respond within the Required Period shall be deemed Landlords consent to the
proposed Tenant Improvement Work described with reasonable particularity in such written request.
Notwithstanding the terms of
Section 8
of the Lease to the contrary, if (i) when Tenant
requests Landlords approval of any Tenant Improvement Work, Tenant specifically requests that
Landlord identify any such Tenant Improvement Work that will not be required to be removed pursuant
to
Section 8
of the Lease, (ii) Landlord fails to respond within the stated Required
Period, and (iii) such Tenant Improvement Work is deemed approved in accordance with the foregoing
sentence, then the following provisions shall apply with respect to such Tenant Improvement Work:
2.2.1 All such Tenant Improvement Work shall become Landlords property upon installation and
without compensation to Tenant; provided, however, that unless otherwise notified by Landlord,
Tenant, at its expense and before the expiration or earlier termination hereof, shall (a) remove
any such Tenant Improvement Work, (b) repair any resulting damage to the Premises or Building, and
(c) restore the affected portion of the Premises to its condition existing before the installation
of such Tenant Improvement Work. If Tenant fails to complete any removal, repair or restoration
when required under this
Section 2.2
, Landlord may do so at Tenants expense.
2.2.2 If, subsequent to Landlords deemed approval of any such Tenant Improvement Work,
Tenant specifically requests that Landlord identify any such Tenant Improvement Work that will not
be required to be removed pursuant to
Section 2.2.1
above, Landlord shall do so within 10
business days of such written request.
2.3
No Coordination Fee
.
Tenant shall not be obligated to pay Landlord a fee in
connection with Landlords review of the Tenant Improvement Work.
2.4
Tenant Default
.
Notwithstanding any contrary provision of this Agreement, if
Tenant Defaults, then (a) Landlords obligations under this Work Letter shall be excused, and
Landlord may cause Tenants contractor to cease performance of the Tenant Improvement Work, until
such default is cured, and (b) Tenant shall be responsible for any resulting delay in the
completion of the Tenant Improvement Work.
2.5
Other
.
This Work Letter shall not apply to any space other than the Premises.
Exhibit B
2
EXHIBIT C
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
CONFIRMATION LETTER
, 20___
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Re:
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Office Lease (the
Lease
) dated
, 2010 between
CA-METRO CENTER LIMITED
PARTNERSHIP, a Delaware limited partnership
(
Landlord
), and
QUINSTREET, INC., a Delaware
corporation
(
Tenant
), concerning Suites 400, 450, 500 and 600 on the 4
th
,
5
th
and 6th floor of the building located at 950 Tower Lane, Foster City,
California.
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Lease ID:
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Business Unit Number:
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Dear
:
In accordance with the Lease, Tenant accepts possession of the Premises and confirms the
following:
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1.
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The Commencement Date is
and the Expiration Date is
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2.
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The exact number of rentable square feet within the Premises is 63,998 square
feet, subject to
Section 2.1.1
of the Lease.
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3.
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Tenants Share, based upon the exact number of rentable square feet within the
Premises, is 15.8793%, subject to
Section 2.1.1
of the Lease.
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Please acknowledge the foregoing by signing all three (3) counterparts of this letter in the
space provided below and returning two (2) fully executed counterparts to my attention. Please
note that, pursuant to
Section 2.1.1
of the Lease, if Tenant fails to execute and return
(or, by notice to Landlord, reasonably object to) this letter within ten (10) days after receiving
it, Tenant shall be deemed to have executed and returned it without exception.
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Landlord:
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CA-METRO CENTER LIMITED
PARTNERSHIP, a Delaware
limited partnership
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By:
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EOP Owner GP
L.L.C., a Delaware
limited liability
company, its general
partner
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By:
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Name:
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Title:
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Exhibit C
1
Agreed and Accepted as of
, 200___.
Tenant:
QUINSTREET, INC., a Delaware corporation
Exhibit C
2
EXHIBIT D
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
RULES AND REGULATIONS
Tenant shall comply with the following rules and regulations (as modified or supplemented from
time to time, the
Rules and Regulations
). Landlord shall not be responsible to Tenant for the
nonperformance of any of the Rules and Regulations by any other tenants or occupants of the
Project. In the event of any conflict between the Rules and Regulations and the other provisions
of this Lease, the latter shall control.
1. Tenant shall not alter any lock or install any new or additional locks or bolts on any
doors or windows of the Premises without obtaining Landlords prior consent. Tenant shall bear the
cost of any lock changes or repairs required by Tenant. Two (2) keys will be furnished by Landlord
for the Premises, and any additional keys required by Tenant must be obtained from Landlord at a
reasonable cost to be established by Landlord. Upon the termination of this Lease, Tenant shall
restore to Landlord all keys of stores, offices and toilet rooms furnished to or otherwise procured
by Tenant, and if any such keys are lost, Tenant shall pay Landlord the cost of replacing them or
of changing the applicable locks if Landlord deems such changes necessary.
2. All doors opening to public corridors shall be kept closed at all times except for normal
ingress and egress to the Premises.
3. Landlord may close and keep locked all entrance and exit doors of the Building during such
hours as are customary for comparable buildings in the vicinity of the Building. Tenant shall
cause its employees, agents, contractors, invitees and licensees who use Building doors during such
hours to securely close and lock them after such use. Any person entering or leaving the Building
during such hours, or when the Building doors are otherwise locked, may be required to sign the
Building register, and access to the Building may be refused unless such person has proper
identification or has a previously arranged access pass. Landlord will furnish passes to persons
for whom Tenant requests them. Tenant shall be responsible for all persons for whom Tenant
requests passes and shall be liable to Landlord for all acts of such persons. Landlord and its
agents shall not be liable for damages for any error with regard to the admission or exclusion of
any person to or from the Building. In case of invasion, mob, riot, public excitement or other
commotion, Landlord may prevent access to the Building or the Project during the continuance
thereof by any means it deems appropriate for the safety and protection of life and property.
4. No furniture, freight or equipment shall be brought into the Building without prior notice
to Landlord. All moving activity into or out of the Building shall be scheduled with Landlord and
done only at such time and in such manner as Landlord designates. Landlord may prescribe the
weight, size and position of all safes and other heavy property brought into the Building and also
the times and manner of moving the same in and out of the Building. Safes and other heavy objects
shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to
properly distribute the weight. Landlord will not be responsible for loss of or damage to any such
safe or property. Any damage to the Building, its contents, occupants or invitees resulting from
Tenants moving or maintaining any such safe or other heavy property shall be the sole
responsibility and expense of Tenant (notwithstanding
Sections 7
and
10.4
of this
Lease).
