e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2010
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OR
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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
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Commission File
No. 001-34636
FINANCIAL ENGINES,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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94-3250323
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1804
Embarcadero Road
Palo Alto, California 94303
(Address
of principal executive offices, Zip Code)
(650) 565-4900
(Registrants
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common Stock, $0.0001 par value per
share
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer 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
Act). Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates of the registrant was approximately
$348,205,000 based upon the closing price of $13.60 of such
common stock on the NASDAQ Global Select Market on June 30,
2010 (the last business day of the registrants most
recently completed second quarter). Shares of common stock held
as of June 30, 2010 by each director and executive officer
of the registrant, as well as shares held by each holder of 5%
of the common stock known to the registrant, have been excluded
for purposes of the foregoing calculation. This determination of
affiliate status is not a conclusive determination for other
purposes.
As of March 1, 2011, there were 43,996,242 shares of
common stock of the registrant outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of
Stockholders (the Proxy Statement) to be held on
May 11, 2011, and to be filed pursuant to
Regulation 14A within 120 days after registrants
fiscal year ended December 31, 2010 are incorporated by
reference into Part III of this Report.
PART I
This Report contains forward-looking statements that involve
risks and uncertainties. The forward-looking statements are
contained principally in the sections entitled Risk
Factors, Managements Discussion and Analysis
of Financial Condition and Results of Operations and
Business. In some cases, you can identify
forward-looking statements by terms such as may,
might, will, objective,
intend, should, could,
can, would, expect,
believe, design, estimate,
predict, potential, plan, or
the negative of these terms, and similar expressions intended to
identify forward-looking statements. These statements reflect
our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements. Forward-looking statements include,
but are not limited to, statements about anticipated trends and
challenges in our business and the markets in which we operate;
the capabilities, benefits and effectiveness of our services;
our plans for future services and enhancements of existing
services; our expectations regarding our expenses and revenue;
our anticipated cash needs and our estimates regarding our
capital requirements and our needs for additional financing; our
ability to retain and attract customers; our regulatory
environment; our legal proceedings; intellectual property; our
expectations regarding competition; and sources of revenue.
These statements involve known and unknown risks, uncertainties
and other factors which may cause our actual results,
performance or achievements to be materially different from any
future results, performances or achievements expressed or
implied by the forward-looking statements. Forward-looking
statements are subject to risks and uncertainties that could
cause actual results to differ materially from those projected.
These risks and uncertainties include, but are not limited to,
the risks set forth throughout this Report, including under
Item 1, Business and under Item 1A,
Risk Factors. These forward-looking statements speak
only as of the date hereof. We expressly disclaim any obligation
or undertaking to release publicly any updates or revisions to
any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement
is based.
Financial Engines, Inc. was incorporated on May 13, 1996
under the laws of the state of California and is headquartered
in Palo Alto, California. In February 2010, Financial Engines,
Inc. was reincorporated in the state of Delaware. Our investment
advisory and management services are provided through our
subsidiary, Financial Engines Advisors L.L.C., a federally
registered investment adviser. References in this Report to
Financial Engines, our company,
we, us and our refer to
Financial Engines, Inc. and its consolidated subsidiaries during
the periods presented unless the context requires otherwise.
FINANCIAL
ENGINES®,
INVESTOR
CENTRAL®,
FINANCIAL ENGINES INVESTMENT
ADVISOR®,
WE MAKE IT
PERSONAL®,
RETIREMENT HELP FOR
LIFE®,
the Financial Engines logo and a sun and cloud design mark are
all trademarks or service marks owned by Financial Engines,
Inc., registered in the United States and other countries. In
addition, Financial Engines, Inc. owns the trademarks
ADVICESERVER and FORECASTER, registered in Japan and FINENG,
registered in Tunisia. The mark ADVICE LIGHT is also a trademark
owned by Financial Engines, Inc. All other trademarks, service
marks and trade names appearing in this filing are the property
of their respective owners.
Our
Company
We are a leading provider of independent, technology-enabled
portfolio management services, investment advice and retirement
income services to participants in employer-sponsored defined
contribution plans, such as 401(k) plans. We help investors plan
for retirement by offering personalized plans for saving and
investing, as well as by providing assessments of retirement
income needs and readiness, regardless of personal wealth or
investment account size. Financial
Engines®
Income+, a feature of our portfolio management service, is
designed to prepare a portfolio to generate income in
retirement, and calculates and facilitates the payment of steady
recurring payouts throughout retirement. We use our proprietary
advice technology platform to provide our services to millions
of retirement plan participants on a cost-efficient basis. We
believe that our services have significantly lowered the cost
and increased the accessibility to plan participants of
independent, personalized portfolio management services,
investment advice and retirement income.
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Our business model is based on workplace delivery of our
services. We target three key constituencies in the retirement
plan market: plan participants (employees of companies offering
401(k) plans), plan sponsors (employers offering 401(k) plans to
their employees) and plan providers (companies providing
administrative services to plan sponsors). We provide the
following benefits for each of these constituencies:
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Plan Participants: For retirement plan
participants, we provide personalized, unconflicted advice and
management services unique to each individuals specific
investment needs and goals, using the investment options
available through their employer-provided plans. We offer the
following principal services:
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Professional Management is a discretionary managed
account service designed for plan participants who want
affordable, personalized and professional portfolio management
services, investment advice and retirement income services from
an independent investment advisor without the conflicts of
interest that can arise when an advisor offers proprietary
products. With this service, we provide discretionary management
of the participants plan assets and make investment
decisions on behalf of the participant. Plan sponsors choosing
to make our Professional Management service available typically
also make available our Online Advice service. In some cases, we
provide this service by acting as a subadvisor to a plan
provider acting as the investment manager to plan participants.
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Financial
Engines®
Income+ is a new feature of Professional Management which
manages portfolios to generate income and calculates and
facilitates the potential payment of steady recurring payouts
from those portfolios in retirement. For members using the
Income+ feature, a portion of the account balance is designated
for an optional
out-of-plan
annuity purchase to enable a lifetime income guarantee. We do
not provide the annuity. An annuity purchase is not required,
and Income+ availability does not require an in-plan annuity
option or changes to the fund
line-up.
Members can start payouts, stop payouts or make additional
withdrawals from their portfolio at any time. Income+ is
currently available at no additional cost to Professional
Management members and sponsors.
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Online Advice is an Internet-based non-discretionary
investment advisory service designed for plan participants who
manage their portfolios directly and want to receive
personalized investment advice. With this service, plan
participants review our investment recommendations and may elect
to follow or not follow the advice. Participants can use the
interactive online service to see investment forecasts for their
portfolio and to explore the forecast impact of various
investment decisions, such as risk preference or savings. In
some cases, we provide this service by acting as a subadvisor to
a plan provider acting as the investment advisor to plan
participants.
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Retirement Evaluation is a retirement readiness
assessment provided to plan participants upon rollout and
generally annually thereafter, together with Professional
Management enrollment materials. Retirement Evaluations
highlight specific types of risks in a plan participants
retirement account and assess the likelihood of achieving the
plan participants retirement income goals. The assessment
also provides guidance on how to reduce these highlighted risks
and provides information on how our services can help to address
the risks.
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Plan Sponsors: For retirement plan sponsors,
our services are designed to improve employee satisfaction and
reduce fiduciary and business risk by evaluating, disclosing and
addressing poor investment and savings decisions by plan
participants, and by providing an opportunity for
cost-effective, steady lifetime payouts in retirement.
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Plan Providers: For retirement plan providers,
our services can represent a cost-effective method of providing
personalized, independent investment advice that can be an
attractive and increasingly necessary service for the largest
plan sponsors. Providing these services helps plan providers
compete more effectively in the large plan market.
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We deliver our services to plan sponsors and plan participants
primarily through connections to eight retirement plan
providers. In addition, we have connectivity with Charles Schwab
to support a few plan sponsors. We target large plan sponsors
across a wide range of industries. As of December 31, 2010,
we were under contract to provide our services to approximately
7.3 million plan participants. We provide Professional
Management services to 414 plan sponsors representing
approximately 4.6 million participants and approximately
$376 billion of assets
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in retirement plans for which we have rolled out our
Professional Management service, which we refer to as Assets
Under Contract, or AUC. Retirement Evaluation services and
Income+ are part of our Professional Management services. As of
December 31, 2010, we had approximately $37.7 billion
in assets under management, or AUM, and managed the accounts of
approximately 472,000 members who have delegated investment
decision-making authority to us. Our AUC does not include assets
in plans for which we have signed contracts but have not yet
rolled out our Professional Management service. Assets are
included in AUM once plan participants actively or passively
enroll in Professional Management. The assets underlying our
Online Advice only service are not included in AUC. We do not
derive revenue based on AUC but believe that AUC can be a useful
indicator of the additional plan assets available for enrollment
efforts that, if successful, result in these assets becoming AUM.
Our business model is characterized by subscription-based,
recurring revenue. Our contracts with plan sponsors typically
have initial terms of three or five years and auto-renewal
clauses that extend the initial term until terminated by either
party after a specified notice period. Our revenue is derived
from both member fees and platform fees. The member fees we earn
are based on the value of the assets that we manage for plan
participants who have delegated investment decision-making
authority to us or to a plan provider for which we act as a
subadvisor. None of our fees are based on investment performance
or other incentive arrangements. Our fees generally are not
based on a share of the capital gains or appreciation in a
members account. Member fees are generally payable
quarterly in arrears. Prior to October 1, 2010, our member
fees were generally the product of member fee rates and the
value of AUM at the end of each quarter. Effective
October 1, 2010, we changed our method of fee calculation
for substantially all members with whom we have a direct
advisory relationship from quarterly to monthly, thereby
calculating member fees as the product of member fee rates and
the value of AUM at the end of each month. The platform fees we
earn are derived through annual subscriptions paid by the plan
sponsor, plan provider or the retirement plan itself, depending
on the plan structure, and are based on the number of eligible
employees in the plan and the type of service provided. We do
not currently charge Professional Management members or sponsors
any additional fees for the Income+ feature.
The key steps associated with delivering our Professional
Management service are as follows:
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Contract with Plan Sponsor. First, a plan
sponsor signs a contract to provide our Professional Management
service to its employees.
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Plan Rollout. Second, we obtain plan and plan
participant data, set up the plan on our systems, and make
services available to plan participants. Upon completion of
rollout, our services are available to all eligible participants
of that plan.
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Encourage Usage of our Service. Once the plan
has been rolled out, we deliver to plan participants Retirement
Evaluations and enrollment materials, either through the plan
provider or directly to plan participants, and with the support
of the plan sponsor.
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Manage Assets. Once a plan participant enrolls
in our Professional Management service, the retirement assets of
that plan participant count toward our AUM.
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Market
Trends
We believe the following key market trends will continue to
drive the growth of our business and increase the value of our
service offerings. Changes in these trends can have negative
implications for our business prospects.
Shifting Demographics Drive a Growing Need for Retirement
Help. The ongoing growth in retirement assets,
especially 401(k) assets, is driven in part by individuals
seeking to supplement retirement funds they expect to receive
from Social Security and corporate defined benefit plans.
According to a recent McKinsey and Co. study, Winning in the
DC Market of 2015, by 2015, nearly 70% of assets will
be held by individuals at or within five years of retirement
age. The 78 million baby boomers, or individuals born
between 1946 and 1964, represent the largest population cohort
in American history. Starting January 2011, more than 10,000
baby boomers will turn 65 every day and this pattern will
continue for the next 19 years. However, studies suggest
that many baby boomers are not financially prepared to support
themselves in retirement. According to recent research compiled
for the Wall Street Journal by the Center for Retirement
Research at Boston College, only 8% of households with a median
income of $87,700 in 2009 that are approaching retirement have
enough
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401(k) savings to generate the income needed to replace 85% of
their pre-retirement income. With the increased reliance on
defined contribution plans, we believe many investors are not
equipped to adequately formulate an investment strategy for
their retirement assets. The 2010 Financial Engines National
401(k) Evaluation suggests that 3 out of 4 Americans will
fall short of their retirement goals due to low savings or poor
investing choices.
Growing Reliance on Defined Contribution
Plans. As employer-sponsored retirement plans
shift from defined benefit plans to defined contribution plans,
the responsibility for making retirement investment decisions
shifts from professional pension fund managers to individual
investors. Cerulli Associates estimates that private defined
contribution assets, excluding Individual Retirement Accounts,
or IRAs, were approximately $3.2 trillion and constituted more
than 20% of total retirement assets in the United States,
excluding Social Security, in 2009. According to Cerulli
Associates, there were approximately 47 million active
401(k) plan participants as of December 31, 2009.
Changing Legal and Regulatory Framework. As
the burden of retirement investing shifts to the individual, we
believe that there is an increasing need for assistance and
guidance on how to invest for retirement wealth. However,
according to a 2009 survey by Hewitt Associates, the primary
reason cited by plan sponsors for not making investment advice
available to employees has been the fear of increased fiduciary
or legal risk. We believe the Pension Protection Act of 2006 and
subsequent Department of Labor regulations can reduce these
concerns by further supporting the existing foundation for
professional asset management of 401(k) accounts. Adherence to
these new guidelines provides specific safeguards to plan
sponsors from fiduciary and legal risk.
Furthermore, policy makers are taking a close look at how to
facilitate turning retirement savings into retirement income.
The Department of Labor and the Treasury Department are
exploring ways of facilitating access to and utilization of
products and services designed to help provide retirement income
within 401(k) plans.
Employers Providing More Retirement Help to
Employees. More employers are making investment
advisory services available to their participants. According to
Aon Hewitts 2011 Hot Topics in Retirement: A Changing
Horizon, employers are offering workers more help to meet
retirement goals. The study found that of the plan sponsors who
do not currently offer online investment advisory services to
participants, 36% are likely to offer online advice and 30% are
considering offering managed accounts.
We believe the automatic 401(k) is a big part of getting
participants the help they need. As a result of the Pension
Protection Act of 2006 and Department of Labor guidelines, plan
sponsors are now actively seeking automatic retirement savings
solutions for their employees. According to Aon Hewitts
2011 Hot Topics in Retirement: A Changing Horizon, the
percentage of employers that automatically enroll new
participants has increased from 24% in 2006 to 57% in 2010.
Similarly, automatic contribution escalation, where
employees contribution rates are automatically increased
over time unless the employee affirmatively elects otherwise,
increased from 17% in 2006 to 47% in 2010.
Our
Strategy
Increase Enrollment Within Our Existing Professional
Management Plan Sponsors. We plan to attempt to
increase enrollment by continuing to promote our services to
participants. We plan to continue utilizing Active Enrollment
campaigns, which require that plan participants proactively sign
up for our Professional Management service. We plan to implement
enhancements to our direct marketing materials in our Active
Enrollment campaigns and deploy effective techniques more
broadly across our installed base of customers.
We are also implementing integrated online enrollment into
certain provider websites. In 2010, we implemented the
integration of personalized online assessments of certain types
of investing risks into several plan providers websites.
This integration allows participants who log onto the provider
website to view personalized assessments of their portfolio
online and to learn more about our services. We plan to continue
to develop the effectiveness of this online placement over time.
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We are extending our services as baby boomers enter retirement.
We achieved a major milestone towards this goal on
January 31, 2011 when we announced Income+, an enhancement
to our Professional Management service designed to provide the
opportunity for steady monthly payouts from a 401(k) account
that can last for life. We believe that Income+ can drive growth
along multiple dimensions. We believe it can drive AUC growth by
appealing to new plan sponsors who are interested in a safe and
easy income solution. We believe it can drive enrollment and
AUM, especially among near-retirees who represent a large
portion of our AUC. We believe Income+ can increase retention by
encouraging participants to leave their money in their 401(k)
accounts and to continue using our services throughout
retirement. We also believe that it can open up opportunities
for growth beyond the workplace.
Finally, we plan to continue to encourage plan sponsors to
implement Passive Enrollment campaigns, which automatically
enroll some or all of a plan sponsors plan participants
into our Professional Management service unless the individual
participant declines or opts-out of the service. Our
past experience indicates that in cases where a plan sponsor
used Passive Enrollment, the enrollment rate of plan assets was
higher and achieved at lower acquisition cost per member than in
cases where a plan sponsor used Active Enrollment.
Expand Number of Retirement Plan Sponsors. We
intend to sell our services to other plan sponsors that are not
current clients but are serviced by the plan providers with whom
we have relationships. We may also seek to create data
connections with additional plan providers to access defined
contribution plans of educational institutions, non-profit
organizations and government entities.
Expand Beyond Workplace Defined Contribution
Plans. We intend to expand our services in the
longer-term to help members of our Professional Management
program who roll over their 401(k) account into an IRA account
available through the plan provider and to help other individual
IRA investors manage and draw down income from their IRAs. We
believe our established investment methodology, technology and
relationships with plan providers, plan sponsors and plan
participants provide us with the distribution and technological
capabilities to help individuals who want ongoing, lifetime
payouts from their retirement accounts.
Products
and Services
We provide personalized portfolio management services,
investment advice and retirement income services to plan
participants through plan providers. Our services address some
of the most important questions and concerns faced by plan
participants as they prepare for retirement, including:
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How should I invest my money?
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When can I retire?
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How much can I spend in retirement and not run out?
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Professional Management. Our Professional
Management service, a discretionary managed account service
launched in 2004, is designed for 401(k) participants who want
affordable, personalized and professional portfolio management,
investment advice and retirement income services from an
independent investment advisor with no conflicts of interest.
With this service, plan participants delegate investment
decision-making and trading authority to us, which is referred
to as discretionary authority. We developed our Professional
Management service to reach a large number of plan participants
on a cost-effective basis and assist them on the path to a
secure retirement. When plan participants enroll in our
Professional Management service, we use our Advice Engines to
create personalized, diversified portfolios and provide ongoing
Professional Management.
Our investment recommendations are limited to the investment
alternatives available in a 401(k) plan, including any employer
stock, as determined and approved by a plan fiduciary other than
us, although we do take into account other identified holdings
of the plan participant when offering investment advice.
Members enrolled in the Professional Management service receive
a Retirement Plan, which analyzes their investments,
contribution rate and projected retirement income. The
Retirement Plan provides advice on their annual contribution
amount, shows how we propose to allocate their investments, and
forecasts their retirement income relative to a retirement goal.
Members are encouraged to provide their desired retirement age,
risk preference, employer stock holding preference and
information regarding certain other assets that they hold
outside
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of their 401(k) accounts. Any personal information provided is
used to customize a new portfolio allocation that is reflected
in a revised Retirement Plan. Member portfolios are reviewed
every three months and transactions are executed, if necessary,
to reallocate the investments. Members also receive a quarterly
Retirement Update that shows how they are progressing towards
their retirement goals and describes any changes that we have
made to their investment allocations.
Members can, at any time, call one of our Advisor Center
employees who are registered in various states through the
Investment Adviser Registration Depository, referred to as
Investment Advisor Representatives, or log in to a website to
check their progress or further tailor their portfolio to their
personal circumstances. Our Investment Advisor Representatives,
and certain call center personnel of the plan providers with
whom we work, have access to the Financial Engines Professional
Advisor, our proprietary client relationship management
application, enabling the advisor to change or add to the
personal information used to manage the members account
and explain to the member the impact of any changes on the
members projected future 401(k) balance. Registered
Investment Advisor Representatives can modify member inputs but
not Advice Engine outputs and recommendations. As members
approach retirement, they are offered a Retirement Checkup,
which is a phone-based consultation with an Investment Advisor
Representative. During the Retirement Checkup, the Investment
Advisor Representative confirms the members retirement
goal, reviews the members retirement income forecast and
helps the member close the gap, if any, by exploring the impact
of increasing savings or adjusting the members retirement
age. In addition to the Investment Advisor Representatives who
support calls in our advisor center, we also rely on supervisors
and other trained employees and personnel when call volumes are
high. We expect to increase the number of Investment Advisor
Representatives to support outbound calling and other advisor
center initiatives. Certain of the plan providers also maintain
call centers to support members.
On January 31, 2011, we announced the launch of Financial
Engines®
Income+, a new feature of our Professional Management service
that provides retirement income for 401(k) participants. We
designed Income+ to provide discretionary portfolio management
with an income objective and to provide participants with steady
monthly payouts from their 401(k) accounts during retirement.
Early in retirement, Income+ provides payouts from the 401(k)
assets. Later in retirement, it is designed to enable
participants to obtain a lifetime income guarantee by drawing
upon the 401(k) assets to make an optional annuity purchase
outside of the plan. We do not provide the annuity. With
Income+, members can contact an Investment Advisor
Representative to start payouts, stop payouts, or make
additional withdrawals from their 401(k) accounts so they have
access to their savings as needed. With Income+, members receive
Retirement Plans that show how we plan to allocate their
investments as well as quarterly Retirement Updates that show
any changes we have made to their investment allocations. If the
member has requested payouts, the Retirement Plan also shows the
current payout amount and the planned payout schedule, and the
Retirement Update presents the history of recent payouts. If the
member has not yet requested payouts, the statements will show
the members estimated total income in retirement,
considering various income sources such as Social Security,
defined benefit, or other 401(k) plan accounts. Members with
Income+ can also discuss their total retirement income picture
with an Investment Advisor Representative. We do not currently
charge Professional Management members or sponsors any
additional fees for the Income+ feature. We do not currently
issue, sell, distribute, or solicit the sale of annuities or
other insurance products or services, nor do we receive, accept
or charge fees, payments or commissions related to any purchases
of insurance products or services. Income+ availability does not
require an in-plan annuity or changes to the plans fund
line-up. As
a feature of Professional Management, Income+ is easy for plan
sponsors to implement with no fiduciary lock-in. Income+
availability is subject to establishment of data connectivity
between Financial Engines and the applicable plan provider, and
is also subject to applicable retirement plan provisions related
to plan withdrawals. We started offering Income+ to plan
participants in December 2010.