5. No furniture, packages, supplies, equipment or merchandise will be received in the Building
or carried up or down in the elevators, except between such hours, in such specific elevator and by
such personnel as shall be designated by Landlord.
6. Employees of Landlord shall not perform any work or do anything outside their regular
duties unless under special instructions from Landlord.
7. No sign, advertisement, notice or handbill shall be exhibited, distributed, painted or
affixed by Tenant on any part of the Premises or the Building without Landlords prior consent.
Tenant shall not disturb, solicit, peddle or canvass any occupant of the Project.
8. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose
other than that for which they were constructed, and no foreign substance shall be thrown therein.
Notwithstanding
Sections 7
and
10.4
of this Lease, Tenant shall bear the expense of
any breakage, stoppage or damage resulting from any violation of this rule by Tenant or any of its
employees, agents, contractors, invitees or licensees.
Exhibit D
1
9. Tenant shall not overload the floor of the Premises, or mark, drive nails or screws or
drill into the partitions, woodwork or drywall of the Premises, or otherwise deface the Premises,
without Landlords prior consent. Tenant shall not purchase bottled water, ice, towel, linen,
maintenance or other like services from any person not approved by Landlord.
10. Except for vending machines intended for the sole use of Tenants employees and invitees,
no vending machine or machines other than fractional horsepower office machines shall be installed,
maintained or operated in the Premises without Landlords prior consent.
11. No inflammable, explosive or dangerous fluids or substances shall be used or kept by
Tenant in the Premises or about the Project, except for such 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 Laws. Without limiting the foregoing, Tenant shall not, without Landlords
prior consent, use, store, install, disturb, spill, remove, release or dispose of, within or about
the Premises or any other portion of the Project, 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. 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. No burning candle or other open flame shall
be ignited or kept by Tenant in the Premises or about the Project.
12. Tenant shall not, without Landlords prior consent, use any method of heating or air
conditioning other than that supplied by Landlord.
13. Tenant shall not use or keep any foul or noxious gas or substance in or on the Premises,
or occupy or use the Premises in a manner offensive or objectionable to Landlord or other occupants
of the Project by reason of noise, odors or vibrations, or interfere with other occupants or those
having business therein, whether by the use of any musical instrument, radio, CD player or
otherwise. Tenant shall not throw anything out of doors, windows or skylights or down passageways.
14. Tenant shall not bring into or keep within the Project, the Building or the Premises any
animals (other than service animals), birds, aquariums, or, except in areas designated by Landlord,
bicycles or other vehicles.
15. No cooking shall be done in the Premises, nor shall the Premises be used for lodging, for
living quarters or sleeping apartments, or for any improper, objectionable or immoral purposes.
Notwithstanding the foregoing, Underwriters laboratory-approved equipment and microwave ovens may
be used in the Premises for heating food and brewing coffee, tea, hot chocolate and similar
beverages for employees and invitees, provided that such use complies with all Laws.
16. The Premises shall not be used for manufacturing or for the storage of merchandise except
to the extent such storage may be incidental to the Permitted Use. Tenant shall not occupy the
Premises as an office for a messenger-type operation or dispatch office, public stenographer or
typist, or for the manufacture or sale of liquor, narcotics or tobacco, or as a medical office, a
barber or manicure shop, or an employment bureau, without Landlords prior consent. Tenant shall
not engage or pay any employees in the Premises except those actually working for Tenant in the
Premises, nor advertise for laborers giving an address at the Premises.
17. Landlord may exclude from the Project any person who, in Landlords judgment, is
intoxicated or under the influence of liquor or drugs, or who violates any of these Rules and
Regulations.
18. Tenant shall not loiter in or on the entrances, corridors, sidewalks, lobbies, courts,
halls, stairways, elevators, vestibules or any Common Areas for the purpose of smoking tobacco
products or for any other purpose, nor in any way obstruct such areas, and shall use them only as a
means of ingress and egress for the Premises.
19. Tenant shall not waste electricity, water or air conditioning, shall cooperate with
Landlord to ensure the most effective operation of the Buildings heating and air conditioning
system, and shall not attempt to adjust any controls. Tenant shall install and use in the Premises
only ENERGY STAR rated equipment, where available. Tenant shall use recycled paper in the Premises
to the extent consistent with its business requirements.
20. Tenant shall store all its trash and garbage inside the Premises. No material shall be
placed in the trash or garbage receptacles if, under Law, it may not be disposed of in the ordinary
and customary manner of disposing of trash and garbage in the vicinity of the Building. All trash,
garbage and refuse disposal shall be made only through entryways and elevators provided for such
purposes at such times as Landlord shall designate. Tenant shall comply with Landlords recycling
program, if any.
Exhibit D
2
21. Tenant shall comply with all safety, fire protection and evacuation procedures and
regulations established by Landlord or any governmental agency.
22. Any persons employed by Tenant to do janitorial work shall be subject to Landlords prior
consent and, while in the Building and outside of the Premises, shall be subject to the control and
direction of the Building manager (but not as an agent or employee of such manager or Landlord),
and Tenant shall be responsible for all acts of such persons.
23. No awning or other projection shall be attached to the outside walls of the Building
without Landlords prior consent. Other than Landlords Building-standard window coverings, no
curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with,
any window or door of the Premises. All electrical ceiling fixtures hung in the Premises or spaces
along the perimeter of the Building must be fluorescent and/or of a quality, type, design and a
warm white bulb color approved in advance by Landlord. Neither the interior nor exterior of any
windows shall be coated or otherwise sunscreened without Landlords prior consent. Tenant shall
abide by Landlords regulations concerning the opening and closing of window coverings.
24. Tenant shall not obstruct any sashes, sash doors, skylights, windows or doors that reflect
or admit light or air into the halls, passageways or other public places in the Building, nor shall
Tenant place any bottles, parcels or other articles on the windowsills.
25. Tenant must comply with requests by Landlord concerning the informing of their employees
of items of importance to the Landlord.
26. Tenant must comply with the State of California No-Smoking law set forth in California
Labor Code Section 6404.5 and with any local No-Smoking ordinance that is not superseded by such
law.
27. Tenant shall cooperate in any reasonable safety or security program developed by Landlord
or required by Law.
28. All office equipment of an electrical or mechanical nature shall be placed by Tenant in
the Premises in settings approved by Landlord, to absorb or prevent any vibration, noise or
annoyance.
29. Tenant shall not use any hand trucks except those equipped with rubber tires and rubber
side guards.
30. No auction, liquidation, fire sale, going-out-of-business or bankruptcy sale shall be
conducted in the Premises without Landlords prior consent.
31. Without Landlords prior consent, Tenant shall not use the name of the Project or Building
or use pictures or illustrations of the Project or Building in advertising or other publicity or
for any purpose other than as the address of the business to be conducted by Tenant in the
Premises.
Landlord may from time to time modify or supplement these Rules and Regulations in a manner
that, in Landlords reasonable judgment, is appropriate for the management, safety, care and
cleanliness of the Premises, the Building, the Common Areas and the Project, for the preservation
of good order therein, and for the convenience of other occupants and tenants thereof, provided
that (a) no such modification or supplement shall materially reduce Tenants rights or materially
increase Tenants obligations hereunder and (b) in the event of any conflict between such
modification or supplement and the other provisions of this Lease (other than those set forth in
this
Exhibit D
), the other provisions of the Lease shall control. Landlord may waive any
of these Rules and Regulations for the benefit of any tenant, but no such waiver shall be construed
as a waiver of such Rule and Regulation in favor of any other tenant nor prevent Landlord from
thereafter enforcing such Rule and Regulation against any tenant.
Exhibit D
3
EXHIBIT E
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
JUDICIAL REFERENCE
IF (AND ONLY IF) THE JURY-WAIVER PROVISIONS OF
SECTION 25.7
OF THIS LEASE ARE NOT
ENFORCEABLE UNDER CALIFORNIA LAW, THE PROVISIONS SET FORTH BELOW SHALL APPLY.
It is the desire and intention of the parties to agree upon a mechanism and procedure under
which controversies and disputes arising out of this Lease or related to the Premises will be
resolved in a prompt and expeditious manner. Accordingly, except with respect to actions for
unlawful or forcible detainer or with respect to the prejudgment remedy of attachment, any action,
proceeding or counterclaim brought by either party hereto against the other (and/or against its
officers, directors, employees, agents or subsidiaries or affiliated entities) on any matters
arising out of or in any way connected with this Lease, Tenants use or occupancy of the Premises
and/or any claim of injury or damage, whether sounding in contract, tort, or otherwise, shall be
heard and resolved by a referee under the provisions of the California Code of Civil Procedure,
Sections 638 645.1, inclusive (as same may be amended, or any successor statute(s) thereto) (the
Referee Sections). Any fee to initiate the judicial reference proceedings and all fees charged
and costs incurred by the referee shall be paid by the party initiating such procedure (except that
if a reporter is requested by either party, then a reporter shall be present at all proceedings
where requested and the fees of such reporter except for copies ordered by the other parties
shall be borne by the party requesting the reporter); provided however, that allocation of the
costs and fees, including any initiation fee, of such proceeding shall be ultimately determined in
accordance with
Section 25.5
of this Lease. The venue of the proceedings shall be in the
county in which the Premises is located. Within 10 days of receipt by any party of a request to
resolve any dispute or controversy pursuant to this
Exhibit E
, the parties shall agree upon
a single referee who shall try all issues, whether of fact or law, and report a finding and
judgment on such issues as required by the Referee Sections. If the parties are unable to agree
upon a referee within such 10-day period, then any party may thereafter file a lawsuit in the
county in which the Premises is located for the purpose of appointment of a referee under the
Referee Sections. If the referee is appointed by the court, the referee shall be a neutral and
impartial retired judge with substantial experience in the relevant matters to be determined, from
Jams/Endispute, Inc., ADR Services, Inc. or a similar mediation/arbitration entity approved by each
party in its sole and absolute discretion. The proposed referee may be challenged by any party for
any of the grounds listed in the Referee Sections. The referee shall have the power to decide all
issues of fact and law and report his or her decision on such issues, and to issue all recognized
remedies available at law or in equity for any cause of action that is before the referee,
including an award of attorneys fees and costs in accordance with this Lease. The referee shall
not, however, have the power to award punitive damages, nor any other damages that are not
permitted by the express provisions of this Lease, and the parties waive any right to recover any
such damages. The parties may conduct all discovery as provided in the California Code of Civil
Procedure, and the referee shall oversee discovery and may enforce all discovery orders in the same
manner as any trial court judge, with rights to regulate discovery and to issue and enforce
subpoenas, protective orders and other limitations on discovery available under California Law.
The reference proceeding shall be conducted in accordance with California Law (including the rules
of evidence), and in all regards, the referee shall follow California Law applicable at the time of
the reference proceeding. The parties shall promptly and diligently cooperate with one another and
the referee, and shall perform such acts as may be necessary to obtain a prompt and expeditious
resolution of the dispute or controversy in accordance with the terms of this
Exhibit E
.
In this regard, the parties agree that the parties and the referee shall use best efforts to ensure
that (a) discovery be conducted for a period no longer than 6 months from the date the referee is
appointed, excluding motions regarding discovery, and (b) a trial date be set within 9 months of
the date the referee is appointed. In accordance with Section 644 of the California Code of Civil
Procedure, the decision of the referee upon the whole issue must stand as the decision of the
court, and upon the filing of the statement of decision with the clerk of the court, or with the
judge if there is no clerk, judgment may be entered thereon in the same manner as if the action had
been tried by the court. Any decision of the referee and/or judgment or other order entered
thereon shall be appealable to the same extent and in the same manner that such decision, judgment,
or order would be appealable if rendered by a judge of the superior court in which venue is proper
hereunder. The referee shall in his/her statement of decision set forth his/her findings of fact
and conclusions of law. The parties intend this general reference agreement to be specifically
enforceable in accordance with the Code of Civil Procedure. Nothing in this
Exhibit E
shall prejudice the right of any party to obtain provisional relief or other equitable remedies
from a court of competent jurisdiction as shall otherwise be available under the Code of Civil
Procedure and/or applicable court rules.
Exhibit E
1
EXHIBIT F
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
ADDITIONAL PROVISIONS
1.
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Asbestos Notification
. Tenant acknowledges that it has received the asbestos
notification letter attached to this Lease as
Exhibit G
, disclosing the existence of
asbestos in the Building. Tenant agrees to comply with the California Connelly Act and
other applicable laws, including by providing copies of Landlords asbestos notification
letter to all of Tenants employees and owners, as those terms are defined in the Connelly
Act and other applicable laws.
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2.
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Provisions Required Under Existing Security Agreement.
Notwithstanding any contrary
provision of this Lease:
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A.
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Permitted Use.
No portion of the Premises shall be used for any of the
following uses: any pornographic or obscene purposes, any commercial sex
establishment, any pornographic, obscene, nude or semi-nude performances, modeling,
materials, activities, or sexual conduct or any other use that, as of the time of the
execution hereof, has or could reasonably be expected to have a material adverse effect
on the Property or its use, operation or value.