Online Advice. Our Online Advice service,
launched in 1998, is a nondiscretionary Internet-based service
designed for plan participants who wish to take a more active
role in personally managing their portfolio. With this service,
plan participants may elect to follow the online advice without
delegating investment decision-making and trading authority to
us, making this a nondiscretionary service. This Internet-based
service includes interactive access to simulation and portfolio
optimization technologies through our Advice Engines. Plan
participants see a forecast that shows how likely they are to
reach their desired retirement goals, get recommendations on
which investments to buy or sell and simulate how their
portfolios might perform under a wide variety of economic
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scenarios. They can also explore different levels of investment
risk, savings amounts and retirement horizons, as well as get
tax-efficient advice on accounts other than their 401(k)
accounts. The service offers investment advice on the fund
options available in a 401(k) plan and can also offer advice on
the investment options available in other non-plan sponsored
accounts. The Online Advice service is integrated with single
sign-on to the plan providers 401(k) website, which
enables data pre-population and, typically, the ability to
initiate transactions directly from the Online Advice service. A
version of the service is also available to retail investors
directly through our website.
Retirement Evaluation. When Professional
Management is being offered in a plan, we send each eligible
plan participant a Retirement Evaluation or similar retirement
readiness assessment upon rollout and generally annually
thereafter, together with Professional Management enrollment
materials. Retirement Evaluations highlight specific risks in a
plan participants retirement account, provide an
assessment of the likelihood of achieving the plan
participants retirement income goal, provide guidance on
how to reduce those risks and introduce our services as a means
of obtaining help in addressing these issues. Retirement
Evaluations are based on data provided by the plan provider and
include an evaluation of how well the plan participant is
investing and saving in the retirement plan. Specifically, the
evaluation considers the individual plan participants
risk, diversification, employer stock concentration and 401(k)
contribution rate. In 2010, we implemented the integration of
personalized online assessments of certain types of investing
risks into several plan providers websites. This
integration allows participants who log onto the provider
website to view personalized assessments of their portfolio
online and to learn more about our services.
Revenue. We derive nearly all of our revenue
from Financial Engines Advisors L.L.C.s investment
advisory and management services through our contracts with plan
providers, plan sponsors and plan participants. AUM is defined
as the amount of retirement plan assets that we manage as part
of our Professional Management service. We generate revenue
primarily from member fees on AUM as well as from platform fees,
by providing portfolio management services, investment advice
and retirement income services to plan participants of
employer-sponsored retirement plans. We derive professional
management revenue from member fees paid by plan participants
for our Professional Management service. The arrangement
generally provides for member fees based on the value of assets
we manage for plan participants, and is generally payable
quarterly in arrears. We derive our platform revenue from
recurring, annual subscription-based fees for access to our
services, including Professional Management, Online Advice and
Retirement Evaluation. Platform fees are paid by the plan
sponsor, plan provider or the retirement plan itself, depending
on the plan structure, and are typically based on the number of
eligible employees in the plan and the type of service provided.
Our total revenue for 2010 was $111.8 million, compared to
$85.0 million and $71.3 million for 2009 and 2008,
respectively. We generated professional management revenue of
$79.1 million for 2010, $52.6 million for 2009, and
$39.0 million for 2008. We generated platform revenue of
$29.7 million for 2010, compared to $30.0 million and
$29.5 million for 2009 and 2008, respectively. We have
historically earned, and expect to continue to earn on a
combined basis, a significant portion of our revenue through
three subadvisory relationships. Please refer to the
Managements Discussion and Analysis of Financial
Condition and Results of Operations section for additional
revenue information.
Investment
Process and Methodology
Our goal is to apply investment techniques traditionally
available only to large, sophisticated investors to help
individual investors achieve their retirement goals. Our advice
services incorporate several of the methodologies developed by
our co-founder and economics Nobel Laureate, Professor William
F. Sharpe. We use Monte Carlo simulation and proprietary
optimization techniques to provide plan participants with
cost-effective, sophisticated, personalized and unconflicted
advice. Monte Carlo simulation is widely used in investment
management and is a statistical technique in which many
simulations of an uncertain quantity are run to model the
distribution of possible outcomes.
We model more than 30,000 securities, including retail mutual
funds, stocks, employee stock options, institutional funds,
guaranteed investment contracts and stable value funds,
exchange-traded funds and fixed-income securities on an ongoing
basis. When providing simulations and investment
recommendations, our methodology evaluates a variety of factors
that impact investment returns, including: fees, portfolio
turnover,
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management performance, tax-efficiency, and a funds
investment style where we identify the underlying asset class
exposures and active management risk associated with asset
allocation changes by a fund manager in response to market
conditions and decisions to weight specific security holdings
differently than comparable indices. By modeling the
characteristics of specific investment alternatives, we are able
to provide quantitative estimates of possible future outcomes
and make investment recommendations. We are also able to model
the complexities found in large retirement plans and to provide
investment advice to plan participants that can be implemented
within the limits of a given plans available options.
Unlike traditional advisory services, we do not rely on the
subjective evaluation of each plan participants portfolio
by a human investment advisor. Instead, our services rely on
Advice Engines that accept inputs on available investment
choices along with a variety of personal information including:
investment objective, risk tolerance, investment horizon, age,
savings, outside personal assets, investor preferences and tax
considerations. This approach results in a consistent,
systematic and objective investment methodology in which the
advice generation is distinct from the method of delivery, which
may be online, via printed materials or through phone
conversations with our registered Investment Advisor
Representatives or the call center representatives of certain
plan providers with whom we have relationships. The
representatives who are available by phone to speak with
Professional Management members have the ability to change or
add to the personal information used to manage the members
account and explain to the member the impact of any changes on
the members projected future 401(k) balance. Registered
Investment Advisor Representatives can modify member inputs but
not Advice Engine outputs and recommendations. This process is
designed to ensure that the advice is personalized and
consistent regardless of the asset balance of the plan
participant, or the channel through which the plan participant
receives our advice. This process also ensures that the
investment recommendations are consistent across plan providers,
plan sponsors and plan participants. Finally, this approach
enables a detailed audit trail of the recommendations provided
to each plan participant over time to assist with regulatory
responsibilities.
To maintain the quality of our investment recommendations, our
Advice Engines incorporate a wide variety of automated checks
and validation procedures. These procedures are overseen by
multiple groups within our Investment Management and Service
Delivery organizations and help verify that the data inputs into
our systems are timely and accurate, and that the resulting
investment recommendations reflect the correct application of
our investment methodology. We devote substantial ongoing
product development to the maintenance and development of these
data and advice validation procedures.
Our investment recommendations are limited to the investment
alternatives available in a 401(k) plan as determined and
approved by a plan fiduciary other than us, although we do take
into account other identified holdings of the plan participant
when offering investment advice. With the exception of employer
stock, if any, included as an investment alternative, we do not
provide advice on or manage single-company securities. We do not
consult with, or make recommendations to, the plan sponsor
regarding which investment alternatives to make available in its
401(k) plan.
We offer no proprietary investment products. We are free of the
conflicts of interest, or the perceptions of conflicts of
interest, that can arise for competitors who offer such
products. We do not receive differential compensation based on
the investments we recommend. We do not hold assets in custody
or execute trades.
We have a single investment methodology that is consistently
applied across all member accounts. We create diversified
portfolios for each member from the investment choices available
in a plan with the goal of balancing potential returns
consistent with the clients investment objective,
investment horizon, other financial assets and risk preferences.
A clients investment objective, either accumulation or
generating retirement income, helps determine the structure of
the optimized portfolios.
For members with Income+, the investment portfolios are
structured to provide the potential for steady income payouts
throughout retirement. The Income+ optimization methodology
shares similarities with bond immunization and liability-driven
investing, or LDI, practices used by pension funds.
LDI strategies involve structuring asset portfolios to match
certain liabilities in the future. In the context of an
individual participant, this means developing an investment
strategy that will deliver desired annual income payouts with a
predetermined statistical confidence level. To have sufficient
confidence in a future payout, it is desirable to immunize the
liability against possible changes in interest rates and the
stock market. Using the fixed income options available in the
plan, the
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Income+ optimization structures a portfolio that matches the
duration of assets with the specific income stream desired by
that participant.
To accomplish this objective, the Income+ optimization approach
divides the portfolio into three components. The first portion
of the assets is used to structure a fixed income portfolio from
the options in the plan that best match the duration of the
income payments through age 85. A second portion of assets is
set aside to enable the optional future purchase of an annuity
outside of the plan that can maintain the income payments for
life. Income+ allows participants to purchase such an annuity up
to the age of 85. We do not provide any of these annuities or
other financial products. Finally, a third portion of assets is
invested in a diversified mix of equities to provide growth
potential and to help the payouts keep up with inflation. Over
time, the equities are gradually converted into additional fixed
income assets to support a higher floor.
We maintain an ongoing research program to improve and extend
our investment methodologies as well as our portfolio management
and investment advisory services. We conduct research into the
needs of retirees, publishing new findings in academic and
practitioner journals. Research has included a behavioral
finance study of the demand for annuities, efficient methods for
addressing longevity risk and efficient methods for generating
retirement income. This research can form the basis of
extensions to our current investment methodology, such as
Income+. We believe that these extensions can expand the
opportunity to manage assets for participants both within
existing sponsored plans as well as in IRA rollover accounts.
Investment
Technology
We believe portfolio management services in the workplace should
be offered to all eligible plan participants regardless of
wealth. As of December 31, 2010, the median assets under
management for all Professional Management members was
approximately $36,000. Achieving our objective requires
significant scalability to achieve an affordable cost to the
investment manager. The scalability of our technology has been
tested, and continues to deliver flexibility and results as our
business has grown. As of December 31, 2010, we were
managing the assets of approximately 472,000 members with a
total AUM of approximately $37.7 billion.
Our Advice Engines consist of two main components: a Simulation
Engine and an Optimization Engine. In the course of our
development, we have received twelve U.S. patents that
relate to various parts of our financial advisory platform,
including eight U.S. patents that apply specifically to the
Advice Engines.
Simulation Engine. We have developed a Monte
Carlo Simulation Engine that provides plan participants with a
view of the potential range of future values of their retirement
investments. The Simulation Engine helps plan participants reach
informed decisions about the appropriate level of risk, savings
and time horizon to improve the likelihood of achieving
financial goals. Our Simulation Engine is capable of:
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modeling more than 30,000 securities, including retail mutual
funds, stocks, employee stock options, institutional funds,
guaranteed investment contracts and stable value funds,
exchange-traded funds and fixed-income securities while
considering tax implications, expenses, redemption fees, loads
and distributions;
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considering security-specific characteristics such as investment
style, expenses, turnover, manager performance, and
security-specific and industry risk;
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forecasting the total household portfolio, including
tax-deferred and taxable accounts;
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incorporating social security, pension income and other
retirement benefits; and
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presenting outcomes in terms of portfolio value or retirement
income.
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Optimization Engine. We use our Optimization
Engine to construct personalized portfolios. We do not rely on
generic, model portfolios that are unable to accommodate many
real-world complexities. We believe individuals prefer
personalized investment recommendations that consider their
personal preferences and financial circumstances over model
portfolios.
Our Optimization Engine takes into consideration the costs,
quality and investment styles of the specific investment
alternatives available to a plan participant. Specifically, our
investment recommendations take into
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consideration for each fund the mix of asset class exposures,
fund expenses, turnover, fund-specific risk due to active
management, manager performance and consistency, user-imposed
constraints and tax efficiency, where applicable, to construct a
personalized portfolio recommendation for each client. The
calibration of this model is based on more than a decade of
research into the factors that influence investment performance.
Our approach does not rely on market timing or tactical asset
allocation strategies. Our models are designed and calibrated on
an ongoing basis to reflect the consensus market expectations
built into the observed asset holdings of the market as a whole.
We believe this approach increases the probability that our
recommendations are consistent with current market conditions
and are free from subjective or market timing biases that can
arise from traditional optimization models. Our platform has
been employed to provide portfolio management services,
investment advice and retirement readiness assessments to
millions of investors over the last 12 years.
When constructing a portfolio during the accumulation phase, our
Optimization Engine:
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supports real-time, specific, product-level buy and sell
recommendations for Online Advice, which can be readily
executed, and automated transactions for Professional Management;
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creates recommended portfolios from the available investment
alternatives, such as retail mutual funds, institutional funds
and employer stock, in the case of a 401(k) plan, or from either
the entire universe of more than 15,000 retail mutual funds, or
a subset thereof, in the case of taxable or other tax-deferred
accounts;
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creates recommendations across multiple taxable and tax-deferred
accounts;
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takes into consideration investment objective, investor risk
preferences, restricted positions, redemption fees, investor
constraints and outside account information provided to us to
create personalized investment recommendations;
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for assets held in taxable accounts, considers the impact of
personal tax rates, unrealized capital gains and losses, the tax
efficiency of specific investment options including the
propensity to distribute capital gains and income distributions
and the benefit of optimal asset placement to maximize after-tax
investment returns; and
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enables real-time interaction with plan participants allowing
them to partially override certain types of recommendations and
immediately receive updated advice reflecting these constraints.
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When managing a portfolio during the income phase, our
Optimization Engine:
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creates structured 401(k) portfolios of fixed income and
equities that enable the generation of steady income payouts
that can last for life, and can go up with the market; and
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takes into consideration fund expenses, bond durations, asset
class style exposures, and changes in interest rates to create
dynamic portfolios that support steady income payouts.
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Our systems assess a plan participants portfolio through a
variety of market conditions including variation in inflation,
interest rates, dividends and the performance of 15 different
asset classes. We are able to simulate an individual investment
portfolios performance across a wide variety of scenarios
in a fraction of a second, illustrating the possible outcomes
for a given strategy. This technology underlies the interactive
user experience available to users online or through call center
sessions. The platform enables us to provide a financial
forecast of a plan participants current or target
portfolio, showing the impact of a wide variety of potential
market scenarios on investment performance.
Research
and Development
Research and development expense includes costs associated with
defining and specifying new features and ongoing enhancement to
our Advice Engines and other aspects of our service offerings,
financial research, quality assurance, related administration
and other costs that do not qualify for capitalization. Costs in
this area are primarily related to employee compensation for our
investment research, product development and engineering
personnel and related expenses and, to a lesser extent, related
external consulting expenses.
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Research and development expenses were $19.3 million in
2010, compared to $15.6 million and $13.7 million in
2009 and 2008, respectively. A substantial amount of the
research and development expenses in 2010 were allocated to the
development of the Income+ feature.
Customers
and Key Relationships
We provide personalized portfolio management services,
investment advice and retirement income services to plan
participants and reach them through plan sponsors whose
retirement plans are administered by plan providers.
Retirement Plan Participants. We define plan
participants as employees participating in retirement plans who
have access to our Professional Management or Online Advice
services. As of December 31, 2010, approximately
7.3 million plan participants had access to our services.
As of December 31, 2010, we managed portfolios for
approximately 472,000 members with a median balance of
approximately $36,000 in their 401(k) accounts, collectively
representing approximately $37.7 billion in AUM. More than
2 million participants have accepted our online services
agreement.
Retirement Plan Sponsors. We define plan
sponsors as employers across a range of industries who offer
defined contribution plans to employees. As of December 31,
2010, we were under contract to provide Professional Management
services to 414 plan sponsors. No more than 5% of our revenue
was associated with any one plan sponsor in 2010. As of
December 31, 2010, the average sponsor retention over the
last three years was 98%. Our plan sponsor agreements are
typically for an initial three or five year term and continue
thereafter unless terminated. At any time during the initial
term or thereafter, a plan sponsor can cancel a contract for
fiduciary reasons or breach of contract. A plan sponsor can
generally terminate a contract after the initial term upon
90 days notice.
Retirement Plan Providers. We define plan
providers as the administrators and recordkeepers of defined
contribution plans. In consultation with plan sponsors, plan
providers make available a range of investment alternatives
through retirement plans to individual participants. We work
with plan providers to make available portfolio management and
investment advisory services to the participants in the defined
contribution plans of plan sponsors. We deliver our services to
plan sponsors and plan participants primarily through existing
connections with eight retirement plan providers. Our contracts
with plan providers generally have terms ranging from three to
five years, and have successive automatic renewal terms of one
year unless terminated in accordance with prior notice
requirements. Certain of the plan provider agreements are in or
will soon be in renewal periods. In addition, a plan provider
may terminate its contract with us at any time for specified
breaches. We maintain two types of relationships with our plan
providers:
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Subadvisory Relationships. In these
relationships, the plan provider is the primary advisor and plan
fiduciary and we act in a subadvisory capacity. Our contract is
with the plan provider and not the plan sponsor. We receive
sales support from the plan provider and offer our co-branded
services under the plan providers brand, with the services
identified as powered by Financial Engines. Revenue
is collected by the plan provider who then pays a subadvisory
fee to us. We have subadvisory relationships with ING, JPMorgan
and Vanguard; and in March 2011, Aon Hewitt announced our
agreement to change to a subadvisory relationship for plan
sponsors not currently under contract or in negotiations with us
directly. We have historically earned, and expect to continue to
earn on a combined basis, a significant portion of our revenue
through these three retirement plan providers.
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Direct Advisory Relationships. In these
relationships, we are the primary advisor and a plan fiduciary.
Data is shared between the plan providers and us via data
connections. In addition, our sales teams directly engage plan
sponsors, although, in some cases, we have formed and are
executing a joint sales and collaborative marketing strategy
with the plan provider. We have separate contracts with both the
plan sponsor and plan provider and pay fees to the plan provider
for facilitating the exchange of plan and plan participant data
as well as implementing our transaction instructions for member
accounts. Plan providers with whom we have direct advisory
relationships are ACS, Charles Schwab (for a few plan sponsors),
Fidelity, Aon Hewitt (for plan sponsors currently under contract
or in negotiations with us), Mercer and T. Rowe Price.
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Sales and
Marketing
Increasing the number of plan participant accounts and assets we
manage requires establishing relationships and data connections
with plan providers, obtaining contracts with plan sponsors to
make our services available to their plan participants and
conducting direct marketing and other promotional activities to
encourage plan participants to use our Online Advice service or
to enroll in our Professional Management service, including the
Income+ feature.
Establishing Relationships and Connections with Plan
Providers. We rely on direct sales to create
contractual relationships with plan providers. Following
contract signing, technical teams from Financial Engines and the
plan provider initiate a data connection project that typically
takes between four months and one year to complete. Once we have
incurred this one-time, up-front cost to establish a
relationship and connection with a plan provider, we are able to
roll out our services for any plan sponsor of that plan provider
with more modest time and effort.
Obtaining Contracts with Plan Sponsors. Either
Financial Engines or, in the case of a subadvisory relationship,
the plan provider, must obtain a contract with a plan sponsor
before we can make available our Professional Management or
Online Advice services to that plan sponsors participants.
We market our services to plan sponsors in the following manner:
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Sell through the Retirement Plan
Provider. Where we have a subadvisory
relationship with the plan provider, we provide a combination of
primary and secondary sales and marketing support depending on
the plan sponsor opportunity. Together with the plan provider,
we develop a joint sales and rollout plan in which our
relationship managers and direct sales team support the plan
provider. This distribution model enables us to reach plan
sponsors efficiently, while providing consistent and independent
investment advice to plan participants.
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Direct to Plan Sponsor. In the case of direct
advisory relationships, we pursue a direct sales strategy with
plan sponsors. Our direct sales teams efforts are
supported by a client services team that engages in sales
efforts with existing plan sponsors and that coordinates sales
activities directed at new plan sponsors with our plan provider
partners. The direct sales and client services teams are
supported by a channel marketing team that seeks to generate
demand for our services through public relations, industry
events, plan provider specific marketing programs and sales
support in the field.
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Direct Marketing to Plan Participants. Once a
retirement plan has been set up on our systems and our services
have been made available to plan participants, we conduct direct
marketing, print fulfillment and other promotional activities to
encourage use of our Online Advice service and enrollment in our
Professional Management service. These efforts typically include
printed Retirement Evaluations, email notifications and website
integration. These campaigns are usually conducted at the time
of rollout and annually thereafter. Plan sponsors can choose an
Active Enrollment campaign, in which a plan participant must
affirmatively sign up for the Professional Management service,
or a Passive Enrollment campaign, in which a plan participant
will become a member of the Professional Management service
unless the individual declines the service. Passive Enrollment
campaigns achieve higher enrollment results at lower acquisition
cost per member than do Active Enrollment campaigns. We believe
Passive Enrollment is attractive to plan sponsors due to the
lower fees payable by plan participants who are passively
enrolled, the fiduciary protection afforded to plan sponsors by
participants having to affirmatively elect to not receive
professional advice and the relatively higher number of
participants who will be enrolled and receiving professional
management upon rollout. Depending on the proportion of the
plans participants who are passively enrolled, we
eliminate or reduce our platform fees, as well as reducing the
fees payable by plan participants.
Service
Delivery and Systems
Our service delivery team is responsible for the rollout,
operation and support of our Professional Management and Online
Advice services. As of December 31, 2010, we had rolled out
our Professional Management service at 414 plan sponsors with
approximately 472,000 members enrolled in this service. In
addition, the service delivery team supports the availability of
the service to approximately 7.3 million plan participants
who have access to our Online Advice service.