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B.
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Subordination and Attornment.
This Lease shall be subject and subordinate to
any Security Agreement (other than a ground lease) existing as of the date of mutual
execution and delivery of this Lease (as the same may be amended, restated, replaced,
supplemented or otherwise modified from time to time, an
Existing Security Agreement
)
or any loan document secured by any Existing Security Agreement (an
Existing Loan
Document
). In the event of the enforcement by any Security Holder of any remedy under
any Existing Security Agreement or Existing Loan Document, Tenant shall, at the option
of the Security Holder or of any other person or entity succeeding to the interest of
the Security Holder as a result of such enforcement, attorn to the Security Holder or
to such person or entity and shall recognize the Security Holder or such successor in
the interest as lessor under this Lease without change in the provisions thereof;
provided, however, the Security Holder or such successor in interest shall not be
liable for or bound by (i) any payment of an installment of rent or additional rent
which may have been made more than thirty (30) days before the due date of such
installment, (ii) any act or omission of or default by Landlord under this Lease (but
the Security Holder, or such successor, shall be subject to the continuing obligations
of Landlord to the extent arising from and after such succession to the extent of the
Security Holders, or such successors, interest in the Property), (iii) any credits,
claims, setoffs or defenses which Tenant may have against Landlord, or (iv) any
obligation under this Lease to maintain a fitness facility at the Property. Tenant,
upon the reasonable request by the Security Holder or such successor in interest, shall
execute and deliver an instrument or instruments confirming such attornment.
Notwithstanding the foregoing, in the event the Security Holder under any Existing
Security Agreement or Existing Loan Document shall have entered into a separate
subordination, attornment and non-disturbance agreement directly with Tenant governing
Tenants obligation to attorn to the Security Holder or such successor in interest as
lessor (including, without limitation, any such agreement executed and delivered
pursuant to
Section 17.1
of the Lease), the terms and provisions of such
agreement shall supersede the provisions of this Subsection.
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C.
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Proceeds.
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1.
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As used herein,
Proceeds
means any compensation, awards,
proceeds, damages, claims, insurance recoveries, causes or rights of action
(whenever accrued) or payments which Landlord may receive or to which Landlord
may become entitled with respect to the Property or any part thereof (other
than payments received in connection with any liability or loss of rental value
or business interruption insurance) in connection with any taking by
condemnation or eminent domain (
Taking
) of, or any casualty or other damage
or injury to, the Property or any part thereof.
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2.
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Nothing in this Lease shall be deemed to entitle Tenant to
receive and retain Proceeds except those that may be specifically awarded to it
in condemnation proceedings because of the Taking of its trade fixtures and its
leasehold
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Exhibit F
1
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improvements which have not become part of the Property and such business
loss as Tenant may specifically and separately establish. Nothing in the
preceding sentence shall be deemed to expand any right Tenant may have under
this Lease to receive or retain any Proceeds.
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3.
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Nothing in this Lease shall be deemed to prevent Proceeds from
being held and disbursed by any Security Holder under any Existing Loan
Documents in accordance with the terms of such Existing Loan Documents.
However, if, in the event of any casualty or partial Taking, any obligation of
Landlord under this Lease to restore the Premises or the Building is materially
diminished by the operation of the preceding sentence, then Landlord, as soon
as reasonably practicable after the occurrence of such casualty or partial
Taking, shall provide written notice to Tenant describing such diminution with
reasonably specificity, whereupon, unless Landlord has agreed in writing, in
its sole and absolute discretion, to waive such diminution, Tenant, by written
notice to Landlord delivered within 10 days after receipt of Landlords notice,
shall have the right to terminate this Lease effective 10 days after the date
of such termination notice.
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3.1.
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During the Term and subject to the terms of this
Section 3
, Tenant
shall have the right to use the areas shown on
Exhibit H
attached hereto for
outdoor seating (each an
Outdoor Patio
and collectively, the
Outdoor Patios
).
Tenant, at its cost, shall obtain any governmental approvals that may be necessary for
Tenant to lawfully use the Outdoor Patios, and in all other respects Tenants use of
the Outdoor Patios shall comply with all applicable Laws. The Outdoor Patios shall be
deemed part of the Premises for purposes of Tenants insurance, waiver, release and
indemnification obligations under the Lease.
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3.2.
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Tenant shall not construct any improvements in or on the Outdoor Patios;
provided, however, that, subject to applicable Law and Landlords prior written consent
(which consent shall not be unreasonably withheld, conditioned or delayed), Tenant, at
its cost, may fabricate and install signage at the entrance to the Outdoor Patios which
indicates that such Outdoor Patios are for the exclusive use of the Tenant. Tenant
shall remove any such signage upon the expiration or earlier termination of the Term
and restore such areas of the Building to the condition which existed prior to such
signage installation. Notwithstanding any provision in the Lease to the contrary,
Landlord shall have no obligation to restrict others from entering into or using the
Outdoor Patios; provided, however, that Landlord shall not enter into a license or
lease with another person or entity for such Outdoor Patios. Tenant, at its expense,
may furnish each of the Outdoor Patios with up to 4 tables, 4 chairs, and a reasonable
number of trash receptacles (collectively, the
Outdoor Furniture
); provided, however,
that the color, design, material, finish, size, location and method of installation of
the Outdoor Furniture shall be subject to Landlords prior approval in its reasonable
discretion. No item of Outdoor Furniture shall display any logo or graphics, and no
material component of any item of Outdoor Furniture shall be made of plastic. Except
as otherwise explicitly permitted in this
Section 3
, Tenant shall not place any
furniture or other personalty in or on the Outdoor Patios.
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3.3.
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Tenant, at its cost, shall (i) keep the Outdoor Patios and the Outdoor
Furniture free of trash and litter and otherwise in a sanitary, clean, neat and orderly
condition; (ii) keep the Outdoor Furniture and any Tenant installed signage in good
working order and condition; and (iii) maintain the appearance of the Outdoor Furniture
and any Tenant installed signage. Without limiting the foregoing, upon Landlords
request from time to time, Tenant, at its expense, shall refurbish or replace any item
of Outdoor Furniture or Tenant installed signage that Landlord determines in good faith
requires such refurbishment or replacement.
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3.4.
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If Tenant fails to perform any of its obligations under this
Section 3
,
beyond any applicable notice and cure period, then Landlord, at its option, may (i)
perform such obligation at Tenants cost, or (ii) by notice to Tenant, terminate
Tenants rights to use the Outdoor Patios. No reduction or termination of Tenants
rights with respect to the Outdoor Patios shall diminish or otherwise affect Tenants
obligations under the Lease.
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4.1
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General Provisions
. Concurrently with Tenants execution of this
Lease, Tenant shall deliver to Landlord, as collateral for the full performance by
Tenant of all of its
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Exhibit F
2
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obligations under this Lease and for all losses and damages Landlord may suffer as a
result of any default by Tenant under this Lease
,
including, but not limited to, any
post lease termination damages under section 1951.2 of the California Civil Code, a
standby, unconditional, irrevocable, transferable letter of credit (the
Letter
of Credit
) in either (i) the form of
Exhibit I
hereto and containing the
terms required herein or (ii) in such other standard form of the financial
institution issuing such Letter of Credit, so long as (a) such standard form contains
the terms required herein, (b) such standard form contains terms that are materially
consistent with the terms set forth in the form attached hereto as
Exhibit I
,
and (c) such standard form contains only those other terms that are acceptable to the
Landlord in its reasonable discretion. The Letter of Credit shall be in the face
amount of
$500,000.00
(the
Letter of Credit Amount
), name Landlord as
beneficiary, and permit multiple and partial draws. The Letter of Credit shall be
issued (or confirmed) by a financial institution that meets the Minimum Financial
Requirement and is otherwise reasonably acceptable to Landlord. For purposes hereof,
a financial institution shall be deemed to meet the
Minimum Financial Requirement
on a particular date if and only if, as of such date, such financial institution (x)
has not been placed into receivership by the FDIC; and (y) has a financial strength
that, in Landlords good faith judgment, is not less than that which is then
generally required by Landlord and its affiliates as a condition to accepting letters
of credit in support of new leases. 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 120 days after the scheduled expiration date of the Term, the
Extension Term (as applicable), the Second Extension Term (as applicable) or any
other renewal 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 30 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 4
, shall be irrevocable, transferable and shall
remain in effect (or be automatically renewable) through the Final LC Expiration
Date.
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4.2
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Drawings under Letter of Credit
. Landlord shall have the immediate
right to draw upon the Letter of Credit, in whole or in part, at any time and from time
to time: (i) If a Default occurs; or (ii) 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),
and Tenant fails to deliver to Landlord, at least 30 days prior to the expiration date
of the Letter of Credit then held by Landlord, a renewal or substitute Letter of Credit
that is in effect and that complies with the provisions of this
Section 4
. No
condition or term of this Lease shall be deemed to render the Letter of Credit
conditional to justify the issuer of the Letter of Credit in failing to honor a drawing
upon such Letter of Credit in a timely manner. Tenant hereby acknowledges and agrees
that Landlord is entering into this Lease in material reliance upon the ability of
Landlord to draw upon the Letter of Credit upon the occurrence of any Default by Tenant
under this Lease or upon the occurrence of any of the other events described above in
this
Section 4
.
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4.3
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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 this 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 any Default by Tenant under this
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 is not in Default of any of its obligations under this Lease,
Landlord agrees to pay to Tenant within 30 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 an involuntary petition is filed against Tenant by any
of Tenants 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 this Lease have been
resolved in such bankruptcy or reorganization case or such bankruptcy or reorganization
case has been dismissed, in each case pursuant to a final court order not subject to
appeal or any stay pending appeal.
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Exhibit F
3
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4.4
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Additional Covenants of Tenant
. If, as result of any proper
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 4
, and if Tenant fails to
comply with the foregoing, notwithstanding anything to the contrary contained in this
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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4.5
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Transfer of Letter of Credit
. Landlord may, at any time and without
notice to Tenant and without first obtaining Tenants consent thereto, transfer all or
any portion of its interest in and to the Letter of Credit to another party, person or
entity, including Landlords mortgagee and/or to have the Letter of Credit reissued in
the name of Landlords Mortgagee. If Landlord transfers its interest in the Building
and transfers the Letter of Credit (or any proceeds thereof then held by Landlord) in
whole or in part to the transferee, Landlord shall, without any further agreement
between the parties hereto, thereupon be released by Tenant from all liability
therefor. The provisions hereof shall apply to every transfer or assignment of all or
any part of the Letter of Credit to a new landlord. In connection with any such
transfer of the Letter of Credit by Landlord, Tenant shall, at Tenants sole cost and
expense, execute and submit to the issuer of the Letter of Credit such applications,
documents and instruments as may be necessary to effectuate such transfer. Tenant shall
be responsible for paying the issuers transfer and processing fees in connection with
any transfer of the Letter of Credit and, if Landlord advances any such fees (without
having any obligation to do so), Tenant shall reimburse Landlord for any such transfer
or processing fees within ten days after Landlords written request therefor.
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4.6
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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.
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4.7
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Not a Security Deposit
. 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 4
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 Parties (as defined below), including any damages Landlord suffers following
termination of the Lease. As used herein,
Tenant Parties
shall mean Tenant and its
(direct or indirect) owners, and their respective beneficiaries, trustees, officers,
directors, employees and agents.
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5.
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Early Entry for Suites 400, 450 and 500
.
After the final execution and
delivery (in each parties sole and absolute discretion) of this Lease and provided Tenant has
delivered the prepaid Base Rent, the Letter of Credit and insurance certificates (pursuant to
Section 10.3
of this Lease), Tenant may enter Suites 400, 450 and 500 of the Building
prior to the Commencement Date, at its sole risk for the purpose of performing the Tenant
Improvement Work (as defined in
Exhibit B
hereto) and for the Permitted Use. Other
than the obligation to pay Base Rent and Tenants Share of any Expense Excess or Tax Excess,
all of Tenants obligations hereunder shall apply during any period of such early entry.
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6.
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Early Entry for Suite 600
.
Effective as of April 1, 2010 (the
Suite 600
Early Access Date
), so long as this Lease has been fully executed and delivered (in each
parties sole and absolute discretion) and Tenant has delivered the prepaid Base Rent, the
Letter of Credit and insurance
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Exhibit F
4
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certificates (pursuant to
Section 10.3
of this Lease), Tenant may enter Suite 600 of
the Building prior the Commencement Date, at its sole risk for the purpose of performing the
Tenant Improvement Work (as defined in
Exhibit B
hereto) and for the Permitted Use.