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Our client implementations team is responsible for project
management and the steps involved in setting up and rolling out
our services to a plan sponsor. This includes learning the
specifics of each plan sponsors plan(s), including the
fund lineup, fees, matching rules, associated defined benefit
and non-qualified and other plans, configuring the plan
specifics using our plan sponsor configuration tool, verifying
the implementation and approving the commencement of enrollment
efforts. The team also oversees the preparation and production
of enrollment materials for each participant in the plan. Once a
sponsor is set up and rolled out, our client implementations
team is also responsible for maintenance of each sponsors
ongoing plan updates as directed by our account managers.
The operations team is responsible for data processing and
validation of prospect data for new sponsor rollouts and annual
campaigns, as well as the ongoing servicing of members in the
Professional Management service. These member servicing
responsibilities include member data load and verification, the
coordination and oversight of all printed materials, such as
Welcome Kits and quarterly Retirement Updates, transaction
processing and reconciliation, fee processing and reconciliation
and quarterly sponsor report generation. For members with
Income+, the operations team is also responsible for
coordinating with the plan provider to facilitate the generation
and distribution of retirement payouts in the form of checks or
direct deposits.
Our advisor call center is staffed with registered Investment
Advisor Representatives. These advisors service participants
through phone and email channels by providing guidance to plan
participants regarding the operation of the program, enrollment
and personalization of the participants financial profile.
Our registered Investment Advisor Representatives and certain
call center personnel of the plan providers with whom we work
have access to the Financial Engines Professional Advisor, our
proprietary client relationship management application, which
enables the advisor to change or add to the personal information
used to manage the members portfolio allocation.
Registered Investment Advisor Representatives can modify member
inputs but cannot modify Advice Engine outputs and
recommendations.
Our services are deployed using a centrally hosted, web-based
architecture built on industry-standard hardware and software.
We have off-site
back-up
facilities for our database and network equipment, a disaster
recovery plan and on-going third-party security audits to ensure
the integrity of our systems. We evaluate and improve our
systems based on measures of availability, system response time
and processing capacity.
Competition
We operate in a competitive industry, with many investment
advice providers competing for business from individual
investors, financial advisors and institutional customers.
Direct competitors who offer independent portfolio management
and investment advisory services to plan participants in the
workplace include Morningstar, GuidedChoice and ProManage. Plan
providers that offer directly competing portfolio management and
investment advisory services to investors in the workplace
include Fidelity and Merrill Lynch. We currently have a
relationship with Fidelity that allows us to provide our
services to plan sponsors, for whom Fidelity is the plan
provider, who elect to hire us. We also face indirect
competition from products that could potentially be substitutes
for our portfolio management services, investment advice and
retirement income services, most notably target-date retirement
funds. Target-date funds are offered by multiple financial
institutions, such as BlackRock, T. Rowe Price, Fidelity and
Vanguard. These funds provide generic asset allocation based
solely on the investment horizon of the investor. Among the plan
sponsors to whom we offer our Professional Management service
and that offer target-date funds, approximately 78% offer
retail-priced target-date funds. Target-date funds, managed
accounts and balance funds have been granted Qualified Default
Investment Alternative, or QDIA, status by the Department of
Labor. In addition, with the introduction of the Income+
feature, indirect competitors who offer income solutions in
retirement include providers of insurance products, such as
annuities.
We believe the competitive factors in our industry include:
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ability to provide systemic portfolio management, investment
advice and retirement income services based on widely recognized
financial economic theory without conflicts of interest during
both the accumulation and the income phases of retirement;
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established investment methodology and technology that allows
for personalized scalable advice;
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ability to provide a retirement income feature that is easy for
plan sponsors to implement with no fiduciary lock-in, which can
provide participants with the potential for steady lifetime
payments and flexibility;
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quality, breadth and convenience of advisory services;
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established relationships with plan providers and plan sponsors;
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reputation and experience serving plan sponsors and plan
participants; and
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price.
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We believe we currently compete favorably with respect to these
factors.
Regulation
Our investment advisory and management business is subject to
extensive, complex and rapidly changing federal and state laws
and regulations. Financial Engines Advisors L.L.C., a subsidiary
of Financial Engines, Inc., is registered as an investment
advisor with the SEC and is subject to examination by the SEC.
The Investment Advisers Act of 1940, as amended, referred to as
the Investment Advisers Act, and related regulations impose
numerous obligations and restrictions on registered investment
advisers including fiduciary duties, record keeping
requirements, operational requirements, marketing requirements
and disclosure obligations.
The SEC is authorized to institute proceedings and impose fines
and sanctions for violations of the Investment Advisers Act,
including the power to limit, restrict or prohibit a registered
investment adviser from carrying on its business in the event
that it fails to comply with applicable laws and regulations.
Our failure to comply with the requirements of the Investment
Advisers Act or the related SEC rules and interpretations, or
other relevant legal provisions could have a material adverse
effect on us. We believe we are in compliance in all material
respects with SEC requirements and all material laws and
regulations. We were last inspected by the SEC in 2000. At the
end of that examination the SEC staff sent us a letter
indicating that the examination was concluded without findings,
typically referred to as a no-further action letter
or no deficiencies letter. These findings do not
indicate that the SEC staff concluded that we were in compliance
with federal securities laws or other applicable laws and
regulations, but only that no deficiencies or violations came to
the attention of the SEC staff during the course and scope of
their examination.
We derived nearly all of our revenue from Financial Engines
Advisors L.L.C.s investment advisory and management
services through our contracts with plan providers, plan
sponsors and plan participants. As an Investment Advisor,
Financial Engines Advisors L.L.C. is not permitted to assign any
investment advisory contract without the relevant clients
consent. The term assignment is broadly defined and
includes direct assignments as well as assignments that may be
deemed to occur, under certain circumstances, upon the transfer,
directly or indirectly, of a controlling interest in Financial
Engines Advisors L.L.C. The initial public offering of our
common stock did not constitute an assignment for these
purposes. Accordingly, we did not seek approvals from our
clients in connection with our initial public offering.
Some of our executives and other employees are registered
Investment Adviser Representatives with various states through
the Investment Adviser Registration Depository and are subject
in some states to examination requirements.
Financial Engines Advisors L.L.C. is subject to the Employee
Retirement Income Security Act of 1974, as amended, referred to
as ERISA, and the regulations promulgated thereunder, with
respect to investment advisory and management services provided
to participants in retirement plans covered by ERISA and is also
subject to state laws applicable to retirement plans not covered
by ERISA. ERISA and applicable provisions of the Internal
Revenue Code of 1986, as amended, referred to as the Code,
impose certain duties on persons who are fiduciaries under ERISA
and prohibit certain transactions involving ERISA plan clients.
We rely on certain regulatory interpretations and guidance in
connection with our current business model, including
regulations and guidance allowing us to passively enroll
participations into our Professional Management service. We
provide subadvisory services to plan participants pursuant to
the Department of Labors Advisory Opinion
2001-09A.
The failure of Financial Engines Advisors L.L.C. to comply with
these requirements could have a material adverse effect on us.
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We are also subject to state and federal regulations related to
privacy, data use and security. These rules require that we
develop, implement and maintain written, comprehensive
information security programs including safeguards that are
appropriate to our size and complexity, the nature and scope of
our activities and the sensitivity of any customer information
at issue. In recent years, there has been a heightened
legislative and regulatory focus on data security, including
requiring consumer notification in the event of a data breach.
Legislation has been introduced in Congress and there have been
several Congressional hearings addressing these issues. Congress
is considering legislation establishing requirements for data
security and response to data breaches that, if implemented,
could affect us by increasing our costs of doing business. In
addition, several states have enacted security breach
legislation requiring varying levels of consumer notification in
the event of a security breach. Several other states are
considering similar legislation. Further, the SEC has issued a
proposed rule expanding current requirements for safeguarding
and disposing of customer information. The proposed rule also
adds a requirement to notify customers in the event of a data
security breach. Adoption of this rule will also increase our
costs of doing business.
In recent years, there has been a heightened legislative and
regulatory focus on the financial services industry, including
proposals that call for creation of a self-regulatory framework
for investment advisors similar to the regulatory structure that
currently exists for broker-dealers through FINRA, elimination
of pre-dispute arbitration clauses, additional fee disclosures,
and the imposition of additional qualification requirements on
investment advisors providing services to ERISA plan clients.
The
Dodd-Frank
Wall Street Reform and Consumer Protection Act, referred to as
the
Dodd-Frank
Act, which was signed into law on July 21, 2010, included
various financial reform proposals that may affect investment
advisers, including Financial Engines Advisors L.L.C. Although
many implementing rules and regulations under the Dodd Frank Act
are still pending, it is expected that the compliance costs and
liability risks for investment advisers will increase.
Rigorous legal and compliance analysis of our business is
important to our culture. Our General Counsel supervises our
compliance group, which is responsible for addressing all
regulatory and compliance matters that affect our activities.
Intellectual
Property
We rely on a combination of trademark, copyright, patent and
trade secret protection laws to protect our proprietary
technology and our intellectual property. We seek to control
access to and distribution of our proprietary information. We
enter into confidentiality agreements with our employees,
consultants, vendors, plan sponsors and plan providers that
generally provide that any confidential or proprietary
information developed by us or on our behalf be kept
confidential. We have proprietary know-how in software
development, implementation and testing methodologies. We also
pursue the registration of certain of our trademarks and service
marks in the United States and other countries. We have
registered the mark Financial Engines in the United
States, Australia, Switzerland, China, the European Community,
Hong Kong, Japan, Taiwan and Tunisia and have registered sun and
clouds design marks in the United States, China, Hong Kong,
Japan, and Taiwan. We have registered the marks
Adviceserver and Forecaster in Japan and
FinEng in Tunisia. We have registered our corporate
logo and the marks Investor Central, Financial
Engines Investment Advisor, Retirement Help for
Life, and We Make it Personal in the United
States. Advice Light is also a trademark owned by
Financial Engines, Inc., which we use to notify an online user
that we have advice on his or her account. In addition, we have
registered our domain name, www.FinancialEngines.com. We have
twelve issued U.S. patents in the following categories:
user interface; outcomes-based investing, including our
financial advisory system, our pricing module and load-aware
optimization; financial goal planning and advice palatability.
These patents have expiration dates ranging from
December 2, 2017 to February 23, 2021. We also have
several pending U.S. patent applications and pending
applications and issued patents in foreign jurisdictions.
We have established a system of security measures to protect our
computer systems from security breaches and computer viruses. We
have employed various technology and process-based methods, such
as clustered and multi-level firewalls, intrusion detection
mechanisms, vulnerability assessments, content filtering,
antivirus software and access control mechanisms. We also use
encryption techniques. We control and limit access to
customer-specific project areas, particularly at our data
centers based on a need to know basis.
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Employees
As of December 31, 2010 we employed 303 full-time
equivalent employees including employees in investment
management, product development and engineering, sales and
marketing, service delivery, and general and administrative
management. We consider relations with our employees to be good
and have never experienced a work stoppage. None of our
employees are either represented by a labor union or subject to
a collective bargaining agreement.
Available
Information
Our website is
http://www.financialengines.com.
We make available free of charge, on or through our website, our
Annual Report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, if any, or other filings filed
or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after
electronically filing or furnishing these reports with the
Securities and Exchange Commission, or SEC. Information
contained on our website is not a part of this report. We have
adopted a code of ethics applicable to our senior financial
officers which is available free of charge, on or through our
websites investor relations page.
The SEC maintains an Internet site at
http://www.sec.gov
that contains our the Annual Report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, if any, or other filings filed
or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, proxy and information statements. All reports that
we file with the SEC may be read and copied at the SECs
Public Reference Room at 100 F Street, N.E.,
Washington, DC, 20549. Information about the operation of the
Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330.
Risks
Related to Our Business
Our
revenue and operating results can fluctuate from period to
period, which could cause our share price to
fluctuate.
Our revenue and operating results have fluctuated in the past
and may fluctuate from
period-to-period
in the future due to a variety of factors, many of which are
beyond our control. Factors relating to our business that may
contribute to these fluctuations include the following factors,
as well as other factors described elsewhere in this document:
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a decline or slowdown of the growth in the value of financial
market assets, which may reduce the value of assets we have
under management and therefore our revenue and cash flows;
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variations in expected enrollment rates for our Professional
Management service;
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unanticipated delays of anticipated advertising, marketing
promotions or rollouts of our services;
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changes in the number of Professional Management members who
withdraw all assets from their 401(k) plan, effectively
terminating their relationship with us, or who decide to cancel
their Professional Management program participation;
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unanticipated changes to economic terms in contracts with plan
providers or plan sponsors, including renegotiations;
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changes in fees paid by us to plan providers for whom we are not
acting as a subadvisor for data retrieval, transaction
processing and fee deduction interfaces based on attaining
contractually-agreed upon thresholds;
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downward pressure on fees we charge for our services;
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mix in plan sponsors that choose our Active Enrollment or
Passive Enrollment options;
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unanticipated delays in expected service availability;
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fluctuations in quarterly revenue due to changes in fees paid by
Professional Management members based on attaining
contractually-agreed upon thresholds;
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cancellations or non-renewal of existing contracts with plan
providers or plan sponsors;
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unanticipated plan sponsor terminations during a migration from
Online Advice only to Professional Management services;
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failure to enter into contracts with new plan sponsors;
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unanticipated changes in the timing or cost of our enrollment
and member materials or mix of subadvised, advised and Passive
Enrollment materials sent to our Professional Management members
and postage costs;
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elimination or reduction of sponsor matching contributions into
members 401(k) plans, which could reduce the growth rate
of assets under management;
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changes in laws or regulatory policy that could impact our
ability to offer services to plan providers as a subadvisor;
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unanticipated delays in recognizing revenue based on timing of
meeting specified milestones under contracts with customization
and consulting services;
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changes in our pricing policies or the pricing policies of our
competitors to which we have to adapt; and
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negative public perception and reputation of our Company or the
financial services industry.
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As a result of these and other factors, the results of any prior
quarterly or annual periods should not be relied upon as
indications of our future revenue or operating performance.
We
have an accumulated deficit and have incurred net losses in the
past. We may incur net losses in the future.
As of December 31, 2010, we had an accumulated deficit of
approximately $93.8 million. We have incurred net losses in
each year through 2008. We may incur net losses in the future,
in which event our operating results and financial condition
could be harmed.
A
substantial portion of our revenue is based on fees earned on
the value of assets we manage. Our revenue and earnings could
suffer if the financial markets experience a downturn or a
slowdown in growth that reduces the value, or slows the growth,
of our Assets Under Management.
We derive a significant and growing portion of our revenue from
member fees based on the assets in the retirement accounts we
manage, which we refer to as AUM. We allocate these assets among
the investments available to each particular plan participant.
The investment alternatives for a particular plan are selected
by the plans fiduciary, not by us, and may include retail
mutual funds, institutional funds, exchange-traded funds,
fixed-income investments and potentially higher volatility
employer stock, if it is an investment alternative in a
particular plan. In addition, our business is highly
concentrated in the 401(k) plans of plan sponsors in the United
States and the United States subsidiaries of international
companies. The value of these investments can be affected by the
performance of the financial markets globally, currency
fluctuations, interest rate fluctuations and other factors.
Prior to October 1, 2010, our professional management
revenue was generally the product of member fee rates and the
value of AUM at the end of each quarter. Effective
October 1, 2010, we changed our method of calculating fees
for substantially all members with which we have a direct
advisory relationship from quarterly to monthly, and fees for
some of our subadvised portfolios are also calculated monthly.
Our methodology may result in lower fees if the financial
markets are down when fees are calculated, even if the market
had performed well earlier in the month or the quarter. In
addition, an economic downturn or slowdown in growth could cause
plan participants or their employers to contribute less to their
401(k) plans and cause fewer eligible employees to participate
in 401(k) plans, which could adversely affect the amount of AUM.
If plan participants are not satisfied with the performance of
their retirement portfolios due to a decline in the financial
markets or otherwise, our cancellation rates could increase,
which in turn would cause our AUM to decline. If any of these
factors reduces the value of assets we have under
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management, the amount of fees we would earn for managing those
assets would decline, and our revenue, operating results and
financial condition could be harmed.
Our
revenue could be harmed if we experience unanticipated delays in
expected service availability.
We generally do not earn platform fees from a plan sponsor until
our services are available to plan participants, and we do not
earn fees for our Professional Management service until we begin
to manage a participants account. If service availability
is delayed due to actions or inactions on our part or on the
part of a plan sponsor or provider, or due to matters beyond our
control, our revenue would be harmed. This in turn would
negatively affect our anticipated operating results and
financial condition for a particular period.
Our
revenue could be harmed if fail to enroll new Professional
Management plan participants or if we experience increased
cancellations or unanticipated variations in new enrollment
campaigns.
Our enrollment rate, and therefore our revenue, depend on plan
participants signing up for or, in the case of a Passive
Enrollment campaign, not declining, the Professional Management
service. Increasing plan participant enrollment in our
Professional Management service increases the AUM on which we
earn fees. If we are unable to continue to increase our
enrollment, our business may not grow as we anticipate.
Unanticipated variations in the number, size, methodology or
timing of enrollment campaigns could also affect our revenue for
a particular period. If we are not able to generate expected
enrollment under a particular contract, this would negatively
affect our revenue growth. For example, we have found that if
plan sponsors do not use our standard enrollment campaign,
enrollment rates tend to be lower. If fewer plan sponsors elect
Passive Enrollment for their plan participants, which typically
generates higher enrollment rates, our revenue may not grow at
anticipated rates. Even when we have rolled out our Professional
Management service at a particular plan sponsor, some plan
participants may not be eligible for our services due to plan
sponsor limitations on employees treated as insiders for
purposes of securities laws or other characteristics of the plan
participant. Certain securities within a plan participants
account may be ineligible for management by us, such as employer
stock subject to trading restrictions, and we do not manage or
charge a fee for that portion of the account. As we endeavor to
find new ways to grow enrollment, we may introduce processes
that some plan providers, plan sponsors or plan participants
reject or resist, which may result in an unsuccessful enrollment
campaign or may harm our reputation with those plan providers,
plan sponsors or plan participants, thereby jeopardizing future
enrollment with those parties. Further, individual plan
participants whose accounts we manage may choose at any time to
stop having us manage those accounts. Historically, member
cancellations rates have typically increased during periods
where there has been a significant decline in stock market
performance and, in addition, member cancellation rates are
typically the highest in the three months immediately following
the completion of a given promotional campaign. If we are
unsuccessful in our Professional Management enrollment
campaigns, if we lose plan participants, or if we otherwise fail
to increase enrollment rates, our revenue, operating results and
financial condition could be harmed.
We
plan to extend and expand our services and may not be able to
successfully implement new services or accurately estimate the
impact on our business of developing and introducing these
services.
We plan to extend our services into new areas, including helping
investors turn their retirement assets into retirement income.
For example, we recently introduced Income+, a service available
to our Professional Management members which allows them to
manage their defined contribution assets while directing payouts
from their retirement accounts. We intend to invest significant
resources to the research, development, sales and marketing of
this new service. We have limited experience determining and
executing income payments from defined contribution accounts. If
our assessments or forecasts with respect to the expected
duration and sufficiency of assets to support retirement income
payments to participants are inaccurate, or if we fail to ensure
that payouts are made at the times expected, our business and
reputation could suffer. We may not be able to anticipate or
manage new risks and obligations or legal, compliance or other
requirements that may arise if we offer investment management or
retirement income payout services for accounts other than 401(k)
accounts. We may not be able to accurately estimate the impact
of these future services on our business or how the benefits of
these services will be perceived by our clients. In addition,
the anticipated benefits of these services on our business may
not outweigh the resources and costs associated with their
development or the liabilities associated with their operation.
If we do not
18
realize the anticipated benefits of these services, our revenue,
operating results and financial condition could be harmed.
Our
revenue is highly dependent upon a small number of plan
providers with whom we have relationships, and the renegotiation
or termination of our relationship with any of these plan
providers could significantly impact our business.
Our relationships and data connections with plan providers allow
us to effectively manage plan participant accounts and integrate
our services into plan providers current service
platforms. These relationships also provide us with an advantage
in trying to sign potential plan sponsors. If a plan provider
were to terminate our contract, reduce its volume of business,
or substantially renegotiate the terms of its contract with us,
our revenue could be harmed.
We refer to three of our eight primary retirement plan provider
relationships as subadvisory relationships. In March 2011, one
additional plan provider announced an agreement to change to a
subadvisory relationship for plan sponsors not currently under
contract or in negotiations with us directly. For the provider
relationships which we refer to as subadvised, we typically act
as subadvisor to the plan provider acting as investment advisor,
but we may directly act as investment advisor if Online Advice
is the only service offered by a particular plan sponsor or for
certain legacy plans. Where we act as subadvisor, we do not have
a direct relationship with the plan sponsors and therefore may
be less able to influence decisions by those plan sponsors to
use or continue to use our services, or, if Online Advice is the
only service offered by a particular plan sponsor, to add our
Professional Management service. We have historically earned,
and expect to continue to earn on a combined basis, a
significant portion of our revenue through the three retirement
plan providers with whom we had subadvisory relationships as of
December 31, 2010. The renegotiation or termination of our
relationship with any of these plan providers could negatively
impact our business. For the year ended December 31, 2010,
19%, 9% and 6% of our total revenue was attributable to the
subadvisory fees paid to us by JP Morgan, Vanguard and ING,
respectively, the three plan providers with whom we had
subadvisory relationships as of December 31, 2010. We
receive additional revenue from fees paid to us directly by the
online-only or legacy plan sponsors that receive plan
administration services from certain of the providers with whom
we have subadvisory relationships but such fees did not
represent a significant portion of our total revenue for the
year ended December 31, 2010.
Our contracts with our eight primary retirement plan providers
generally have terms ranging from three to five years, and have
successive automatic renewal terms of one year unless terminated
in accordance with prior notice requirements. A majority of
these provider agreements are in renewal periods. A plan
provider may also terminate its contract with us at any time for
specified breaches. In addition, there are unpredictable
factors, other than our performance, that could cause the loss
of a plan provider. If we lose one of our plan providers with
whom we have a relationship or if one of those plan providers
significantly reduces its volume of business with us or
renegotiates the economic terms of its contract with us, our
revenue, operating results and financial condition could be
harmed.
Some
plan providers with whom we have relationships also provide or
may provide competing services.
Some plan providers with whom we have relationships, such as
Fidelity, offer or may offer directly competing investment
guidance, advice portfolio management and retirement income
services to plan participants. We also face indirect competition
from products that could potentially substitute for our
services, most notably target-date retirement funds, which are
offered by a number of plan providers with whom we have
relationships, including J.P. Morgan, Fidelity and
Vanguard. Among the plan sponsors to whom we offer our
Professional Management service and that offer target-date
funds, approximately 78% offer retail-priced target-date funds.
Finally, some of our plan providers offer annuities and other
retirement income products which compete with Income+. This
competition with companies with whom we have relationships can
strain the relationship with plan providers and may result in
less favorable contract terms or contract cancellation, in which
event our revenue, operating results and financial condition
could be harmed.
19
Our
revenue is highly dependent upon the plan sponsors with whom we
have relationships, and the renegotiation or termination of our
relationship with one or more large plan sponsors could
significantly impact our business.
A substantial portion of our revenue is generated as a result of
contracts with plan sponsors. Under these contracts, we earn
annual platform fees that are paid by the plan sponsor, plan
provider or the retirement plan itself as well as fees based on
AUM that are generally paid by plan participants. Our contracts
with plan sponsors typically have initial terms of three or five
years and continue thereafter unless terminated. At any time
during the initial term or thereafter, a plan sponsor can cancel
a contract for fiduciary reasons or breach of contract. A plan
sponsor can generally terminate a contract after the initial
term upon 90 days notice. If a plan sponsor were to
cancel or not renew a contract, we would no longer earn platform
fees under that contract. In addition, we would no longer manage
any assets in that plan and consequently would no longer earn
fees based on AUM in that plan. If one or more plan sponsors
were to cancel their contracts with us or fail to renew those
contracts, our revenue, operating results and financial
condition could be harmed.
Our
Professional Management service makes up a significant and
growing part of our revenue base. Our business could suffer if
fees we can charge for these services decline.
We earn fees for our Professional Management service based on
the value of assets in the accounts we manage, which we refer to
as AUM. We believe that these services will continue to make up
a substantial and growing portion of our revenue for the
foreseeable future. There are many investment advisory and
management services and other financial products available in
the marketplace, which could result in downward pressure on fees
for our Professional Management service. Government regulation,
such as legislative constraints on fees, could also limit the
fees we can charge for our Professional Management service. Our
contract terms may include thresholds, which upon attainment,
may reduce the fees we charge for our Professional Management
service. If we are forced to lower the fees we charge for our
Professional Management service, our revenue, operating results
and financial condition could be harmed.
Our
failure to increase the number of plan sponsors with whom we
have relationships could harm our business.
Our future success depends on increasing the number of plan
sponsors with whom we have relationships. If the market for our
services declines or develops more slowly than we expect, or the
number of plan sponsors that choose to provide our services to
their plan participants declines or fails to increase as we
expect, revenue, operating results and financial condition could
be harmed.
We
rely on plan providers and plan sponsors to provide us with
accurate and timely plan and plan participant data in order for
us to provide our services, and we rely on plan providers to
execute transactions in the accounts we manage.
Our ability to provide high-quality services depends on plan
sponsors and plan providers supplying us with accurate and
timely data in a usable format. Errors or delays in the data we
receive from plan providers or plan sponsors, missing data, data
transmitted in a format that we cannot readily use, or
miscommunication about what data should be transmitted or in
what format, could lead us to make advisory, transaction or
disbursement errors that could harm our reputation or lead to
financial liability, or may prevent us from providing our
services to, or earning revenue from, otherwise eligible plan
participants. In addition, when we make changes in an account we
manage, or direct a disbursement, we instruct the plan provider
to execute the transactions. If a plan provider fails to execute
transactions in an accurate and timely manner, it could harm our
reputation or lead to financial liability. In turn, our
operating results and financial condition could be harmed.
We may
be liable to our plan sponsors, plan participants or plan
providers for damages caused by system failures, errors or
unsatisfactory performance of services.
If we fail to prevent, detect or resolve errors in our services,
regardless of the cause of the errors, our business and
reputation could suffer. Errors in inputs or processing, such as
plan
set-ups,
transaction instructions or plan participant data, could be
magnified across many accounts. Concentrated positions held by
many plan participants,
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particularly in employer stock, could result in a large
liability if a systematic input or processing error was to cause
us to make errors in transactions relating to those positions.
We may not be able to identify or resolve these errors in a
timely manner. In addition, failure to perform our services for
Professional Management members, including plan disbursements,
on a timely basis could result in liability. We may also have
liability to the plan provider where we have a subadvisory
relationship with the plan provider. After an error is
identified, resolving the error and implementing remedial
measures would likely divert the attention and resources of our
management and key technical personnel from other business
concerns. Any errors in the performance of services for a plan
sponsor or plan provider, or poor execution of these services,
could result in a plan sponsor or plan provider terminating its
agreement. Although we attempt to limit our contractual
liability for consequential damages in rendering our services,
these limitations on liability may be unenforceable in some
cases, or may be insufficient to protect us from liability for
damages. ERISA and other applicable laws require that we meet a
fiduciary obligation to plan participants. We maintain general
liability insurance coverage, including coverage for errors or
omissions; however, this coverage may not continue to be
available on reasonable terms or may be unavailable in
sufficient amounts to cover one or more large claims. An insurer
might disclaim coverage as to any future claim. A successful
assertion of one or more large claims against us that exceeds
our available insurance coverage or changes in our insurance
policies, including premium increases or the imposition of a
large deductible or co-insurance requirement, in which event our
operating results and financial condition could be harmed.
If our
reputation is harmed, we could suffer losses in our business and
revenue.
Our reputation, which depends on earning and maintaining the
trust and confidence of plan providers, plan sponsors and plan
participants that are current and potential customers, is
critical to our business. Our reputation is vulnerable to many
threats that can be difficult or impossible to control, and
costly or impossible to remediate. Regulatory inquiries or
investigations, lawsuits initiated by other plan fiduciaries or
plan participants, employee misconduct, perceptions of conflicts
of interest and rumors, among other developments, could
substantially damage our reputation, even if they are baseless
or satisfactorily addressed. In addition, any perception that
the quality of our investment advice may not be the same or
better than that of other providers could also damage our
reputation. Any damage to our reputation could harm our ability
to attract and retain plan providers, plan sponsor customers and
key personnel. This damage could also cause plan participants to
stop using or enrolling in our Professional Management service,
which would adversely affect the amount of AUM on which we earn
fees, in which event our revenue, operating results and
financial condition could be harmed.
Any
failure to ensure and protect the confidentiality of plan
provider, plan sponsor or plan participant data could lead to
legal liability, adversely affect our reputation and have a
material adverse effect on our business, financial condition or
results of operations.
Our services involve the exchange of information, including
detailed information regarding plan participants provided by
plan providers and plan sponsors, through a variety of
electronic and non-electronic means. In addition, plan
participants routinely input personal investment and financial
information, including portfolio holdings and, in some
instances, credit card data, into our systems. We rely on a
complex network of process and software controls to protect the
confidentiality of data provided to us or stored on our systems.
If we do not maintain adequate internal controls or fail to
implement new or improved controls, this data could be
misappropriated or confidentiality could otherwise be breached.
We could be subject to liability if we inappropriately disclose
any plan participants personal information, or if third
parties are able to penetrate our network security or otherwise
gain access to any plan participants name, address,
portfolio holdings, credit card number or other personal
information. Any such event could subject us to claims for
unauthorized credit card purchases, identity theft or other
similar fraud claims or claims for other misuses of personal
information, such as unauthorized marketing or unauthorized
access to personal information.
Many of our agreements with plan sponsors and plan providers do
not limit our potential liability for breaches of
confidentiality and consequential damages. If any person,
including any of our employees, penetrates our network security,
misappropriates or mishandles sensitive data, inadvertently or
otherwise, we could be subject to significant liability from our
plan sponsors and plan providers for breaching contractual
confidentiality provisions or privacy laws. In addition, our
agreements with plan sponsors and plan providers require us to
meet specified minimum system security and privacy standards.
Given the growing concern over privacy and identity theft, we
have been and expect to continue to be subject to increased
scrutiny by both plan providers and plan sponsors, which
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have increased the frequency and thoroughness of their audits.
If we fail to meet these standards, our plan sponsors and plan
providers may seek to terminate their agreements with us.
Regulations in some states may require notification via the
press in the event of security breaches, which could further
harm our reputation. Unauthorized disclosure of sensitive or
confidential data, whether through breach of our computer
systems, systems failure or otherwise, could damage our
reputation, expose us to litigation, cause us to lose business,
harm our revenue, operating results or financial condition and
subject us to regulatory action, which could include sanctions
and fines.
Privacy
concerns could require us to modify our
operations.
As part of our business, we use plan participants personal
data. For privacy or security reasons, privacy groups,
governmental agencies and individuals may seek to restrict or
prevent our use of this data. We have incurred, and will
continue to incur, expenses to comply with privacy and security
standards and protocols imposed by law, regulation, industry
standards or contractual obligations. Increased domestic or
international regulation of data utilization and distribution
practices, including self-regulation, could require us to modify
our operations and incur significant additional expense, in
which event our revenue, operating results and financial
condition could be harmed.
Acquisition
activity involving plan providers or plan sponsors could
adversely affect our business.
Acquisitions or similar transactions involving our plan
providers or plan sponsors could negatively affect our business
in a number of ways. After such a transaction, the plan provider
or plan sponsor might terminate, not renew or seek to
renegotiate the economic terms of its contract with us.
Companies involved in these transactions may experience
integration difficulties that could increase the risk of
providing us inaccurate or untimely data or delay in service
availability. Any of our existing plan sponsors may be acquired
by an organization or a plan sponsor with no relationship with
us, effectively terminating our relationship, or be acquired by
a plan sponsor with an online services-only relationship rather
than a Professional Management relationship which might cause us
to lose business and harm our revenue, operating results or
financial condition. Plan providers could be acquired by a
company offering competing services to ours, which could
increase the risk that they terminate their relationship with
us, or be acquired by an organization with no relationship with
us which might cause us to lose that plan provider, have to
renegotiate the economic terms of their contract with us and
harm our revenue, operating results or financial condition. We
cannot predict the impact, if any, that these corporate actions
may have on our revenue, operating results or financial
condition.
Our
ability to compete, succeed and generate profits depends, in
part, on our ability to obtain accurate and timely data from
third-party vendors on commercially reasonable
terms.
We currently obtain market and other financial data we use to
generate our investment advice from a number of third-party
vendors. Termination of one or more of these vendor agreements,
exclusion from, or restricted use of a data providers
information could decrease the information available for us to
use and offer our clients. We do not currently have secondary
sources or other suppliers for some of these data items and the
lack of these resources may have a material adverse effect on
our business, financial condition or results of operations. If
these data feed agreements were terminated, backup services
would take time to set up and our business and results of
operations could be harmed. We rely on these data suppliers to
provide timely and accurate information, and their failure to do
so could harm our business.
In addition, some data suppliers may seek to increase licensing
fees for providing content to us. If we are unable to
renegotiate acceptable licensing arrangements with these data
suppliers or find alternative sources of equivalent content, we
may experience a reduction in our operating margins or market
share, in which event our revenue, operating results and
financial condition could be harmed.
Our
portfolio management and investment advisory operations may
subject us to liability for losses that result from a breach of
our fiduciary duties.
Our portfolio management and investment advisory operations
involve fiduciary obligations that require us to act in the best
interests of the plan participants to whom we provide advice or
for whom we manage accounts. We may face liabilities for actual
or claimed breaches of our fiduciary duties. We may not be able
to prevent plan participants,
22
plan sponsors or the plan providers to or through whom we
provide investment advisory services from taking legal action
against us for an actual or claimed breach of a fiduciary duty.
Because we currently provide investment advisory services on
substantial assets, we could face substantial liability to plan
participants or plan sponsors if we breach our fiduciary duties.
In addition, we may face liabilities for actual or claimed
deficiencies in the quality or outcome of our investment
advisory recommendations, investment management and other
services, even in the absence of an actual or claimed breach of
fiduciary duty. While we believe that we would have substantial
and meritorious defenses against such a claim, we cannot predict
the outcome or consequences of any such potential litigation.
Competition
could reduce our share of the portfolio management, investment
advisory and retirement planning market and hurt our financial
performance.
We operate in a highly competitive industry, with many
investment advice providers competing for business from
individual investors, financial advisors and institutional
customers. Direct competitors that offer independent portfolio
management and investment advisory services to plan participants
in the workplace include Morningstar, Inc., GuidedChoice and
ProManage LLC. Plan providers that offer directly competing
portfolio management and investment advisory services to
investors in the workplace include Fidelity and Merrill Lynch.
We currently have a relationship with Fidelity that allows us to
provide our services to plan sponsors that elect to hire us for
which Fidelity is the plan provider. We also face indirect
competition from products that could potentially substitute for
our portfolio management services, investment advice and
retirement income, most notably target-date retirement funds.
Target-date funds are offered by multiple financial
institutions, including BlackRock, T. Rowe Price, Fidelity and
Vanguard. These funds provide generic asset allocation based on
the investment horizon of the investor. Target-date funds,
managed accounts and balanced funds have been granted Qualified
Default Investment Alternative, or QDIA, status by the
Department of Labor. In addition, with the introduction of the
Income+ feature, indirect competitors who offer income solutions
in retirement include providers of insurance products. Plan
providers offer or may choose to offer directly and indirectly
competitive products in the future. The plan providers with
which we do not have contractually exclusive relationships may
enter into similar relationships with our competitors. This in
turn may harm our business.
Many of our competitors have larger customer bases and
significantly greater resources than we do. This may allow our
competitors to respond more quickly to new technologies and
changes in demand for services, to devote greater resources
developing and promoting their services and to make more
attractive offers to potential plan providers, plan sponsors and
plan participants. Industry consolidation may also lead to more
intense competition. Increased competition could result in price
reductions or loss of market share, in which event our revenue,
operating results and financial condition could be harmed.
Our
future success depends on our ability to recruit and retain
qualified employees, including our executive
officers.
Our ability to provide portfolio management services, investment
advice and retirement income and maintain and develop
relationships with plan participants, plan providers and plan
sponsors depends largely on our ability to attract, train,
motivate and retain highly skilled professionals, particularly
professionals with backgrounds in sales, technology and
financial and investment services. We believe that success in
our business will continue to be based upon the strength of our
intellectual capital. For example, due to the complexity of our
services and the intellectual capital invested in our investment
methodology and technology, the loss of personnel integral to
our investment research, product development and engineering
efforts would harm our ability to maintain and grow our
business. Consequently, we must hire and retain employees with
the technical expertise and industry knowledge necessary to
continue to develop our services and effectively manage our
growing sales and marketing organization to ensure the growth of
our operations. We believe there is significant competition for
professionals with the skills necessary to perform the services
we offer. We experience competition for analysts and other
employees from financial institutions and financial services
organizations such as hedge funds and investment management
companies that generally have greater resources than we do and
therefore may be able to offer higher compensation packages.
Competition for these employees is intense, and we may not be
able to retain our existing employees or be able to recruit and
retain other highly qualified personnel in the future. If we
cannot hire and retain qualified personnel, our ability to
continue to expand our business would be impaired and our
revenue, operating results and financial condition could be
harmed.
23
If our
intellectual property and technology are not adequately
protected to prevent use or appropriation by our competitors,
our business and competitive position could
suffer.
Our future success and competitive position depend in part on
our ability to protect our proprietary technology and
intellectual property. We rely and expect to continue to rely on
a combination of trademark, copyright, patent and trade secret
protection laws to protect our proprietary technology and
intellectual property. We also require our employees,
consultants, vendors, plan sponsors and plan providers to enter
into confidentiality agreements with us. We currently have 12
issued U.S. patents which relate to novel aspects of our
financial advisory platform, including user interface features,
our pricing module, load-aware optimization, advice
palatability, financial goal planning and other key technologies
of our outcomes-based investing methodologies. We also have
several additional pending U.S. patent applications. In
addition, we have issued patents and pending patent applications
in foreign jurisdictions. One or more of our issued patents or
pending patent applications may be called into question on the
basis of being directed to abstract ideas or methods of doing or
conducting business. The general validity of software patents
and so called business method patents have been
challenged in a number of jurisdictions, including the United
States. Changes in patent laws or case law may impact the scope
of patent-eligible subject matter by, for example, limiting what
constitutes a patentable process. Our patents may
become less valuable if software or business methods are found
to be a non-patentable subject matter or if additional
requirements are imposed that our patents do not meet.
The steps we have taken may be inadequate to prevent the
misappropriation of our proprietary technology. Our patent and
trademark applications may not lead to issued patents and
registered trademarks. There can be no assurance that others
will not develop or patent similar or superior technologies,
products or services, or that our patents, trademarks and other
intellectual property will not be challenged, invalidated or
circumvented by others. The legal standards relating to the
validity, enforceability and scope of protection of intellectual
property rights are uncertain and still evolving. Unauthorized
copying or other misappropriation of our proprietary
technologies could enable third parties to benefit from our
technologies without paying us for doing so, which could harm
our business. Policing unauthorized use of proprietary
technology is difficult and expensive and our monitoring and
policing activities may not be sufficient to identify any
misappropriation and protect our proprietary technology. In
addition, third parties may knowingly or unknowingly infringe
our patents, trademarks and other intellectual property rights,
and litigation may be necessary to protect and enforce our
intellectual property rights. If litigation is necessary to
protect and enforce our intellectual property rights, any such
litigation could be very costly and could divert management
attention and resources.
We also expect that the more successful we are, the more likely
it becomes that competitors will try to develop products that
are similar to ours, which may infringe on our proprietary
rights. If we are unable to protect our proprietary rights or if
third parties independently develop or gain access to our or
similar technologies, our business, revenue, operating results,
financial condition, reputation and competitive position could
be harmed.
Third
parties may assert intellectual property infringement claims
against us, or our services may infringe the intellectual
property rights of third parties, which may subject us to legal
liability and harm our reputation.
Assertion of intellectual property infringement claims against
us, plan providers or plan sponsors could result in litigation.
We might not prevail in any such litigation or be able to obtain
a license for the use of any infringed intellectual property
from a third party on commercially reasonable terms, or at all.
Even if obtained, we may be unable to protect such licenses from
infringement or misuse, or prevent infringement claims against
us in connection with our licensing efforts. We expect that the
risk of infringement claims against us will increase if more of
our competitors are able to obtain patents for software products
and business processes, and if we hire employees who possess
third party proprietary information. Any such claims, regardless
of their merit or ultimate outcome, could result in substantial
cost to us, divert managements attention and our resources
away from our operations and otherwise harm our reputation. Our
process for controlling employees use of third party
proprietary information may not be sufficient to prevent
assertions of intellectual property infringement claims against
us. If we are not successful in overcoming such claims and are
required to pay damages, licensing fees or fines, our revenue,
operating results and financial condition could be harmed.
24
Any
inability to manage our growth could disrupt our business and
harm our operating results.
We expect our growth to place significant demands on our
management and other resources. Our success will depend in part
upon the ability of our senior management to manage growth
effectively. Expansion creates new and increased management and
training responsibilities for our employees. In addition,
continued growth increases the challenges involved in:
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recruiting, training and retaining sufficient skilled technical,
marketing, sales and management personnel;
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preserving our culture, values and entrepreneurial environment;
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successfully expanding the range of services offered to our plan
sponsors and plan participants;
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developing and improving our internal administrative
infrastructure, particularly our financial, operational,
compliance, recordkeeping, communications and other internal
systems; and
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maintaining high levels of satisfaction with our services among
plan sponsors and plan participants.
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Our
ability to raise capital in the future may be limited, and our
failure to raise capital when needed could prevent us from
executing our growth strategy.
We believe that our existing cash and cash equivalents will be
sufficient to fund our planned capital expenditures and other
anticipated cash needs for the foreseeable future. If our
capital resources are insufficient to satisfy our liquidity
requirements, we may seek to sell additional equity or debt
securities or obtain debt financing. If we decide to seek
additional financing, it may result in additional dilution to
existing stockholders or, in the case of debt, may result in
additional operating or financial covenants. We have not made
arrangements to obtain additional financing and there is no
assurance that financing, if required, will be available in
amounts or on terms acceptable to us, if at all.
We
will be subject to additional regulatory compliance
requirements, including Section 404 of the Sarbanes-Oxley
Act of 2002, as a result of becoming a public company and our
management has limited experience managing a public
company.
We have and will continue to incur significant legal, accounting
and other expenses as a public company. The individuals who
constitute our management team have limited experience managing
a publicly traded company and limited experience complying with
the increasingly complex and changing laws pertaining to public
companies. Our management team and other personnel will need to
devote a substantial amount of time to new compliance
initiatives, and we may not continue to successfully or
efficiently manage our transition into a public company. We
expect rules and regulations such as the Sarbanes-Oxley Act of
2002 and the Investor Protection and Securities Reform Act of
2010 to increase our legal and finance compliance costs and to
make some activities more time-consuming and costly. We will
need to engage additional resources with public accounting and
disclosure experience in order to meet our ongoing obligations
as a public company. For example, Section 404 of the
Sarbanes-Oxley Act of 2002 requires that our management report
on, and our independent auditors attest to, the effectiveness of
our internal control structure and procedures for financial
reporting in our annual report on
Form 10-K
for the fiscal year ending December 31, 2011.