Other than the obligation to pay Base Rent and Tenants Share of any Expense Excess or Tax
Excess, all of Tenants obligations hereunder shall apply during any period of such early
entry. Notwithstanding the foregoing, if Landlord fails to provide Tenant with early
access to Suite 600 of the Building on or before the Suite 600 Early Access Date, as a
result of any holdover or unlawful possession by another party, Landlord shall use
reasonable efforts to obtain possession of such space and the Suite 600 Early Access Date
shall be the date on which Landlord provides access to Suite 600 of the Building to Tenant
free from occupancy by any party. Any such delay in the Suite 600 Early Access Date shall
not subject Landlord to any liability for any loss or damage resulting therefrom. If the
Suite 600 Early Access Date is delayed, the expiration date under the Lease shall not be
similarly extended
.
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7.
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Extension Option
.
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7.1.
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Grant of Option; Conditions
. Tenant shall have the right (the
Extension Option
) to extend the Term for one additional period of one (1) year
commencing on the day following the Expiration Date and ending on the first anniversary
of the Expiration Date (the
Extension Term
), if:
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A.
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Not less than 9 and not more than 15 full calendar months
before the Expiration Date, Tenant delivers written notice to Landlord
(
Extension Notice
) electing to exercise the Extension Option;
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B.
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Tenant is not in default under the Lease beyond any applicable
cure period when Tenant delivers the Extension Notice;
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C.
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No part of the Premises is sublet (other than pursuant to a
Permitted Transfer) when Tenant delivers the Extension Notice; and
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D.
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The Lease has not been assigned (other than pursuant to a
Permitted Transfer) before Tenant delivers the Extension Notice.
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7.2.
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Terms Applicable to Extension Term
.
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A.
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During the Extension Term, (a) the Base Rent rate per rentable
square foot shall be equal to a rate of $3.45 per rentable square foot per
month; and (b) Base Rent shall be payable in monthly installments in accordance
with the terms and conditions of the Lease.
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B.
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During the Extension Term, Tenant shall pay Tenants Share of
Expenses and Taxes for the Premises in accordance with the Lease.
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7.3.
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Extension Amendment
.
If Tenant is entitled to and properly exercises
its Extension Option, Landlord, within a reasonable time thereafter, shall prepare and
deliver to Tenant an amendment (the
Extension Amendment
) reflecting changes in the
Base Rent, the Term, the Expiration Date, and other appropriate terms, and Tenant shall
execute and return the Extension Amendment to Landlord within 15 days after receiving
it.
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7.4.
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Intentionally Omitted
.
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8.
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Second Extension Option
.
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8.1.
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Grant of Option; Conditions
. Tenant shall have the right (the
Second
Extension Option
) to extend the term of the Lease for one additional period of one (1)
year commencing on the day following the expiration of the Extension Term (if any) and
ending on the first anniversary thereof (the
Second Extension Term
), if:
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A.
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Not less than 6 and not more than 12 full calendar months
before the expiration date of the Extension Term (if any), Tenant delivers
written notice to Landlord (for purposes hereof, the
Second Extension Notice
)
electing to exercise the Second Extension Option;
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B.
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Tenant is not in default under the Lease beyond any applicable
cure period when Tenant delivers the Second Extension Notice;
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C.
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No part of the Premises is sublet (other than pursuant to a
Permitted Transfer) when Tenant delivers the Second Extension Notice; and
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Exhibit F
5
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D.
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The Lease has not been assigned (other than pursuant to a
Permitted Transfer) before Tenant delivers the Second Extension Notice.
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8.2.
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Terms Applicable to Second Extension Term
.
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A.
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During the Second Extension Term, (a) the Base Rent rate per
rentable square foot shall be equal to a rate of $3.55 per rentable square foot
per month; and (b) Base Rent shall be payable in monthly installments in
accordance with the terms and conditions of the Lease.
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B.
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During the Second Extension Term, Tenant shall pay Tenants
Share of Expenses and Taxes for the Premises in accordance with the Lease.
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8.3.
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Second Extension Amendment
.
If Tenant is entitled to and properly
exercises its Second Extension Option, Landlord, within a reasonable time thereafter,
shall prepare and deliver to Tenant an amendment (for purposes hereof, the
Second
Extension Amendment
) reflecting changes in the Base Rent, the term of the Lease, the
expiration date of the Lease, and other appropriate terms, and Tenant shall execute and
return the Second Extension Amendment to Landlord within 15 days after receiving it.
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8.4.
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Intentionally Omitted
.
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9.
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Right of First Refusal
.
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9.1
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Grant of Option; Conditions
. Tenant shall have a one-time right of
first refusal (the
Right of First Refusal
) with respect to each of the following
suite
s
(and with respect to each portion of each such suite) (each such suite or
portion thereof, a
Potential Refusal Space
): (i) the 11,487 rentable square feet
known as Suite 700 on the seventh floor of the Building shown on the demising plan
attached to the Lease as
Exhibit J
, (ii) the 2,581rentable square feet known as
Suite 730 on the seventh floor of the Building shown on the demising plan attached to
the Lease as
Exhibit K
; (iii) the 3,033 rentable square feet known as Suite 750
on the seventh floor of the Building shown on the demising plan attached to the Lease
as
Exhibit L
; (iv) the 1,971 rentable square feet known as Suite 770 on the
seventh floor of the Building shown on the demising plan attached to the Lease as
Exhibit M
; (v) the 1,581 rentable square feet known as Suite 780 on the seventh
floor of the Building shown on the demising plan attached to the Lease as
Exhibit
N
; (vi) the 1,939 rentable square feet known as Suite 790 on the seventh floor of
the Building shown on the demising plan attached to the Lease as
Exhibit O
;
(vii) the 9,451 rentable square feet known as Suite 800 on the eighth floor of the
Building shown on the demising plan attached to the Lease as
Exhibit P
; (viii)
the 9,037 rentable square feet known as Suite 870 on the eighth floor of the Building
shown on the demising plan attached to the Lease as
Exhibit Q
; and (ix) the
4,107 rentable square feet known as Suite 888 on the eighth floor of the Building shown
on the demising plan attached to the Lease as
Exhibit R
. Tenants Right of
First Refusal shall be exercised as follows: when Landlord has a prospective tenant,
other than any existing occupant of such space, (the
Prospect
) interested in leasing
any Potential Refusal Space, Landlord shall advise Tenant (the
Advice
) of the terms
under which Landlord is prepared to lease such Potential Refusal Space (a
Refusal
Space
) to such Prospect and Tenant may lease the Refusal Space, under such terms, by
delivery of written notice of exercise to Landlord (the
Notice of Exercise
) within
five (5) 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 with respect to
any Potential Refusal Space, if:
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A.
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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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B.
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the Premises, or any portion thereof, is sublet (other than
pursuant to a Permitted Transfer, as defined in
Section 14.8
of the
Lease) at the time Landlord would otherwise deliver the Advice; or
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C.