Section 404 compliance may divert internal resources and
will take a significant amount of time and effort to complete.
We may not be able to successfully complete the procedures and
certification and attestation requirements of Section 404
by the time we will be required to do so. If we fail to do so,
or if in the future our chief executive officer, chief financial
officer or independent registered public accounting firm
determines that our internal controls over financial reporting
are not effective as defined under Section 404, we could be
subject to sanctions or investigations by The NASDAQ Stock
Market, the SEC, or other regulatory authorities. Furthermore,
investor perceptions of our company may suffer, and this could
cause a decline in the market price of our stock. Irrespective
of compliance with Section 404, any failure of our internal
controls could have a material adverse effect on our stated
results of operations and harm our reputation. If we are unable
to implement these changes effectively or efficiently, it could
harm our operations, financial reporting or financial results
and could result in an adverse opinion on internal controls from
our independent auditors.
25
Our
insiders who are significant stockholders may influence the
election of our board and may have interests that conflict with
those of other stockholders.
Our directors and executive officers, together with members of
their immediate families, beneficially own, in the aggregate, a
significant portion of our outstanding capital stock. As a
result, acting together, this group has the ability to exercise
significant influence over most matters requiring our
stockholders approval, including the election and removal
of directors and significant corporate transactions.
We
could face liability for certain information we disclose,
including information based on data we obtain from other
parties.
We may be subject to claims for securities law violations,
negligence, or other claims relating to the information we
disclose, such as the mutual fund assessments we call
scorecards. Individuals who use our services may
take legal action against us if they rely on information that
contains an error, or a company may claim that we have made a
defamatory statement about it or its employees. We could also be
subject to claims based upon the content that is accessible from
our website through links to other websites. We rely on a
variety of outside parties as the original sources for the
information we use in our published data. These sources include
securities exchanges, fund companies and transfer agents.
Accordingly, in addition to possible exposure for publishing
incorrect information that results directly from our own errors,
we could face liability based on inaccurate data provided to us
by others. Defending claims based on the information we publish
could be expensive and time-consuming and could adversely impact
our business, operating results and financial condition.
If our
operations are interrupted as a result of service downtime or
interruptions, our business and reputation could
suffer.
The success of our business depends upon our ability to obtain
and deliver time-sensitive,
up-to-date
data and information. Our operations and those of our plan
providers and plan sponsors are vulnerable to interruption by
technical breakdowns, computer hardware and software
malfunctions, software viruses, infrastructure failures, fire,
earthquake, power loss, telecommunications failure, terrorist
attacks, wars, Internet failures and other events beyond our
control. Any disruption in our services or operations could harm
our ability to perform our services effectively which in turn
could result in a reduction in revenue or a claim for
substantial damages against us, regardless of whether we are
responsible for that failure. We rely on our computer equipment,
database storage facilities and other office equipment, which
are located primarily in the seismically active
San Francisco Bay area. We maintain off-site
back-up
facilities in Phoenix, Arizona for our database and network
equipment, but these facilities could be subject to the same
interruptions that may affect our headquarters. If we suffer a
significant database or network facility outage, our business
could experience disruption until we fully implement our
back-up
systems. We also depend on certain significant vendors for
facility storage and related maintenance of our main technology
equipment and data at these locations. Any failure by these
vendors to perform those services, any temporary or permanent
loss of our equipment or systems or any disruptions to basic
infrastructure like power and telecommunications could impede
our ability to provide services to our plan participants, harm
our reputation, cause plan participants to stop using our
investment advisory or Professional Management services, reduce
our revenue and harm our business. Our agreements with our plan
providers or plan sponsors also require us to meet specified
minimum system security and privacy standards. If we fail to
meet these standards, our plan sponsors and plan providers may
seek to terminate their agreements with us. This in turn could
damage our reputation and harm our market position and business.
Risks
Related to Our Industry
Changes
in laws applicable to our services may adversely affect our
business.
We may be adversely affected as a result of new or revised
legislation or regulations promulgated by Congress, the SEC,
Department of Labor or other U.S. regulatory authorities or
self-regulatory organizations that supervise the financial
markets and retirement industry. In addition, we may be
adversely affected by changes in the interpretation of existing
laws and rules by these governmental authorities and
self-regulatory organizations. It is impossible to determine the
extent of the impact of any new laws, regulations or initiatives
that may be proposed, or whether any of the proposals will
become law. It is difficult to predict the future impact of the
broad and expanding
26
legislative and regulatory requirements affecting our business.
For example, legislation or regulation regarding fees may affect
our business. Future legislation or regulation could change or
eliminate certain existing restrictions relating to conflicts of
interest, which might lower the relative value of our
independence, or reduce or eliminate tax benefits associated
with defined contribution plans or otherwise restructure defined
contribution plans in a way that affects their use by plan
sponsors or plan participants, which could cause a reduction in
the number of plans where our services are offered or slow our
AUM growth. Changes to laws or regulations, or any change that
results in our becoming subject to the jurisdiction of any
additional regulator, such as a self-regulatory organization,
could increase our potential liability for offering portfolio
management services, investment advice and retirement income,
affect our ability to offer our Passive Enrollment option or
invalidate pre-dispute arbitration clauses in our agreements,
leading to increased costs to litigate any claims against us.
Changes to laws or regulations could also increase our legal
compliance costs, divert internal resources and make some
activities more time-consuming and costly. The laws, rules and
regulations applicable to our business may change in the future,
and we may not be able to comply with any such changes. If we
fail to comply with any applicable law, rule or regulation, we
could be fined, sanctioned or barred from providing investment
advisory services in the future, which could materially harm our
business and reputation.
We are
subject to complex regulation, and any compliance failures or
regulatory action could adversely affect our
business.
The financial services industry is subject to extensive
regulation at the federal and state levels. It is very difficult
to predict the future impact of the legislative and regulatory
requirements affecting our business. The securities laws and
other laws that govern our activities as a registered investment
advisor are complex and subject to rapid change. The activities
of our investment advisory and management operations are subject
primarily to provisions of the Investment Advisers Act and
ERISA, as well as certain state laws. We are a fiduciary under
ERISA. Our investment advisory services are also subject to
state laws including anti-fraud laws and regulations. The
Investment Advisers Act addresses, among other things, fiduciary
duties, recordkeeping and reporting requirements and disclosure
requirements and also includes general anti-fraud prohibitions.
If we fail to comply with any applicable law, rule or
regulation, we could be fined, sanctioned or barred from
providing investment advisory services in the future, which
could materially harm our business and reputation. We may also
become subject to additional regulatory and compliance
requirements as a result of any expansion or enhancement of our
existing services or any services we may offer in the future.
For example, we may be subject to insurance licensing or other
requirements in connection with our retirement planning
services, even if our activities are limited to describing
regulated products. Compliance with any new regulatory
requirements may divert internal resources and take significant
time and effort. Any claim of noncompliance, regardless of merit
or ultimate outcome, could subject us to investigation by the
SEC or other regulatory authorities. This in turn could result
in substantial cost to us and divert managements attention
and other resources away from our operations. Furthermore,
investor perceptions of us may suffer, and this could cause a
decline in the market price of our common stock. Our compliance
processes may not be sufficient to prevent assertions that we
failed to comply with any applicable law, rule or regulation.
We
face additional scrutiny when we act as subadvisor, and any
failure to comply with regulations or meet expectations could
harm our business.
Some of the plan providers to whom we are subadvisors are
broker-dealers registered under the Securities Exchange Act of
1934, referred to as the Exchange Act, and are subject to the
rules of the Financial Industry Regulatory Authority, or FINRA.
When we act as a subadvisor, we may be subject to the oversight
by regulators of another advisor. We may be affected by any
regulatory examination of that plan provider.
In addition, our subadvisory arrangements are structured to
follow Advisory Opinion
2001-09A, a
Department of Labor opinion provided to SunAmerica Retirement
Markets. Although an advisory opinion provides guidance about
the Department of Labors interpretation of ERISA, it is
directly applicable only to the entity to which it is issued.
SunAmerica Retirement Markets is an entity unrelated to us or
the plan providers to which we act as subadvisor. We could be
adversely affected if the Department of Labor increases
examination of these subadvisory arrangements or changes the
interpretive positions described in the Advisory Opinion. We
could be adversely affected if ERISA is amended in a way that
overturns or materially changes the Department of Labors
position in
27
Advisory Opinion
2001-09A,
such as the imposition of additional requirements relating to
conflicts of interest on the plan providers to which we act as a
subadvisor. Future legislation or regulation could impose
additional requirements relating to conflicts of interest on
some of the plan providers to which we act as a subadvisor.
These plan providers may not be able to comply with these
requirements, and we may therefore not be able to continue to
provide our services on a subadvised basis. In such event, we
could incur additional costs to transition our services for
affected plan providers and their plan sponsors to another
structure. Legislation has been introduced in Congress and there
have been several Congressional hearings addressing these
issues, although final versions of these bills have not been
adopted and signed into law, and the final scope and wording of
the legislation, or the implementing rules and regulations, are
not yet known.
If
government regulation of the Internet or other areas of our
business changes or if consumer attitudes toward use of the
Internet change, we may need to change the manner in which we
conduct our business or incur greater operating
expenses.
The adoption, modification or interpretation of laws or
regulations relating to the Internet or other areas of our
business could adversely affect the manner in which we conduct
our business or the overall popularity or growth in use of the
Internet. Such laws and regulations may cover sales and other
procedures, tariffs, user privacy, data protection, pricing,
content, copyrights, distribution, electronic contracts,
consumer protection, broadband residential Internet access and
the characteristics and quality of services. It is not clear how
existing laws governing issues such as property ownership, sales
and other taxes, libel and personal privacy apply to the
Internet. If we are required to comply with new regulations or
legislation or new interpretations of existing regulations or
legislation, this compliance could cause us to incur additional
expenses, make it more difficult to renew subscriptions
automatically, make it more difficult to attract new subscribers
or otherwise alter our business model. Any of these outcomes
could have a material adverse effect on our business, financial
condition or results of operations.
Our
business will suffer if we do not keep up with rapid
technological change, evolving industry standards or changing
requirements of plan sponsors and plan
participants.
We expect technological developments to continue at a rapid pace
in our industry. Our success will depend, in part, on our
ability to:
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continue to develop our technology expertise;
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recruit and retain skilled investment and technology
professionals;
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enhance our current services;
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develop new services that meet changing plan sponsor and plan
participant needs;
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advertise and market our services; and
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influence and respond to emerging industry standards and other
technological changes.
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In addition, we must continue to meet changing plan provider and
plan sponsor expectations and requirements, including addressing
plan complexities and meeting plan provider and plan sponsor
demands for specific features and delivery dates. We must
accomplish all of these tasks in a timely and cost-effective
manner, and our failure to do so could harm our business,
including materially reducing our revenue and operating results.
Further, a key aspect of our growth strategy is to expand our
investment research capabilities and introduce new services. We
expect that our research and development expense will continue
to represent a meaningful percentage of our revenue in the
future. A viable market for our new service offerings may not
exist or develop, and our offerings may not be well received by
potential plan sponsor customers or individual plan participants
or investors.
Risks
Related to our Common Stock
Our
share price may be volatile, and the value of an investment in
our common stock may decline.
An active, liquid and orderly market for our common stock may
not be sustained, which could depress the trading price of our
common stock. The price of our common stock has been, and is
likely to continue to be, volatile, which means that it could
decline substantially within a short period of time. For
example, since shares of our
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common stock were sold in our initial public offering in March
2010 at a price of $12.00 per share, our closing stock price has
ranged from $12.35 to $19.97 for the period March 16, 2010
to December 31, 2010. The market price of shares of our
common stock could be subject to wide fluctuations in response
to many risk factors listed in this section, many of which are
beyond our control, including:
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actual or anticipated fluctuations in our financial condition
and operating results;
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general economic and market conditions;
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issuance of new or updated research or reports by securities
analysts;
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our announcement of actual results for a fiscal period that are
higher or lower than projected results or our announcement of
revenue or earnings guidance that is higher or lower than
expected;
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changes in the economic performance or market valuations of
other companies engaged in providing portfolio management
services, investment advice and retirement income;
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loss of a significant amount of existing business;
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actual or anticipated changes in our growth rate relative to our
competitors;
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actual or anticipated fluctuations in our competitors
operating results or changes in their growth rates;
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regulatory developments in our target markets affecting us, our
plan sponsors or our competitors;
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fluctuations in the valuation of companies perceived by
investors to be comparable to us;
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share price and volume fluctuations attributable to inconsistent
trading volume levels of our shares;
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issuances, sales or expected sales of additional common
stock; and
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terrorist attacks or natural disasters or other such events
impacting countries where we or our plan sponsors have
operations.
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Furthermore, the stock markets have experienced extreme price
and volume fluctuations that have affected and continue to
affect the market prices of equity securities of many companies.
These fluctuations often have been unrelated or disproportionate
to the operating performance of those companies. These broad
market and industry fluctuations, as well as general economic,
political and market conditions such as recessions, interest
rate changes or international currency fluctuations, may cause
the market price of shares of our common stock to decline. In
the past, companies that have experienced volatility in the
market price of their stock have been subject to securities
class action litigation. We may be the target of this type of
litigation in the future. Securities litigation against us could
result in substantial costs and divert our managements
attention from other business concerns, which could seriously
harm our business.
If
securities or industry analysts do not publish research or
reports about our business, or if they change their
recommendations regarding our stock adversely, our stock price
and trading volume could decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us or our business. If one or more of the analysts
who cover us downgrade our stock, our stock price would likely
decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could
cause our stock price or trading volume to decline.
The
future sale of shares of our common stock may negatively impact
our stock price.
If our stockholders sell substantial amounts of our common
stock, the market price of our common stock could fall. A
reduction in ownership by a large stockholder could cause the
market price of our common stock to fall. In addition, the
average daily trading volume in our stock is relatively low. The
lack of trading activity in our stock may lead to greater
fluctuations in our stock price. Low trading volume may also
make it difficult for a stockholder to make transactions in a
timely fashion.
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Item 1B.
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Unresolved
Staff Comments
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None.
We currently lease our principal executive offices in Palo Alto,
California under a lease that expires on August 31, 2012.
We also lease office space in Phoenix, Arizona, primarily for
our operations and call center, under a lease that expires on
May 31, 2015, with an option to extend the lease until
May 31, 2020. We are currently expanding our leased space
in Phoenix through an amendment to our existing lease, to
accommodate additional employees added to handle the growth of
our operations and call center. We also sublease office space in
Boston, Massachusetts, under a lease that expires on
January 30, 2015. We are in the process of securing
additional leased space in Boston to accommodate new employees.
We believe that our current facilities in Palo Alto, California
are sufficient to meet our current needs in that location,
though we will continue to monitor our requirements for office
space as our company expands.
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|
Item 3.
|
Legal
Proceedings
|
We are currently not party to any material legal proceedings. We
may from time to time become involved in litigation relating to
claims arising from our ordinary course of business. These
claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.
|
|
Item 4.
|
(Removed
and Reserved).
|
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our shares of common stock are traded on the NASDAQ Global
Select Market under the symbol FNGN. Our initial
public offering was priced at $12.00 per share on March 16,
2010. Prior to that date there was no public trading market for
our common stock. The following table shows, for the periods
indicated, the high and low
intra-day
sale prices for our common stock on the NASDAQ Global Select
Market.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
High
|
|
|
Low
|
|
|
First Quarter (from March 16, 2010)
|
|
$
|
18.96
|
|
|
$
|
14.90
|
|
Second Quarter
|
|
$
|
17.29
|
|
|
$
|
13.09
|
|
Third Quarter
|
|
$
|
16.16
|
|
|
$
|
12.27
|
|
Fourth Quarter
|
|
$
|
20.41
|
|
|
$
|
13.08
|
|
As of March 1, 2011, the number of record holders of our
common stock was 260. Because most of our shares are held by
brokers and other institutions on behalf of stockholders, we are
unable to estimate the total number of beneficial stockholders
represented by these record holders.
Dividends
We have never declared or paid a cash dividend on our common
stock and do not anticipate paying any cash dividends in the
foreseeable future. Any future determination with respect to the
declaration and payment of dividends will be at the discretion
of our Board of Directors.
Securities
Authorized for Issuance under Equity Compensation
Plans
Information regarding the securities authorized for issuance
under our equity compensation plans can be found under
Item 12 of this Annual Report on
Form 10-K.
30
Stock
Performance Graph
This performance graph shall not be deemed soliciting
material or to be filed with the Securities
and Exchange Commission for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act, or otherwise subject to the liabilities under that Section,
and shall not be deemed to be incorporated by reference into any
filing of Financial Engines, Inc. under the Securities Act of
1933, as amended, or the Exchange Act.
The following graph shows a comparison from March 16, 2010
(the date our common stock commenced trading on The NASDAQ
Global Select Market) through December 31, 2010 of the
cumulative total stockholder return on our common stock with the
cumulative total return on the Standard & Poors
500 Index, The NASDAQ Composite Index and the Financial Sector
SPDR. The graph assumes an investment of $100 on March 16,
2010, and the reinvestment of any dividends. For our common
stock, the investment performance is measured as of the closing
price of our common stock on March 16, 2010 of $17.25,
which differs from our IPO price of $12.00.
The comparisons in the graph below are required by the
Securities and Exchange Commission and are not intended to
forecast or be indicative of possible future performance of our
common stock.
COMPARISON
OF 10 MONTH CUMULATIVE TOTAL RETURN*
Among Financial Engines, Inc., the Standard &
Poors 500 Index,
The NASDAQ Composite Index and the Financial Sector
SPDR
* 100 invested in stock as of March 16,
2010 including reinvestment of dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
03/16/10
|
|
|
03/31/10
|
|
|
04/30/10
|
|
|
05/28/10
|
|
|
06/30/10
|
|
|
07/30/10
|
|
|
08/31/10
|
|
|
09/30/10
|
|
|
10/29/10
|
|
|
11/30/10
|
|
|
12/31/10
|
Financial Engines, Inc.
|
|
|
|
100
|
|
|
|
|
98
|
|
|
|
|
92
|
|
|
|
|
88
|
|
|
|
|
79
|
|
|
|
|
85
|
|
|
|
|
77
|
|
|
|
|
77
|
|
|
|
|
85
|
|
|
|
|
98
|
|
|
|
|
115
|
|
S&P 500
|
|
|
|
100
|
|
|
|
|
101
|
|
|
|
|
103
|
|
|
|
|
94
|
|
|
|
|
89
|
|
|
|
|
96
|
|
|
|
|
91
|
|
|
|
|
99
|
|
|
|
|
103
|
|
|
|
|
103
|
|
|
|
|
110
|
|
The NASDAQ Composite Index
|
|
|
|
100
|
|
|
|
|
101
|
|
|
|
|
104
|
|
|
|
|
95
|
|
|
|
|
89
|
|
|
|
|
95
|
|
|
|
|
89
|
|
|
|
|
100
|
|
|
|
|
106
|
|
|
|
|
106
|
|
|
|
|
112
|
|
Financial Sector SPDR
|
|
|
|
100
|
|
|
|
|
101
|
|
|
|
|
103
|
|
|
|
|
93
|
|
|
|
|
88
|
|
|
|
|
94
|
|
|
|
|
86
|
|
|
|
|
92
|
|
|
|
|
93
|
|
|
|
|
92
|
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Unregistered
Sales of Equity Securities
As previously reported in our Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K,
during the year ended December 31, 2010, we issued a net of
2,166,335 shares of common stock upon the exercise of
options to purchase our common stock granted under our 1998
Stock Option Plan. The shares of common stock issued pursuant to
these stock options were unregistered securities granted under
our 1998 Stock Option Plan as permitted by Rule 701 of the
Securities Act of 1933. The aggregate purchase price of the
shares was $11.2 million, of which $11.0 million was
received in cash. The remaining amount of the purchase price was
received in the form of shares forfeited in lieu of cash, which
were valued at the fair market value on the day of the
transaction. All recipients either received adequate information
about us or had access, through employment or other
relationships, to such information. There were no underwriters
employed in connection with these transactions.
As of January 1, 2011, 9,556,719 shares of
unregistered common stock are subject to outstanding stock
options granted under our 1998 Stock Option Plan. These stock
options may be exercised from time to time and have exercise
prices ranging from $1.00 to $10.00 per share. If all such
outstanding options are exercised, we would receive an aggregate
of $60.3 million. Any exercise of these stock options will
be effected under Rule 701 of the Securities Act of 1933,
applicable to our 1998 Stock Option Plan. At the time of any
such exercises, all recipients will have either received
adequate information about us or had access, through employment
or other relationships, to such information. No underwriters
will be employed in connection with these transactions.
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read together with the consolidated financial statements and the
notes to the consolidated financial statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, which are included
elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional management
|
|
$
|
14,597
|
|
|
$
|
28,226
|
|
|
$
|
38,963
|
|
|
$
|
52,579
|
|
|
$
|
79,137
|
|
Platform
|
|
|
28,950
|
|
|
|
31,374
|
|
|
|
29,498
|
|
|
|
30,048
|
|
|
|
29,717
|
|
Other
|
|
|
4,686
|
|
|
|
3,750
|
|
|
|
2,810
|
|
|
|
2,355
|
|
|
|
2,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
48,233
|
|
|
|
63,350
|
|
|
|
71,271
|
|
|
|
84,982
|
|
|
|
111,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of amortization of internal use
software)
|
|
|
15,691
|
|
|
|
20,602
|
|
|
|
27,588
|
|
|
|
29,573
|
|
|
|
37,599
|
|
Research and development
|
|
|
14,233
|
|
|
|
14,643
|
|
|
|
13,663
|
|
|
|
15,618
|
|
|
|
19,343
|
|
Sales and marketing
|
|
|
18,807
|
|
|
|
19,871
|
|
|
|
21,157
|
|
|
|
22,515
|
|
|
|
26,403
|
|
General and administrative
|
|
|
5,557
|
|
|
|
6,663
|
|
|
|
6,613
|
|
|
|
7,679
|
|
|
|
11,644
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
Amortization of internal use software
|
|
|
2,499
|
|
|
|
3,070
|
|
|
|
2,258
|
|
|
|
2,813
|
|
|
|
3,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
56,787
|
|
|
|
64,849
|
|
|
|
74,310
|
|
|
|
78,198
|
|
|
|
98,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(8,554
|
)
|
|
|
(1,499
|
)
|
|
|
(3,039
|
)
|
|
|
6,784
|
|
|
|
12,871
|
|
Interest expense
|
|
|
(317
|
)
|
|
|
(961
|
)
|
|
|
(799
|
)
|
|
|
(612
|
)
|
|
|
(46
|
)
|
Interest and other income, net
|
|
|
896
|
|
|
|
687
|
|
|
|
236
|
|
|
|
351
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(7,975
|
)
|
|
|
(1,773
|
)
|
|
|
(3,602
|
)
|
|
|
6,523
|
|
|
|
12,846
|
|
Income tax expense (benefit)
|
|
|
8
|
|
|
|
31
|
|
|
|
12
|
|
|
|
834
|
|
|
|
(50,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(7,983
|
)
|
|
|
(1,804
|
)
|
|
|
(3,614
|
)
|
|
|
5,689
|
|
|
|
63,575
|
|
Less: Stock dividend
|
|
|
930
|
|
|
|
|
|
|
|
2,362
|
|
|
|
1,082
|
|
|
|
5,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of common stock
|
|
$
|
(8,913
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(5,976
|
)
|
|
$
|
4,607
|
|
|
$
|
58,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Net (loss) income per share attributable to holders of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.00
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.46
|
|
|
$
|
1.66
|
|
Diluted
|
|
$
|
(1.00
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.13
|
|
|
$
|
1.30
|
|
Shares used to compute net income (loss) per share attributable
to holders of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,879
|
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
10,106
|
|
|
|
35,096
|
|
Diluted
|
|
|
8,879
|
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
34,866
|
|
|
|
44,826
|
|
Cash dividends per share to common stockholders
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(1)
|
|
$
|
(856
|
)
|
|
$
|
8,333
|
|
|
$
|
8,409
|
|
|
$
|
19,553
|
|
|
$
|
28,389
|
|
Adjusted Net Income
(Loss)(2)
|
|
$
|
(6,154
|
)
|
|
$
|
925
|
|
|
$
|
1,635
|
|
|
$
|
9,872
|
|
|
$
|
18,066
|
|
Adjusted Earnings per
Share(2)
|
|
$
|
(0.14
|
)
|
|
$
|
0.02
|
|
|
$
|
0.04
|
|
|
$
|
0.23
|
|
|
$
|
0.39
|
|
|
|
|
(1) |
|
The table below sets forth a reconciliation of net income (loss)
to Adjusted EBITDA based on our historical results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, unaudited)
|
|
|
Net income (loss)
|
|
$
|
(7,983
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
|
$
|
63,575
|
|
Interest (income) expense, net
|
|
|
(580
|
)
|
|
|
352
|
|
|
|
563
|
|
|
|
605
|
|
|
|
25
|
|
Income tax expense (benefit)
|
|
|
8
|
|
|
|
31
|
|
|
|
12
|
|
|
|
834
|
|
|
|
(50,729
|
)
|
Depreciation
|
|
|
1,388
|
|
|
|
1,284
|
|
|
|
1,641
|
|
|
|
1,729
|
|
|
|
1,816
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
Amortization of internal use software
|
|
|
2,488
|
|
|
|
3,020
|
|
|
|
2,196
|
|
|
|
2,711
|
|
|
|
3,703
|
|
Amortization of direct response advertising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
1,185
|
|
Amortization of deferred sales commissions
|
|
|
864
|
|
|
|
1,034
|
|
|
|
991
|
|
|
|
1,153
|
|
|
|
1,155
|
|
Stock-based compensation expense
|
|
|
2,959
|
|
|
|
4,416
|
|
|
|
3,589
|
|
|
|
6,768
|
|
|
|
7,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(856
|
)
|
|
$
|
8,333
|
|
|
$
|
8,409
|
|
|
$
|
19,553
|
|
|
$
|
28,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
The table below sets forth a reconciliation of net income (loss)
to Adjusted Net Income (Loss) and Adjusted Earnings Per Share
based on our historical results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data, unaudited)
|
|
|
Net income (loss)
|
|
$
|
(7,983
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
|
$
|
63,575
|
|
Stock-based compensation expense, net of
tax(1)
|
|
|
1,829
|
|
|
|
2,729
|
|
|
|
2,218
|
|
|
|
4,183
|
|
|
|
4,733
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
Income tax benefit from release of valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income (Loss)
|
|
$
|
(6,154
|
)
|
|
$
|
925
|
|
|
$
|
1,635
|
|
|
$
|
9,872
|
|
|
$
|
18,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Adjusted Earnings Per Share
|
|
$
|
(0.14
|
)
|
|
$
|
0.02
|
|
|
$
|
0.04
|
|
|
$
|
0.23
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock outstanding
|
|
|
39,599
|
|
|
|
40,047
|
|
|
|
40,448
|
|
|
|
40,807
|
|
|
|
41,601
|
|
Dilutive restricted stock and stock options
|
|
|
3,279
|
|
|
|
3,167
|
|
|
|
3,462
|
|
|
|
2,052
|
|
|
|
4,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted common shares outstanding
|
|
|
42,878
|
|
|
|
43,214
|
|
|
|
43,910
|
|
|
|
42,859
|
|
|
|
46,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
(1)
|
For the calculation of Adjusted Net Income, an estimated
statutory tax rate of 38.2% has been applied to stock-based
compensation for all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,196
|
|
|
$
|
15,015
|
|
|
$
|
14,857
|
|
|
$
|
20,713
|
|
|
$
|
114,937
|
|
Working capital
|
|
$
|
13,268
|
|
|
$
|
16,390
|
|
|
$
|
2,490
|
|
|
$
|
16,562
|
|
|
$
|
124,970
|
|
Total assets
|
|
$
|
36,755
|
|
|
$
|
42,108
|
|
|
$
|
42,302
|
|
|
$
|
58,352
|
|
|
$
|
217,616
|
|
Bank borrowings and note payable
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
$
|
13,500
|
|
|
$
|
8,055
|
|
|
$
|
|
|
Total liabilities
|
|
$
|
28,988
|
|
|
$
|
30,594
|
|
|
$
|
31,033
|
|
|
$
|
34,086
|
|
|
$
|
32,396
|
|
Total stockholders equity
|
|
$
|
7,767
|
|
|
$
|
11,514
|
|
|
$
|
11,269
|
|
|
$
|
24,266
|
|
|
$
|
185,220
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a leading provider of independent, technology-enabled
portfolio management, investment advice and retirement income
services to participants in employer-sponsored defined
contribution retirement plans, such as 401(k) plans. We use our
proprietary advice technology platform to provide our services
to millions of retirement plan participants on a cost-efficient
basis. Our business model is based on workplace delivery of our
services. We target three key constituencies in the retirement
plan market: plan participants, plan sponsors and plan providers.
Revenue
We generate revenue primarily from management fees on Assets
Under Management, or AUM, as well as from platform fees, by
providing portfolio management services, investment advice and
retirement income services to plan participants of
employer-sponsored retirement plans.
Professional Management. We derive
professional management revenue from member fees paid by plan
participants who are enrolled in our Professional Management
service for the management of their account assets. Our
Professional Management service is a discretionary investment
management service, that includes a Retirement Plan analyzing
investments, contribution rate and projected retirement income,
a Retirement Checkup designed to help plan participants to
develop a strategy for closing the gap, if any, between the
participants retirement goal and current retirement income
forecast and retirement income services. The services are
generally made available to plan participants in a 401(k) plan
by written agreements with the plan provider, plan sponsor and
the plan participant.
The arrangement generally provides for member fees based on the
value of assets we manage for plan participants and is generally
payable quarterly in arrears. Prior to October 1, 2010, our
professional management revenue was generally the product of
member fee rates and the value of AUM at or near the end of each
quarter. Effective October 1, 2010, we changed our method
of calculating fees for substantially all members with which we
have a direct advisory relationship from quarterly to monthly,
thereby calculating fees as the product of member fee rates and
the value of AUM at or near the end of each month for members.
As a result, the majority of our member fees across both
advisory and subadvisory relationships are calculated on a
monthly basis. In general, we expect this new methodology to
reduce the impact of financial market volatility on our
professional management revenue, although this methodology may
result in lower member fees if the financial markets are down
when member fees are calculated, even if the market had
performed well earlier in the month or the quarter.
Due to the fee structure with one of our plan providers under
which we recognize the difference between earned revenue and
minimum contractual revenue in the fourth quarter, we typically
see an increase in professional management revenue in the fourth
quarter.
34
In order to encourage enrollment into our Professional
Management service, we use a variety of promotional techniques,
some of which can potentially impact the amount of revenue
recognized, the timing of revenue recognition or both.
Historically, we have seen a general preference from plan
sponsors to schedule campaigns in the second and third quarters
of the year and we expect this trend to continue.
We would generally expect our professional management revenue to
continue to increase as a percent of overall revenue, which will
cause our revenue to become increasingly more sensitive to
market performance.
Enrollment
Metrics
We measure enrollment in our Professional Management service by
members as a percentage of eligible plan participants and by AUM
as a percentage of Assets Under Contract, or AUC, in each case
across all plans where the Professional Management service is
available for enrollment, including plans where enrollment
campaigns are not yet concluded or have not commenced.
AUM is defined as the amount of retirement plan assets that we
manage as part of our Professional Management service. Our AUM
is the value of assets under management as reported by plan
providers at or near the end of each month or quarter. Our
members are the plan participants who are enrolled in our
Professional Management service as reported by plan providers at
or near the end of each month or quarter.
AUC is defined as the amount of assets in retirement plans under
contract for which the Professional Management service has been
made available to eligible participants. Our AUC and eligible
participants do not include assets or participants in plans
where we have signed contracts but for which we have not yet
made the Professional Management service available. Eligible
participants are reported by plan providers as of various points
in time. The value of assets under contract is reported by plan
providers as of various points in time and is not always updated
or marked to market. If markets have declined since the
reporting date, or if assets have left the plan, our AUC may be
overstated. If markets have risen since the reporting date, or
if assets have been added to the plan, our AUC may be
understated. Some plan participants may not be eligible for our
services due to plan sponsor limitations on employees treated as
insiders for purposes of securities laws or other
characteristics of the plan participant. Certain securities
within a plan participants account may be ineligible for
management by us, such as employer stock subject to trading
restrictions, and we do not manage or charge a fee for that
portion of the account. In both of these circumstances, assets
of the relevant participants may be included in AUC but cannot
be converted to AUM. We believe that AUC can be a useful
indicator of the additional plan assets available for enrollment
efforts that, if successful, would result in these assets
becoming AUM. We believe that total eligible participants
provides a useful approximation of the number of participants
available for enrollment into the Professional Management
service.
In addition to measuring enrollment in all plans where the
Professional Management service is available, we measure
enrollment in plans where the Professional Management service
has been available for at least 14 months and in plans
where it has been available for at least 26 months.
|
|
|
|
|
|
|
|
|
|
|
Members as a
|
|
|
|
|
Percentage of
|
|
AUM as a
|
|
|
Eligible
|
|
Percentage of
|
All plans as of December 31, 2010
|
|
Participants
|
|
AUC
|
|
Professional Management available
|
|
|
10.3
|
%
|
|
|
10.0
|
%
|
Professional Management available 14 months or more
|
|
|
11.4
|
%
|
|
|
11.3
|
%
|
Professional Management available 26 months or more
|
|
|
12.1
|
%
|
|
|
11.9
|
%
|
35
As of December 31, 2010, the aggregate style exposure of
the portfolios we managed was approximately as follows:
|
|
|
|
|
Cash
|
|
|
4
|
%
|
Bonds
|
|
|
24
|
%
|
Domestic Equity
|
|
|
48
|
%
|
International Equity
|
|
|
24
|
%
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
|
|
|
We estimate the aggregate percentage of equity exposures have
ranged from a low of approximately 56% to a high of
approximately 78% since we began managing assets on a
discretionary basis in September 2004. These percentages can be
affected by the asset exposures of the overall market portfolio,
the demographics of our member population, the number of members
who have told us that they want to assume greater or lesser
investment risk, and, to a lesser extent given the amount of
assets we have under management, the proportion of our members
for whom we have completed the transition from their initial
portfolio.
Changes
in AUM
The following table illustrates changes in our AUM from over the
last four quarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q110
|
|
|
Q210
|
|
|
Q310
|
|
|
Q410
|
|
|
|
(In billions)
|
|
|
AUM, beginning of period
|
|
$
|
25.7
|
|
|
$
|
29.9
|
|
|
$
|
29.4
|
|
|
$
|
34.0
|
|
AUM from net
enrollment(1)
|
|
|
2.9
|
|
|
|
0.6
|
|
|
|
1.8
|
|
|
|
1.0
|
|
Other(2)
|
|
|
1.3
|
|
|
|
(1.1
|
)
|
|
|
2.8
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM, end of period
|
|
$
|
29.9
|
|
|
$
|
29.4
|
|
|
$
|
34.0
|
|
|
$
|
37.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate amount of assets under management, at the time of
enrollment, of new members who enrolled in our Professional
Management service within the period less the aggregate amount
of assets, at the time of cancellation, for voluntary
cancellations from the Professional Management service within
the period, less the aggregate amount of assets, as of the last
available positive account balance, for involuntary
cancellations occurring when the members 401(k) plan
account balance has been reduced to zero or when the
cancellation of a plan sponsor contract for the Professional
Management service has become effective within the period. AUM
from net enrollment reflects a minor reporting change from prior
periods related to cancellations and provider conversions. Total
AUM is unchanged. |
|
(2) |
|
Other factors affecting assets under management include market
movement, employer and employee contributions, plan
administrative fees as well as participant loans and hardship
withdrawals. We cannot separately quantify the impact of these
factors as the information we receive from the plan providers
does not separately identify these transactions or the changes
in balances due to market movement. Other reflects a minor
reporting change from prior periods related to cancellations and
provider conversions. Total AUM is unchanged. |
Our AUM increases or decreases based on several factors. AUM can
increase due to market performance, by the addition of new
assets as participants enroll into our Professional Management
service both at existing sponsors as well as at new sponsors
where the services have been made available, and by the addition
of new assets from employee and employer contributions into
their 401(k) accounts. AUM can decrease due to market
performance and by the reduction of assets as a result of
members terminating their membership, members rolling their
assets out of the retirement plan and sponsors canceling the
Professional Management service. Historically, member
cancellation rates have typically increased during periods where
there has been a significant decline in stock market performance
and, in addition, member cancellation rates are typically the
highest in the three months immediately following the completion
of a given promotional campaign.
A substantial portion of the assets we manage is invested in
equity securities, the market prices of which can vary
substantially based on changes in economic conditions. An
additional portion is invested in fixed income securities, which
will generally have lower volatility than the equity market.
Therefore, while any changes in equity
36
market performance would significantly affect the value of our
AUM, particularly for the AUM invested in equity securities,
such changes would typically result in lower volatility for our
AUM than the volatility of the equity market as a whole. Because
a substantial portion of our revenue is derived from the value
of our AUM, any changes in fixed income or equity market
performance would significantly affect the amount of revenue in
a given period. If any of these factors reduces our AUM, the
amount of member fees we would earn for managing those assets
would decline, which in turn could negatively impact our
revenue. Due to the current fee structure with one of our plan
providers, we currently recognize the difference between annual
earned professional management revenue and annual contractual
minimums in the fourth quarter each year.
Platform. We derive platform revenue from
recurring, subscription-based platform fees for access to either
our full suite of services, including Professional Management,
Online Advice service and Retirement Evaluation, or to our
Online Advice service only, and to a lesser extent, from setup
fees. Online Advice is a nondiscretionary Internet-based
investment advisory service, which includes features such as:
recommendations among the investment alternatives available in
the employer sponsored retirement plan; a summary of the current
value of the plan account; a forecast of how much the plan
account investments might be worth at retirement; whether a
change is recommended to the contribution rate, risk and
diversification
and/or
unrestricted employer stock holdings; and a projection of how
much the participant may spend at retirement. Plan participants
may use the service as frequently as they choose to monitor
progress toward their financial goals, receive forecasts and
investment recommendations and access educational content at our
website. The arrangements generally provide for our fees to be
paid by the plan sponsor, plan provider or the retirement plan
itself, depending on the plan structure. Platform revenue is
generally paid annually in advance and recognized ratably over
the term of the subscription period beginning after the
completion of customer setup and data connectivity. Setup fees
are recognized ratably over the estimated average life of
sponsor contracts, which is usually three to five years.
Other Revenue. Other revenue includes
reimbursement for a portion of marketing and member materials
from certain subadvisory relationships and reimbursement for
providing personal statements to participants from a limited
number of plan sponsors. The costs associated with these
reimbursed print fulfillment materials are expensed to cost of
revenue. A small portion of other revenue has been derived from
a defined benefit consulting business, which was discontinued as
of December 31, 2010.
Costs and
Expenses
Employee compensation and related expenses represent our largest
expense. We allocate compensation and other related expenses
including stock-based compensation, to our cost of revenue,
research and development, sales and marketing, general and
administrative as well as amortization of internal use software
expense categories. While we expect our headcount to increase
over time, we believe that the economies of scale in our
business model can allow us to grow our compensation and related
expenses at a lower rate than revenue.
Other costs and expenses include the costs of fees paid to plan
providers related to the exchange of plan and plan participant
data as well as implementing our transaction instructions for
member accounts, marketing materials and postage, and
amortization and depreciation for hardware and software
purchases and support.
The following summarizes our cost of revenue and certain
significant operating expenses:
Cost of Revenue. Cost of revenue includes fees
paid to plan providers for connectivity to plan and plan
participant data, printed materials fulfillment costs for
certain subadvisory relationships for which we are reimbursed,
printed member materials, and employee-related costs for
technical operations, implementations, operations, advisor call
center operations, portfolio management and customer support.
Costs in this area are related primarily to payments to third
parties, employee compensation and related expenses, and
purchased materials. Costs for connectivity to plan and plan
participant data are expected to increase relative to our
professional management revenue, as well as by contractual
increases in plan provider fees as a result of achieving certain
milestones. The expenses included in cost of revenue are shared
across the different revenue categories, and we are not able to
meaningfully allocate such costs between separate categories of
revenue. Consequently, all costs and expenses applicable to our
revenue are included in the category cost of revenue in our
statements of operations. Amortization of internal use software,
a portion of which relates to our cost of revenue, is not
included in cost of revenue but is reflected as a separate line
item in our statement of operations.
37
Research and Development. Research and
development expense includes costs associated with defining and
specifying new features and ongoing enhancement to our Advice
Engines and other aspects of our service offerings, financial
research, quality assurance, related administration and other
costs that do not qualify for capitalization. Costs in this area
are related primarily to employee compensation for our
investment research, product development and engineering
personnel and related expenses and, to a lesser extent, related
external consulting expenses.
Sales and Marketing. Sales and marketing
expense includes costs associated with plan provider and plan
sponsor relationship management, marketing our services, plan
provider and plan sponsor marketing, direct sales, printing of
and postage for marketing materials for direct advisory
relationships and amortization of direct response advertising.
Costs in this area are related primarily to employee
compensation for sales and marketing personnel and related
expenses, and also include commissions, printed materials and
general marketing programs.
General and Administrative. General and
administrative expense includes costs for finance, legal,
compliance and administration. Costs in this area include
employee compensation and related expenses and fees for
consulting and professional services. We have incurred and we
expect that we will continue to incur additional expenses as a
result of becoming a public company for, among other things, SEC
reporting and compliance, including compliance with the
Sarbanes-Oxley Act of 2002, director fees, insurance, and other
similar expenses.
Amortization of Internal Use
Software. Amortization of internal use software
expense includes engineering costs associated with
(1) enhancing our advisory service platform and
(2) developing internal systems for tracking member data,
including AUM, member cancellations and other related member
statistics. Associated direct development costs are capitalized
and amortized using the straight-line method over the estimated
lives, typically three to five years, of the underlying
technology. Costs in this area include employee compensation and
related expenses, and fees for external consulting services.
Critical
Accounting Policies and Significant Management
Estimates
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United
States, or GAAP. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue,
costs and expenses and related disclosures. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. In many instances, we could have reasonably used
different accounting estimates, and in other instances, changes
in the accounting estimates are reasonably likely to occur from
period to period. Accordingly, actual results could differ
significantly from the estimates made by our management. To the
extent that there are material differences between these
estimates and actual results, our future financial statement
presentation, financial condition, results of operations and
cash flows will be affected.