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a Transfer (defined in
Section 14
of the Lease), other
than a sublease or a Permitted Transfer (defined in
Section 14.8
of the
Lease), has occurred before the date Landlord would otherwise deliver the
Advice; or
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D.
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Tenant is not occupying the Premises on the date Landlord would
otherwise deliver the Advice; or
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Exhibit F
6
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E.
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such Potential Refusal Space is not intended for the exclusive
use of Tenant during the Term.
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9.2
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Terms for Refusal Space.
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A.
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If Tenant elects to exercise its Right of First Refusal, the
Term for the Refusal Space shall commence upon the commencement date stated in
the Advice, and upon such commencement date such Refusal Space shall be
considered a part of the Premises, provided that all of the terms stated in
such Advice, including the expiration 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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B.
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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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9.3
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Termination of Right of First Refusal.
The rights of Tenant hereunder
with respect to any Potential Refusal Space shall terminate on the earlier to occur of:
(i) October 31, 2017 (unless Tenant has exercised its Extension Option (defined in
Section 7
above) and/or the Second Extension Option (defined in
Section
8
above), in which event the date shall be one (1) year before the scheduled
expiration date of the Extension Term or, as applicable, the date that is one (1) year
before the scheduled expiration date of the Second Extension Term); (ii) Tenants
failure to exercise its Right of First Refusal with respect to such Potential Refusal
Space within the five (5)-day period provided in
Section 9.1
above; and (iii)
the date Landlord would have provided Tenant an Advice for such Potential Refusal Space
if Tenant had not been in violation of one or more of the conditions set forth in
Section 9.1
above. In addition, if Landlord provides Tenant with an Advice for
any Refusal Space that contains expansion rights (whether such rights are described as
an expansion option, right of first refusal, right of first offer or otherwise) with
respect to any other Potential Refusal Space (such other Potential Refusal Space
subject to such expansion rights is referred to herein as an
Encumbered Potential
Refusal Space
) and Tenant does not exercise its Right of First Refusal to lease such
Refusal Space pursuant to the Advice, Tenants Right of First Refusal with respect to
the Encumbered Potential Refusal Space shall be subject and subordinate to all such
expansion rights contained in the Advice.
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9.4
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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 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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9.5
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Intentionally Omitted
.
|
10.
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Tenant Security System
. Subject to all provisions of this Lease applicable to
Alterations and Tenant-Insured Improvements, Tenant shall be permitted to install a security
system for the Premises (
Tenant Security System
). Tenant shall provide Landlord with such
access cards, keys, code information and other materials and information as may be necessary
for Landlord to access the Premises. From time to time Landlord may review any Tenant
Security System, and if Landlord reasonably determines that such Tenant Security System
adversely affects the Premises, the Base Building, the Building, or any other occupants of the
Building, then, within a reasonable
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Exhibit F
7
|
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time after Landlords written request, Tenant shall make reasonable changes in personnel
and/or equipment in order to eliminate such adverse effect.
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11.
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Supplemental HVAC
. Subject to the terms of this
Section 11
, Tenant may
install and operate in the Premises up to six (6) supplemental HVAC units (each, a
Supplemental HVAC Unit
). Two (2) of the Supplemental HVAC Units may be up to fifteen tons
each and four (4) of the Supplemental HVAC Units may be up to two (2) tons each. Each of the
Supplemental HVAC Units shall be connected to the Buildings condenser water loop; provided,
however, that Tenant shall not use more than its proportionate share of the Buildings excess
water condenser capacity. All aspects of each Supplemental HVAC Unit, including its location
within the Premises, the manner in which it is vented, and the manner in which it is connected
to the Buildings condenser water loop, shall be subject to Landlords prior approval pursuant
to
Sections 7.2
and
7.3
of this Lease. Tenant shall pay the cost of all
electricity consumed in connection with the operation of each Supplemental HVAC Unit, together
with the cost of installing a submeter to measure such electrical consumption. Tenant, at its
expense, shall maintain and repair each Supplemental HVAC Unit in good working order and
condition. Without limiting the foregoing, Tenant, at its expense, shall procure and maintain
in effect throughout the Term a contract (the
Service Contract
) for the maintenance, repair
and replacement of the Supplemental HVAC Units with a contractor reasonably approved by
Landlord. Tenant shall follow all reasonable recommendations of such contractor for the
maintenance, repair and replacement of the Supplemental HVAC Units. The Service Contract
shall require the contractor, at intervals of not less than three (3) months, to inspect the
Supplemental HVAC Units and provide to Tenant a report of any defective conditions, together
with any recommendations for maintenance, repair and/or replacement. Tenant shall provide
Landlord with a copy of the Service Contract and each quarterly service report issued
thereunder promptly upon mutual execution or receipt thereof. Upon the expiration or earlier
termination of this Lease, Tenant shall convey title to the Supplemental HVAC Unit(s) to
Landlord, free of any encumbrance; provided, however, that to the extent required by
Section 8
of the Lease or
Section 2.2
of
Exhibit B
hereto (as
applicable), Tenant, at its expense, shall remove the Supplemental HVAC Unit(s) and repair any
resulting damage.
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Exhibit F
8
EXHIBIT G
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
ASBESTOS NOTIFICATION
Asbestos-containing materials (
ACMs
) were historically commonly used in the construction of
commercial buildings across the country. ACMs were commonly used because of their beneficial
qualities; ACMs are fire-resistant and provide good noise and temperature insulation.
Some common types of ACMs include surfacing materials (such as spray-on fireproofing, stucco,
plaster and textured paint), flooring materials (such as vinyl floor tile and vinyl floor sheeting)
and their associated mastics, carpet mastic, thermal system insulation (such as pipe or duct wrap,
boiler wrap and cooling tower insulation), roofing materials, drywall, drywall joint tape and
drywall joint compound, acoustic ceiling tiles, transite board, base cove and associated mastic,
caulking, window glazing and fire doors. These materials are not required under law to be removed
from any building (except prior to demolition and certain renovation projects). Moreover, ACMs
generally are not thought to present a threat to human health unless they cause a release of
asbestos fibers into the air, which does not typically occur unless (1) the ACMs are in a
deteriorated condition, or (2) the ACMs have been significantly disturbed (such as through abrasive
cleaning, or maintenance or renovation activities).