In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not
require managements judgment in its application, while in
other cases, managements judgment is required in selecting
among available alternative accounting standards that allow
different accounting treatment for similar transactions. We
believe that there are several accounting policies that are
critical to understanding our business and prospects for future
performance, as these policies affect the reported amounts of
revenue and other significant areas that involve
managements judgment and estimates.
These significant policies are:
|
|
|
|
|
Revenue recognition;
|
|
|
|
Income taxes;
|
|
|
|
Stock-based compensation;
|
|
|
|
Direct response advertising; and
|
|
|
|
Deferred sales commissions.
|
38
These policies and our procedures related to these policies are
described in detail below. In addition, please refer to the
notes to consolidated financial statements for further
discussion of our accounting policies.
Revenue Recognition. We recognize revenue when
all four of the following revenue recognition criteria have been
met:
|
|
|
|
|
persuasive evidence of an arrangement exists;
|
|
|
|
the product has been delivered or the service has been performed;
|
|
|
|
the fee is fixed or determinable; and
|
|
|
|
collectibility is reasonably assured.
|
Application of the various accounting principles in GAAP related
to the measurement and recognition of revenue requires the
company to make judgments and estimates. Occasionally,
arrangements with multiple elements and nonstandard terms and
conditions may require contract interpretation to determine the
appropriate accounting, including whether the deliverables
specified in a multiple element arrangement should be treated as
separate units of accounting. Other judgments include
determining whether we are acting as the principal in a
transaction and whether separate contracts are considered part
of one arrangement.
We generate revenue through three primary sources: professional
management revenue, platform revenue and other revenue.
We generate professional management revenue on the value of
assets we manage for plan participants, which fees are generally
payable quarterly in arrears. Each plan provider sends us a
weekly file with the applicable asset under management values,
on a specific day of the week agreed in advance with the plan
provider, but which day varies by plan provider. Prior to
October 1, 2010, we generally used the most recently
received file at each quarter end to calculate our member fees
and recognize revenue for members. Effective October 1,
2010, we changed our method of calculating member fees for
substantially all members with which we have a direct advisory
relationship from quarterly to monthly, thereby calculating fees
for members with which we have a direct advisory relationship as
the product of member fee rates and the value of AUM as per the
most recently received file at each month end. As a result, the
majority of our member fees across both advisory and subadvisory
relationships are calculated on a monthly basis. Pursuant to the
contracts with our members, we calculate our member fees based
on the asset amounts in these files as received directly from
the plan providers, with no judgment or estimates on our part.
None of our member fees are based on investment performance or
other incentive arrangements. Our member fees are not based on a
share of the capital gains or appreciation in a members
account (except as such appreciation is reflected in aggregate
AUM). In some cases, our member fees may adjust downward based
on overall participant or AUM enrollment performance milestones
over time. Our member fees are determined by the value of the
assets in the members account at the specified dates.
Revenue derived from member fees for our Professional Management
service is recognized as the services are performed. In certain
instances, fees payable by members are deferred for a specified
period, and are waived if the member cancels within the
specified period. Effective January 1, 2009, we commenced
recognizing revenue during certain of these fee deferral periods
based on our estimate of the expected retention and cancellation
rates determined by historical experience of similar
arrangements. We currently only recognize revenue for fee
deferral periods of approximately three months or less and where
the member has actively enrolled in our Professional Management
service. If we use different assumptions for expected retention
and cancellation rates, or if actual retention and cancellation
rates differ materially from our estimates, future revenue
recognized may vary from what we have recorded in the current
period. As a result of recognizing revenue during the fee
deferral periods, our revenue during the years ended
December 31, 2009 and 2010 were higher by approximately
$0.3 million and $0.5 million, compared to the year
ended December 31, 2008.
Platform revenue includes annual subscription-based fees for
access to either our Online Advice and Retirement Evaluation
services and to a lesser extent, setup fees. Platform fees are
paid by the plan sponsor, plan provider or the retirement plan
itself, depending on the plan structure, and vary depending on
the type of service provided. Subscription fees for our Online
Advice service are generally paid annually or quarterly in
advance and recognized ratably over the term of the subscription
period beginning after the completion of customer
39
setup and data connectivity. Setup fees are recognized ratably
over the estimated average life of sponsor contracts, which is
usually three to five years. Other revenue is recognized as the
related services are performed, in accordance with the specific
terms of the contract with the customers.
Deferred revenue consists primarily of billings or payments
received in advance of revenue recognition generated by
subscription fees for our Online Advice service and setup fees
described above. For these services, we generally invoice our
customers in annual or quarterly installments payable in
advance. Accordingly, the deferred revenue balance does not
represent the total contract value of annual or multi-year,
non-cancelable subscription contracts. Setup fees are recognized
ratably over the estimated average life of sponsor contracts,
which is usually three to five years.
Income Taxes. We are subject to income taxes
in the U.S. federal jurisdiction and various state
jurisdictions.
We use the asset and liability method to account for income
taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and net operating
loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. We record
a valuation allowance to reduce deferred tax assets to an amount
whose realization is more likely than not. We recognize accrued
interest and penalties related to unrecognized tax benefits as a
component of income tax expense.
During the ordinary course of business, there are many
transactions and calculations for which the ultimate tax
determination is uncertain. As a result, we recognize tax
liabilities based on estimates of whether additional taxes and
interest will be due. These tax liabilities are recognized when,
despite the belief that our tax return positions are
supportable, we believe that certain positions may not be fully
sustained upon review by tax authorities. We believe that our
accruals for tax liabilities are adequate for all open audit
years based on our assessment of many factors including past
experience and interpretations of tax law. This assessment
relies on estimates and assumptions and may involve a series of
complex judgments about future events. To the extent that the
final tax outcome of these matters is different than the amounts
recorded, such differences will impact income tax expense in the
period in which such determination is made.
Prior to September 30, 2010, we maintained a full valuation
allowance for our net deferred tax assets, since the likelihood
of the realization of those assets had not become more
likely than not. We continuously evaluate additional facts
representing positive and negative evidence in the determination
of the realizability of the deferred tax assets, including
scheduling of deferred tax liabilities and projected income from
operating activities. The underlying assumptions we use in
forecasting future taxable income require significant judgment
and take into account our recent performance. As of
September 30, 2010, and December 31, 2010, we believed
that sufficient positive evidence existed from historical
operations and future income projections to conclude that it was
more likely than not to fully realize our federal deferred tax
assets and to partially realize our state of California deferred
tax assets. Therefore, we released valuation allowances of
$55.4 million during the year ended December 31, 2010.
We continue to apply a valuation allowance on certain deferred
tax assets in the amount of $2.5 million relating to the
state of California as it is not more likely than not that we
will be able to realize these assets prior to their expiration.
As of December 31, 2010, we had net operating loss
carryforwards for federal and state income tax purposes of
approximately $120.0 million and $63.5 million,
respectively, available to reduce future income subject to
income taxes. The federal and state net operating loss
carryforwards expire through 2028.
As of December 31, 2010, approximately $25.4 million
of the net operating losses will benefit additional paid in
capital when realized. As of December 31, 2010, we also had
research credit carryforwards for federal and state of
California income tax purposes of approximately
$2.2 million and $1.1 million, respectively, available
to reduce future income taxes. The federal research credit
carryforwards expire through 2030. The state of California
research credit carries forward indefinitely.
40
All tax years since inception are open and may be subject to
examination in one or more jurisdictions. We have undergone a
federal tax examination for fiscal years 2006 and 2007. As a
result, we received a Notice of Proposed Adjustment, or NOPA,
dated August 24, 2010 from the Internal Revenue Service, or
IRS, which reduced our gross unrecognized tax benefits
associated with research credits related to prior returns. We
have determined that the NOPA will not have a material impact on
our financial condition and results of operations.
Stock-Based Compensation. Stock-based
compensation for stock awards is estimated at the grant date
based on the awards fair value as calculated by the
Black-Scholes option pricing model and is recognized as expense
over the requisite service period. The determination of the fair
value of stock-based awards on the date of grant using an option
pricing model is affected by our stock price as well as
assumptions regarding a number of complex and subjective
variables. These variables include our expected stock price and
related volatility over the expected term of the awards, actual
and projected employee stock option exercise behaviors,
risk-free interest rate, estimated forfeitures and expected
dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Expected life in years
|
|
|
6.06
|
|
|
|
6.07
|
|
|
|
5.99
|
|
Risk-free interest rate
|
|
|
2.58
|
%
|
|
|
2.62
|
%
|
|
|
2.60
|
%
|
Volatility
|
|
|
52%
|
|
|
|
53%
|
|
|
|
51%
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
We use the simplified method in developing an
estimate of expected term of stock options as we expect our
employee exercise behavior to change resulting from our initial
public offering. We base the risk-free interest rate on
zero-coupon yields implied from U.S. Treasury issues with
remaining terms similar to the expected term on the options. We
estimate expected volatility based on a combination of the
historical and implied volatility of comparable companies from a
representative peer group based on industry and market
capitalization data. We do not anticipate paying any cash
dividends in the foreseeable future and therefore use an
expected dividend yield of zero in the option pricing model. We
are required to estimate forfeitures at the time of grant and
revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. If we use different
assumptions for estimating stock-based compensation expense in
future periods or if actual forfeitures differ materially from
our estimated forfeitures, future stock-based compensation
expense may differ significantly from what we have recorded in
the current period and could materially affect our operating
income, net income (loss) and net income (loss) per share.
Direct Response Advertising. Effective
July 1, 2009, we commenced capitalization of advertising
costs associated with direct advisory Active Enrollment
campaigns, which caused a significant amount of costs to be
capitalized for the years ended December 31, 2009 and 2010.
Our advertising costs consist primarily of print materials
associated with new member solicitations. Advertising costs that
do not qualify as direct response advertising are expensed to
sales and marketing at the first time the advertisement takes
place. Effective July 1, 2009, we commenced capitalization
of advertising costs associated with direct advisory Active
Enrollment campaigns on a prospective basis as it was then
determined that we had sufficient and verifiable historical
patterns over a reasonable period to demonstrate probable future
benefits of such campaigns.
Direct response advertising costs are capitalized only if the
primary purpose of the advertising is to elicit sales to
customers who could be shown to have responded specifically to
the advertising and the direct response advertising results in
probable future benefits. Advertising costs relating to Passive
Enrollment campaigns and other general marketing materials sent
to participants do not qualify as direct response advertising
and are expensed to sales and marketing in the period the
advertising activities first take place. Print fulfillment costs
relating to subadvisory campaigns do not qualify as direct
response advertising and are expensed to cost of revenue in the
period in which the expenses were incurred. Advertising costs
associated with direct advisory Active Enrollment campaigns
qualify for capitalization as direct response advertising. The
capitalized costs are amortized over the period over which the
future benefits are expected to be received. Because of how we
earn revenue from our Professional Management service,
demonstrating that the direct response advertising related to
our direct advisory Active Enrollment campaigns results in
probable future benefits requires us to make several assumptions
about the gross revenue we will earn and costs we will incur as
a result of each campaign.
41
We have developed forecasting methodologies that have a degree
of reliability sufficient to reasonably estimate the future
gross revenue stream associated with a given campaign. The
significant estimates and judgments we use in our forecasting
methodologies include average period of probable future
benefits, change in AUM due to market performance, AUM
cancellation rates, net contribution rates and estimated
enrollment results for campaigns that have not yet been
completed. We have estimated our period of probable future
benefits by considering both the historical retention rate of
our members while not exceeding the number of years over which
we can accurately forecast future net revenues. The change in
AUM due to market performance is an estimate of future stock
market performance and its estimated relative effect on our AUM.
AUM cancellation rate is defined as the rate at which assets
will cancel out of Professional Management program due to
voluntary member terminations. A voluntary member termination is
when a member contacts Financial Engines and terminates his or
her membership in the Professional Management service.
Involuntary cancellations (such as sponsor and employee
terminations or rollovers) are captured in the net contribution
rate. Net contribution rate is defined as the net amount assets
will increase as a result of new contributions in to the 401(k)
plan less the amount assets will decrease as a result of
disbursements from the 401(k) plan, as a result of involuntary
cancellations. We have estimated AUM cancellation and
contribution rates by analyzing their respective historical
rates. We currently have assumed a probable period of future
benefits of three years, no change in AUM due to market
performance and a zero net contribution rate.
At December 31, 2010, $4.6 million of advertising
costs associated with direct advisory active choice enrollment
campaigns were reported as assets. Advertising expense was
$2.6 million, $2.2 million and $2.0 million for
the years ended December 31, 2008, 2009 and 2010,
respectively, of which direct advisory Active Enrollment
campaign expense was $2.5 million, $2.0 million and
$1.4 million respectively.
The table below evaluates the sensitivity of two of our most
significant estimates, namely average period of probable future
benefits and assumed change in our AUM due to market
performance, on the realizability of net capitalized direct
response advertising costs as of December 31, 2010. This
sensitivity analysis considered all campaigns that were eligible
for capitalization under our current assumptions of a three-year
average period of probable future benefits and 0% change in AUM
due to market performance per year. The sensitivity table
indicates the additional expense charges that would have been
recorded as of December 31, 2010 if we had assumed
different levels of change in AUM due to market performance
and/or
assumed an estimated period of probable benefits other than
3 years.
Direct
Response Advertising Sensitivity Analysis
Additional Expense (Impairments) to be Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Change in AUM due to Market Performance*
|
|
|
|
(Per year)
|
|
|
|
−40%
|
|
|
−20%
|
|
|
−10%
|
|
|
0%
|
|
|
8%
|
|
|
|
(In thousands)
|
|
|
Average Period of Probable Future Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 year
|
|
$
|
1,325
|
|
|
$
|
1,066
|
|
|
$
|
971
|
|
|
$
|
849
|
|
|
$
|
740
|
|
2 years
|
|
$
|
429
|
|
|
$
|
220
|
|
|
$
|
166
|
|
|
$
|
95
|
|
|
$
|
62
|
|
3 years
|
|
$
|
332
|
|
|
$
|
135
|
|
|
$
|
51
|
|
|
$
|
|
|
|
$
|
|
|
4 years
|
|
$
|
274
|
|
|
$
|
44
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
5 years
|
|
$
|
247
|
|
|
$
|
7
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
* |
|
Any comparable percentage change to AUM due to market
performance, net contribution rate and AUM cancellation rate
would have the same relative impact on the sensitivity analysis
as they all directly impact member AUM. |
Deferred Sales Commissions. We defer certain
commission payments to our sales force. Deferred sales
commissions consist of incremental costs paid to our sales force
associated with the execution of non-cancelable customer
contracts. The deferred sales commission amounts are recoverable
through future revenue streams under the non-cancelable customer
contracts. We believe this is the preferable method of
accounting as the commission charges are so closely related to
the revenue from the non-cancelable customer contracts that they
should be recorded as an asset and charged to expense over the
life of the related non-cancelable customer contracts, which is
42
typically three years. Amortization of deferred sales
commissions is included in sales and marketing expense in the
accompanying consolidated statements of operations.
Results
of Operations
Comparison
of the Years Ended December 31, 2009 and 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Increase
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
(Decrease)
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
Amount
|
|
|
%
|
|
|
|
(As a
|
|
|
(In thousands, except percentages)
|
|
|
|
percentage
|
|
|
|
|
|
|
of revenue)
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional management
|
|
|
62
|
%
|
|
|
71
|
%
|
|
$
|
52,579
|
|
|
$
|
79,137
|
|
|
$
|
26,558
|
|
|
|
51
|
%
|
Platform
|
|
|
35
|
|
|
|
26
|
|
|
|
30,048
|
|
|
|
29,717
|
|
|
|
(331
|
)
|
|
|
(1
|
)
|
Other
|
|
|
3
|
|
|
|
3
|
|
|
|
2,355
|
|
|
|
2,918
|
|
|
|
563
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
84,982
|
|
|
|
111,772
|
|
|
|
26,790
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization of internal use software)
|
|
|
35
|
|
|
|
34
|
|
|
|
29,573
|
|
|
|
37,599
|
|
|
|
8,026
|
|
|
|
27
|
|
Research and development
|
|
|
18
|
|
|
|
17
|
|
|
|
15,618
|
|
|
|
19,343
|
|
|
|
3,725
|
|
|
|
24
|
|
Sales and marketing
|
|
|
26
|
|
|
|
24
|
|
|
|
22,515
|
|
|
|
26,403
|
|
|
|
3,888
|
|
|
|
17
|
|
General and administrative
|
|
|
9
|
|
|
|
10
|
|
|
|
7,679
|
|
|
|
11,644
|
|
|
|
3,965
|
|
|
|
52
|
|
Amortization of internal use software
|
|
|
3
|
|
|
|
3
|
|
|
|
2,813
|
|
|
|
3,912
|
|
|
|
1,099
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
92
|
|
|
|
88
|
|
|
|
78,198
|
|
|
|
98,901
|
|
|
|
20,703
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
8
|
|
|
|
12
|
|
|
|
6,784
|
|
|
|
12,871
|
|
|
|
6,087
|
|
|
|
90
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
|
|
|
|
(612
|
)
|
|
|
(46
|
)
|
|
|
566
|
|
|
|
(92
|
)
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
351
|
|
|
|
21
|
|
|
|
(330
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
8
|
|
|
|
11
|
|
|
|
6,523
|
|
|
|
12,846
|
|
|
|
6,323
|
|
|
|
97
|
|
Income tax expense (benefit)
|
|
|
1
|
|
|
|
(45
|
)
|
|
|
834
|
|
|
|
(50,729
|
)
|
|
|
(51,563
|
)
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7
|
%
|
|
|
57
|
%
|
|
$
|
5,689
|
|
|
$
|
63,575
|
|
|
$
|
57,886
|
|
|
|
1,018
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue increased $26.8 million, or 32%, from
$85.0 million for the year ended December 31, 2009 to
$111.8 million for the year ended December 31, 2010.
The increase was due primarily to growth in professional
management revenue of $26.6 million. Professional
management revenue and platform revenue comprised 71% and 26%,
respectively, of total revenue for the year ended
December 31, 2010.
Professional
Management Revenue
Professional management revenue increased $26.6 million, or
51%, from $52.6 million for the year ended
December 31, 2009 to $79.1 million for the year ended
December 31, 2010. This increase was due primarily to an
increase in average AUM from $21.2 billion for the year
ended December 31, 2009 to $32.8 billion for the year
ended December 31, 2010. The increase in AUM was driven
primarily by increased net new enrollment resulting from
marketing campaigns and other ongoing member acquisitions,
market appreciation and contributions.
43
Platform
Revenue
Platform revenue decreased $0.3 million, or 1%, from
$30.0 million for the year ended December 31, 2009 to
$29.7 million for the year ended December 31, 2010,
due primarily to a reduction in contractual fees from certain
subadvisory providers.
Other
Revenue
Other revenue increased $0.6 million, or 24%, from
$2.4 million for the year ended December 31, 2009 to
$2.9 million for the year ended December 31, 2010.
This increase was due primarily to an increase in revenue
related to the reimbursement of printed fulfillment materials
from certain subadvisory relationships.
Cost of
Revenue
Cost of revenue, exclusive of amortization of internal use
software, increased $8.0 million, or 27%, from
$29.6 million for the year ended December 31, 2009 to
$37.6 million for the year ended December 31, 2010.
This increase was due primarily to an increase of
$6.6 million in the fees paid to plan providers for
connectivity to plan and plan participant data. Additional
expense increases included headcount growth and annual
compensation increases effective April 1, 2010, which
resulted in higher wages expense of $0.6 million, benefits
and payroll tax expenses of $0.4 million and cash incentive
compensation expense of $0.4 million for the year ended
December 31, 2010, offset by a $0.6 million reduction
in stock-based compensation expense due primarily to a severance
charge incurred for the year ended December 31, 2009. There
was also an increase in the cost of marketing print fulfillment
materials related to subadvised relationships and member
materials of $0.6 million. As a percentage of revenue, cost
of revenue decreased from 35% for the year ended
December 31, 2009 to 34% for the year ended
December 31, 2010. The decrease as a percentage of revenue
was due primarily to slower increases in payroll and
employee-related expenses relative to the increase in revenue
during the same period, due primarily to a severance charge
incurred for the year ended December 31, 2009. We currently
anticipate issuing an equity grant to certain of our existing
employees in late 2011, which will likely result in a
significant increase to stock-based compensation expense over
the subsequent periods.
Research
and Development
Research and development expense increased $3.7 million, or
24%, from $15.6 million for the year ended
December 31, 2009 to $19.3 million for the year ended
December 31, 2010. This increase was due primarily to
headcount growth and annual compensation increases effective
April 1, 2010 which resulted in higher wages expense of
$1.9 million, cash incentive compensation expense of
$1.1 million, benefits and payroll tax expenses of
$0.9 million, and $0.6 million of other
employee-related expenses for the year ended December 31,
2010. There were also increases in other operating expenses of
$0.4 million related to consulting, equipment and travel.
These increases were offset by an increase in capitalized
internal use software costs of $1.2 million. As a
percentage of revenue, research and development expense
decreased from 18% for the year ended December 31, 2009 to
17% for the year ended December 31, 2010. We currently
anticipate issuing an equity grant to certain of our existing
employees in late 2011, which will likely result in a
significant increase to stock-based compensation expense over
the subsequent periods.