It is possible that some of the various types of ACMs noted above (or other types) are present
at various locations in the Building. Anyone who finds any such materials in the building should
assume them to contain asbestos unless those materials are properly tested and determined to be
otherwise. In addition, Landlord has identified the presence of certain ACMs in the Building. For
information about the specific types and locations of these identified ACMs, please contact the
Building manager. The Building manager maintains records of the Buildings asbestos information
including any Building asbestos surveys, sampling and abatement reports. This information is
maintained as part of Landlords asbestos Operations and Maintenance Plan (
O&M Plan
).
The O&M Plan is designed to minimize the potential of any harmful asbestos exposure to any
person in the building. Because Landlord is not a physician, scientist or industrial hygienist,
Landlord has no special knowledge of the health impact of exposure to asbestos. Therefore,
Landlord hired an independent environmental consulting firm to prepare the Buildings O&M Plan.
The O&M Plan includes a schedule of actions to be taken in order to (1) maintain any building ACMs
in good condition, and (2) to prevent any significant disturbance of such ACMs. Appropriate
Landlord personnel receive regular periodic training on how to properly administer the O&M Plan.
The O&M Plan describes the risks associated with asbestos exposure and how to prevent such
exposure. The O&M Plan describes those risks, in general, as follows: asbestos is not a
significant health concern unless asbestos fibers are released and inhaled. If inhaled, asbestos
fibers can accumulate in the lungs and, as exposure increases, the risk of disease (such as
asbestosis and cancer) increases. However, measures taken to minimize exposure and consequently
minimize the accumulation of fibers, can reduce the risk of adverse health effects.
The O&M Plan also describes a number of activities which should be avoided in order to prevent
a release of asbestos fibers. In particular, some of the activities which may present a health
risk (because those activities may cause an airborne release of asbestos fibers) include moving,
drilling, boring or otherwise disturbing ACMs. Consequently, such activities should not be
attempted by any person not qualified to handle ACMs. In other words, the approval of Building
management must be obtained prior to engaging in any such activities. Please contact the Building
manager for more information in this regard. A copy of the written O&M Plan for the Building is
located in the Building Management Office and, upon your request, will be made available to tenants
to review and copy during regular business hours.
Because of the presence of ACM in the Building, Landlord is also providing the following
warning, which is commonly known as a California Proposition 65 warning:
WARNING: This building contains asbestos, a chemical known to the State of California to cause
cancer.
Please contact the Building manager with any questions regarding the contents of this
Exhibit G
.
Exhibit G
1
EXHIBIT H
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
OUTDOOR PATIOS
Exhibit H
1
EXHIBIT I
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
LETTER OF CREDIT
[Name of Financial Institution]
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Irrevocable Standby
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Letter of Credit
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No.
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Issuance Date:
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Expiration Date:
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Applicant:
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Beneficiary
CA-METRO CENTER LIMITED PARTNERSHIP
Ladies/Gentlemen:
We hereby establish our Irrevocable Standby Letter of Credit in your favor for the account of
the above referenced Applicant in the amount of Five Hundred Thousand U.S. Dollars ($500,000.00)
available for payment at sight by your draft drawn on us when accompanied by the following
documents:
1.
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An original copy of this Irrevocable Standby Letter of Credit.
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2.
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Beneficiarys dated statement purportedly signed by an authorized signatory or agent reading:
This draw in the amount of
U.S. Dollars ($
) under your
Irrevocable Standby Letter of Credit No.
represents funds due and owing
to us pursuant to the terms of that certain lease by and between
, as
landlord, and
, as tenant, and/or any amendment to the lease or any other
agreement between such parties related to the lease.
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It is a condition of this Irrevocable Standby Letter of Credit that it will be considered
automatically renewed for a one year period upon the expiration date set forth above and upon each
anniversary of such date, unless at least 60 days prior to such expiration date or applicable
anniversary thereof, we notify you in writing, by certified mail return receipt requested or by
recognized overnight courier service, that we elect not to so renew this Irrevocable Standby Letter
of Credit. A copy of any such notice shall also be sent, in the same manner, to: Equity Office
Properties, 2 North Riverside Plaza, Suite 2100, Chicago, Illinois 60606, Attention: Treasury
Department. In addition to the foregoing, we understand and agree that you shall be entitled to
draw upon this Irrevocable Standby Letter of Credit in accordance with 1 and 2 above in the event
that we elect not to renew this Irrevocable Standby Letter of Credit and, in addition, you provide
us with a dated statement purportedly signed by an authorized signatory or agent of Beneficiary
stating that the Applicant has failed to provide you with an acceptable substitute irrevocable
standby letter of credit in accordance with the terms of the above referenced lease. We further
acknowledge and agree that: (a) upon receipt of the documentation required herein, we will honor
your draws against this Irrevocable Standby Letter of Credit without inquiry into the accuracy of
Beneficiarys signed statement and regardless of whether Applicant disputes the content of such
statement; (b) this Irrevocable Standby Letter of Credit shall permit partial draws and, in the
event you elect to draw upon less than the full stated amount hereof, the stated amount of this
Irrevocable Standby Letter of Credit shall be automatically reduced by the amount of such partial
draw; and (c) you shall be entitled to transfer your interest in this Irrevocable Standby Letter of
Credit from time to time and more than one time without our approval and without charge. In the
event of a transfer, we reserve the right to require reasonable evidence of such transfer as a
condition to any draw hereunder.
This Irrevocable Standby Letter of Credit is subject to the International Standby Practices
(ISP 98) International Chamber of Commerce (Publication No. 590).
We hereby engage with you to honor drafts and documents drawn under and in compliance with the
terms of this Irrevocable Standby Letter of Credit.
Exhibit I
1
All communications to us with respect to this Irrevocable Standby Letter of Credit must be
addressed to our office located at
to the attention of
.
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Very truly yours,
[name]
[title}
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Exhibit I
2
EXHIBIT J
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
SUITE 700 OFFERING SPACE
Exhibit J
1
EXHIBIT K
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
SUITE 730 OFFERING SPACE
Exhibit K
1
EXHIBIT L
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
SUITE 750 OFFERING SPACE
Exhibit L
1
EXHIBIT M
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
SUITE 770 OFFERING SPACE
Exhibit M
1
EXHIBIT N
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
SUITE 780 OFFERING SPACE
Exhibit N
1
EXHIBIT O
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
SUITE 790 OFFERING SPACE
Exhibit O
1
EXHIBIT P
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
SUITE 800 OFFERING SPACE
Exhibit P
1
EXHIBIT Q
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
SUITE 870 OFFERING SPACE
Exhibit Q
1
EXHIBIT R
METRO CENTER
METRO CENTER TOWER
FOSTER CITY, CALIFORNIA
SUITE 888 OFFERING SPACE
Exhibit R
1