Sales and
Marketing
Sales and marketing expense increased $3.9 million, or 17%,
from $22.5 million for the year ended December 31,
2009 to $26.4 million for the year ended December 31,
2010. This increase was due primarily to headcount growth and
annual compensation increases effective April 1, 2010 which
resulted in higher cash incentive compensation expense of
$2.1 million, wages expense of $1.4 million, benefits
and payroll tax expenses of $0.7 million, and other
employee related expenses of $0.4 million, offset by a
decrease in commission expense of $0.4 million for the year
ended December 31, 2010. There were also increases in
non-direct response advertising printed marketing materials of
$0.8 million as well as other operating expenses, such as
marketing programs and travel, of $0.6 million, offset by
an increase in direct response advertising capitalization, net
of amortization, of $1.7 million. As a percentage of
revenue, sales and marketing expense decreased from 26% for the
year ended
44
December 31, 2009 to 24% for the year ended
December 31, 2010. The decrease as a percentage of revenue
was due primarily to the capitalization of direct response
advertising costs which commenced on July 1, 2009 causing a
partial year of net capitalization for the year ended
December 31, 2009 compared to a full year for the year
ended December 31, 2010. In general, we would expect the
amortization of direct response advertising to increase over the
next one to two years. We currently anticipate issuing an equity
grant to certain of our existing employees in late 2011, which
will likely result in a significant increase to stock-based
compensation expense over the subsequent periods.
General
and Administrative
General and administrative expense increased $4.0 million,
or 52%, from $7.7 million for the year ended
December 31, 2009 to $11.6 million for the year ended
December 31, 2010. This increase was due primarily to
headcount growth and annual compensation increases effective
April 1, 2010 which resulted in higher wages expense of
$1.0 million, stock-based compensation expense of
$1.0 million, cash incentive compensation expense of
$0.4 million, and benefits and payroll tax expenses of
$0.5 million offset by a decrease in overhead expenses of
$0.7 million due to lower headcount growth compared to
other functional areas for the year ended December 31,
2010. There were also increases in professional services expense
to our support operations as a public company of
$1.4 million and other operational expenses of
$0.5 million. As a percentage of revenue, general and
administrative expense increased from 9% for the year ended
December 31, 2009 to 10% for the year ended
December 31, 2010. The increase as a percentage of revenue
was due primarily to increases in expenses to support operations
as a public company growing at a faster rate than revenue. We
currently anticipate issuing an equity grant to certain of our
existing employees in late 2011, which will likely result in a
significant increase to stock-based compensation expense over
the subsequent periods.
Amortization
of Internal Use Software
Amortization expense increased $1.1 million, or 39%, from
$2.8 million for the year ended December 31, 2009 to
$3.9 million for the year ended December 31, 2010.
There was a higher rate of amortization expense due primarily to
the completion of an internal use software project in March 2010
which incurred greater development costs as compared to projects
amortized for the year ended December 31, 2009. These costs
include engineering costs associated with developing and
enhancing our internally developed software.
Interest
Expense
Interest expense decreased $0.6 million, or 92%, from
$0.6 million for the year ended December 31, 2009 to
$46,000 for the year ended December 31, 2010. This decrease
was due to the repayment of a $10 million note in May 2010,
which had a full year of interest expensed for the year ended
December 31, 2009.
Interest
and Other Income, Net
Interest and other income decreased $0.3 million, or 94%,
from $0.4 million for year ended December 31, 2009 to
$21,000 for the year ended December 31, 2010, as a result
of other income of $0.2 million associated with the
repayment of a previously outstanding $10.0 million note as
well as $0.1 million adjustment to the fair value of a
warrant during the year ended December 31, 2009.
Income
Taxes
Income tax expense decreased $51.6 million from a
$0.8 million income tax expense for the year ended
December 31, 2009 to a $50.7 million income tax
benefit for the year ended December 31, 2010, due primarily
to release of valuation allowances of $55.4 million offset
by income tax expense of $4.7 million on current year
income for the year ended December 31, 2010. As a result of
releasing a significant portion of our valuation allowance in
2010 we would expect to see our effective tax rate to be
approximately 38%, not including the effect of disqualified
stock dispositions, in future periods. However, we do not expect
to incur significant cash tax payments until we have utilized
our net operating loss carryforwards.
45
Comparison
of the Years Ended December 31, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Increase
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
(Decrease)
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
(As a
|
|
|
(In thousands, except percentages)
|
|
|
|
percentage of
|
|
|
|
|
|
|
revenue)
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional management
|
|
|
55
|
%
|
|
|
62
|
%
|
|
$
|
38,963
|
|
|
$
|
52,579
|
|
|
$
|
13,616
|
|
|
|
35
|
%
|
Platform
|
|
|
41
|
|
|
|
35
|
|
|
|
29,498
|
|
|
|
30,048
|
|
|
|
550
|
|
|
|
2
|
|
Other
|
|
|
4
|
|
|
|
3
|
|
|
|
2,810
|
|
|
|
2,355
|
|
|
|
(455
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
100
|
|
|
|
100
|
|
|
|
71,271
|
|
|
|
84,982
|
|
|
|
13,711
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization of internal use software)
|
|
|
39
|
|
|
|
35
|
|
|
|
27,588
|
|
|
|
29,573
|
|
|
|
1,985
|
|
|
|
7
|
|
Research and development
|
|
|
19
|
|
|
|
18
|
|
|
|
13,663
|
|
|
|
15,618
|
|
|
|
1,955
|
|
|
|
14
|
|
Sales and marketing
|
|
|
30
|
|
|
|
26
|
|
|
|
21,157
|
|
|
|
22,515
|
|
|
|
1,358
|
|
|
|
6
|
|
General and administrative
|
|
|
9
|
|
|
|
9
|
|
|
|
6,613
|
|
|
|
7,679
|
|
|
|
1,066
|
|
|
|
16
|
|
Withdrawn offering expense
|
|
|
4
|
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
|
|
(3,031
|
)
|
|
|
n/a
|
|
Amortization of internal use software
|
|
|
3
|
|
|
|
3
|
|
|
|
2,258
|
|
|
|
2,813
|
|
|
|
555
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
104
|
|
|
|
92
|
|
|
|
74,310
|
|
|
|
78,198
|
|
|
|
3,888
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
(4
|
)
|
|
|
8
|
|
|
|
(3,039
|
)
|
|
|
6,784
|
|
|
|
9,823
|
|
|
|
n/a
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(799
|
)
|
|
|
(612
|
)
|
|
|
187
|
|
|
|
(23
|
)
|
Interest and other income, net
|
|
|
|
|
|
|
|
|
|
|
236
|
|
|
|
351
|
|
|
|
115
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
(5
|
)
|
|
|
8
|
|
|
|
(3,602
|
)
|
|
|
6,523
|
|
|
|
10,125
|
|
|
|
n/a
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
1
|
|
|
|
12
|
|
|
|
834
|
|
|
|
822
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
(5
|
)%
|
|
|
7
|
%
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
|
$
|
9,303
|
|
|
|
n/a
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue increased 19% from $71.3 million for the year
ended December 31, 2008 to $85.0 million for the year
ended December 31, 2009. The increase was due primarily to
growth in professional management revenue of $13.6 million.
Professional management revenue and platform revenue comprised
62% and 35%, respectively, of total revenue for the year ended
December 31, 2009.
Professional
Management Revenue
Professional management revenue increased 35% from
$39.0 million for the year ended December 31, 2008 to
$52.6 million for the year ended December 31, 2009.
This increase was due primarily to an increase in average AUM
from $17.1 billion for the year ended December 31,
2008 to $21.2 billion for the year ended December 31,
2009. The increase in AUM was driven primarily by market
appreciation, increased enrollment resulting from marketing
campaigns and other ongoing member acquisitions.
Platform
Revenue
Platform revenue increased 2% from $29.5 million for the
year ended December 31, 2008 to $30.0 million for the
year ended December 31, 2009, due to an increased number of
plan participants with respect to whom platform fees are paid,
which was due primarily to an increase in the number of plan
sponsors who use one or more of our services.
46
Other
Revenue
Other revenue decreased 16% from $2.8 million for the year
ended December 31, 2008 to $2.4 million for the year
ended December 31, 2009. This decrease was due primarily to
a reduction in revenue related to the reimbursement of personal
evaluation expenses of $0.6 million, partially offset by an
increase of $0.2 million in reimbursement for marketing
materials from certain subadvisory relationships.
Cost of
Revenue
Cost of revenue increased 7% from $27.6 million for the
year ended December 31, 2008 to $29.6 million for the
year ended December 31, 2009. This increase was due
primarily to an increase of $2.7 million in the fees paid
to plan providers for connectivity to plan and plan participant
data and $0.9 million in cash incentive compensation
expense. These increases were partially offset by a decrease of
$1.1 million in printing and postage of member materials
and personal statements, and recruiting expense of
$0.2 million. As a percentage of revenue, cost of revenue
decreased from 39% for the year ended December 31, 2008 to
35% for the year ended December 31, 2009. The decrease as a
percentage of revenue was due primarily to slower increases in
payroll and employee-related expenses relative to the increase
in revenue during the same period.
Research
and Development
Research and development expense increased 14% from
$13.7 million for the year ended December 31, 2008 to
$15.6 million for the year ended December 31, 2009.
This increase was due primarily to higher cash incentive
compensation expense of $1.7 million and stock-based
compensation of $0.9 million, partially offset by increased
capitalization of internal use software of $0.9 million. As
a percentage of revenue, research and development expense
decreased from 19% for the year ended December 31, 2008 to
18% for the year ended December 31, 2009.
Sales and
Marketing
Sales and marketing expense increased 6% from $21.2 million
for the year ended December 31, 2008 to $22.5 million
for the year ended December 31, 2009. This increase was due
primarily to higher cash incentive compensation expense of
$1.5 million, stock-based compensation of $0.8 million
and participant communication expense of $0.8 million. This
increase was partially offset by the capitalization of direct
response advertising costs of $1.5 million in the second
half of 2009 and a decrease of $0.3 million in consulting
expense due to a rebranding effort for the year ended
December 31, 2008. As a percentage of revenue, sales and
marketing expense decreased from 30% for the year ended
December 31, 2008 to 26% for the year ended
December 31, 2009. The decrease as a percentage of revenue
was due primarily to the capitalization of direct response
advertising costs in the second half of 2009.
General
and Administrative
General and administrative expense increased 16% from
$6.6 million for the year ended December 31, 2008 to
$7.7 million for the year ended December 31, 2009.
This increase was due primarily to increased stock-based
compensation expense of $0.8 million and cash incentive
compensation expense of $0.6 million, offset by a
$0.2 million reduction in recruiting expense. As a
percentage of revenue, general and administrative expense
remained flat at 9% for the year ended December 31, 2008
and 2009.
Amortization
of Internal Use Software
Amortization expense increased 25% from $2.3 million for
the year ended December 31, 2008 to $2.8 million for
the year ended December 31, 2009. This increase was due
primarily to increased capitalized development costs in late
2008. These costs include engineering costs associated with
developing and enhancing our internally developed software.
47
Interest
Expense
Interest expense decreased 23% from $0.8 million for the
year ended December 31, 2008 to $0.6 million for the
year ended December 31, 2009. This decrease was due to a
$10.0 million term loan entered into in April 2009 with an
effective interest rate lower than our previously outstanding
$10.0 million promissory note.
Interest
and Other Income, Net
Interest and other income increased 49% from $0.2 million
for the year ended December 31, 2008 to $0.4 million
for the year ended December 31, 2009, as a result of other
income of $0.2 million associated with the payoff of our
previously outstanding $10.0 million note and
$0.1 million adjustment to the fair value of a warrant,
offset by lower money market rates.
Income
Taxes
Taxes for the year ended December 31, 2008 were de minimis,
as compared to $0.8 million for the year ended
December 31, 2009. The income tax increase for the year
ended December 31, 2009 was primarily a result of increased
state taxes due to operating income for the year ended
December 31, 2009 compared to a loss for the year ended
December 31, 2008 and limitations on our use of net
operating loss carryforwards for the year ended
December 31, 2008.
Quarterly
Results of Operations
The following table sets forth our unaudited quarterly condensed
consolidated statements of operations data for the eight
quarters ended December 31, 2010. The data have been
prepared on the same basis as the audited consolidated financial
statements and related notes and you should read the following
tables together with such financial statements. The quarterly
results of operations include all necessary adjustments,
consisting of only normal recurring adjustments that we consider
necessary for a fair presentation of this data. Results of
interim periods are not necessarily indicative of results for
the entire year and are not necessarily indicative of future
results.
Our professional management revenue generally increased
sequentially in each of the quarters presented as a result of
AUM growth driven primarily by net new enrollment resulting from
marketing campaigns and other ongoing member acquisitions,
market appreciation and contributions. Professional management
revenue decreased in the first quarter of 2010 compared to the
prior quarter, due primarily to the fee structure with one of
our plan providers under which we recognize the difference
between earned revenue and minimum contractual revenue in the
fourth quarter. Platform revenue has generally increased quarter
over quarter as a result of new business, partially offset by
the phase-out of services related to investment guidance.
Total costs and expenses have fluctuated both in absolute
dollars and percentage of revenue from quarter to quarter due
primarily to employee-related expenses related to headcount
growth and compensation increases, including wages, cash
incentive compensation, stock-based compensation and benefits,
fees paid to plan providers for connectivity to plan and plan
participant data and professional services expenses to our
support operations as a public company, offset by increased net
capitalization of direct response advertising. Cost of revenue
generally
48
increased in absolute dollars for each quarter presented as a
result of higher data connectivity fees and member materials.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
Condensed Consolidated
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
Statements of Operations Data:
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional management
|
|
$
|
9,593
|
|
|
$
|
11,137
|
|
|
$
|
13,646
|
|
|
$
|
18,203
|
|
|
$
|
16,611
|
|
|
$
|
17,842
|
|
|
$
|
19,927
|
|
|
$
|
24,757
|
|
Platform
|
|
|
7,220
|
|
|
|
7,704
|
|
|
|
7,602
|
|
|
|
7,522
|
|
|
|
7,177
|
|
|
|
7,186
|
|
|
|
7,659
|
|
|
|
7,695
|
|
Other
|
|
|
595
|
|
|
|
588
|
|
|
|
762
|
|
|
|
410
|
|
|
|
556
|
|
|
|
544
|
|
|
|
1,176
|
|
|
|
642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
17,408
|
|
|
|
19,429
|
|
|
|
22,010
|
|
|
|
26,135
|
|
|
|
24,344
|
|
|
|
25,572
|
|
|
|
28,762
|
|
|
|
33,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of amortization of internal use
software)
|
|
|
6,601
|
|
|
|
6,910
|
|
|
|
7,546
|
|
|
|
8,516
|
|
|
|
8,470
|
|
|
|
8,728
|
|
|
|
10,189
|
|
|
|
10,212
|
|
Research and development
|
|
|
3,688
|
|
|
|
3,711
|
|
|
|
3,967
|
|
|
|
4,252
|
|
|
|
4,470
|
|
|
|
4,990
|
|
|
|
4,678
|
|
|
|
5,205
|
|
Sales and marketing
|
|
|
5,360
|
|
|
|
6,001
|
|
|
|
5,328
|
|
|
|
5,826
|
|
|
|
6,290
|
|
|
|
6,582
|
|
|
|
6,862
|
|
|
|
6,669
|
|
General and administrative
|
|
|
1,842
|
|
|
|
1,773
|
|
|
|
1,744
|
|
|
|
2,320
|
|
|
|
2,599
|
|
|
|
2,850
|
|
|
|
2,849
|
|
|
|
3,346
|
|
Amortization of internal use software
|
|
|
638
|
|
|
|
673
|
|
|
|
815
|
|
|
|
687
|
|
|
|
728
|
|
|
|
992
|
|
|
|
974
|
|
|
|
1,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
18,129
|
|
|
|
19,068
|
|
|
|
19,400
|
|
|
|
21,601
|
|
|
|
22,557
|
|
|
|
24,142
|
|
|
|
25,552
|
|
|
|
26,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(721
|
)
|
|
|
361
|
|
|
|
2,610
|
|
|
|
4,534
|
|
|
|
1,787
|
|
|
|
1,430
|
|
|
|
3,210
|
|
|
|
6,444
|
|
Interest expense
|
|
|
(184
|
)
|
|
|
(171
|
)
|
|
|
(159
|
)
|
|
|
(98
|
)
|
|
|
(73
|
)
|
|
|
(49
|
)
|
|
|
21
|
|
|
|
55
|
|
Interest and other income, net
|
|
|
27
|
|
|
|
232
|
|
|
|
45
|
|
|
|
47
|
|
|
|
1
|
|
|
|
6
|
|
|
|
8
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(878
|
)
|
|
|
422
|
|
|
|
2,496
|
|
|
|
4,483
|
|
|
|
1,715
|
|
|
|
1,387
|
|
|
|
3,239
|
|
|
|
6,505
|
|
Income tax expense (benefit)
|
|
|
(162
|
)
|
|
|
79
|
|
|
|
442
|
|
|
|
475
|
|
|
|
123
|
|
|
|
105
|
|
|
|
(50,172
|
)
|
|
|
(785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(716
|
)
|
|
|
343
|
|
|
|
2,054
|
|
|
|
4,008
|
|
|
|
1,592
|
|
|
|
1,282
|
|
|
|
53,411
|
|
|
|
7,290
|
|
Less: Stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,082
|
|
|
|
5,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of common stock
|
|
$
|
(716
|
)
|
|
$
|
343
|
|
|
$
|
2,054
|
|
|
$
|
2,926
|
|
|
$
|
(3,888
|
)
|
|
$
|
1,282
|
|
|
$
|
53,411
|
|
|
$
|
7,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share attributable to holders of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
|
$
|
0.03
|
|
|
$
|
0.20
|
|
|
$
|
0.29
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.03
|
|
|
$
|
1.30
|
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
|
$
|
(0.25
|
)
|
|
$
|
0.03
|
|
|
$
|
1.15
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA(1)
|
|
$
|
2,251
|
|
|
$
|
3,532
|
|
|
$
|
5,644
|
|
|
$
|
8,129
|
|
|
$
|
5,339
|
|
|
$
|
5,237
|
|
|
$
|
7,106
|
|
|
$
|
10,707
|
|
Adjusted Net
Income(2)
|
|
$
|
263
|
|
|
$
|
1,317
|
|
|
$
|
2,974
|
|
|
$
|
5,318
|
|
|
$
|
2,789
|
|
|
$
|
2,486
|
|
|
$
|
4,740
|
|
|
$
|
8,051
|
|
Adjusted Earnings Per
Share(2)
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
|
$
|
0.12
|
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
$
|
0.10
|
|
|
$
|
0.17
|
|
|
|
|
(1) |
|
The table below sets forth a reconciliation of net income (loss)
to Adjusted EBITDA based on our historical results: |
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(716
|
)
|
|
$
|
343
|
|
|
$
|
2,054
|
|
|
$
|
4,008
|
|
|
$
|
1,592
|
|
|
$
|
1,282
|
|
|
$
|
53,411
|
|
|
$
|
7,290
|
|
Interest (income) expense, net
|
|
|
179
|
|
|
|
170
|
|
|
|
157
|
|
|
|
99
|
|
|
|
72
|
|
|
|
43
|
|
|
|
(29
|
)
|
|
|
(61
|
)
|
Income tax expense (benefit)
|
|
|
(162
|
)
|
|
|
79
|
|
|
|
442
|
|
|
|
475
|
|
|
|
123
|
|
|
|
105
|
|
|
|
(50,172
|
)
|
|
|
(785
|
)
|
Depreciation
|
|
|
478
|
|
|
|
427
|
|
|
|
413
|
|
|
|
412
|
|
|
|
438
|
|
|
|
431
|
|
|
|
481
|
|
|
|
466
|
|
Amortization of internal use software
|
|
|
620
|
|
|
|
650
|
|
|
|
783
|
|
|
|
658
|
|
|
|
696
|
|
|
|
940
|
|
|
|
921
|
|
|
|
1,146
|
|
Amortization of direct response advertising
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
54
|
|
|
|
162
|
|
|
|
228
|
|
|
|
307
|
|
|
|
488
|
|
Amortization of deferred sales commissions
|
|
|
268
|
|
|
|
287
|
|
|
|
297
|
|
|
|
300
|
|
|
|
319
|
|
|
|
260
|
|
|
|
274
|
|
|
|
302
|
|
Stock-based compensation expense
|
|
|
1,584
|
|
|
|
1,576
|
|
|
|
1,488
|
|
|
|
2,120
|
|
|
|
1,937
|
|
|
|
1,948
|
|
|
|
1,913
|
|
|
|
1,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
2,251
|
|
|
$
|
3,532
|
|
|
$
|
5,644
|
|
|
$
|
8,126
|
|
|
$
|
5,339
|
|
|
$
|
5,237
|
|
|
$
|
7,106
|
|
|
$
|
10,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
The table below sets forth a reconciliation of net income (loss)
to Adjusted Net Income and Adjusted Earnings Per Share based on
our historical results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income (loss)
|
|
$
|
(716
|
)
|
|
$
|
343
|
|
|
$
|
2,054
|
|
|
$
|
4,008
|
|
|
$
|
1,592
|
|
|
$
|
1,282
|
|
|
$
|
53,411
|
|
|
$
|
7,290
|
|
Stock-based compensation expense, net of
tax(1)
|
|
|
979
|
|
|
|
974
|
|
|
|
920
|
|
|
|
1,310
|
|
|
|
1,197
|
|
|
|
1,204
|
|
|
|
1,182
|
|
|
|
1,150
|
|
Income tax benefit from release of valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,853
|
)
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
263
|
|
|
$
|
1,317
|
|
|
$
|
2,974
|
|
|
$
|
5,318
|
|
|
$
|
2,789
|
|
|
$
|
2,486
|
|
|
$
|
4,740
|
|
|
$
|
8,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Adjusted Earnings Per Share
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.07
|
|
|
$
|
0.12
|
|
|
$
|
0.06
|
|
|
$
|
0.05
|
|
|
$
|
0.10
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock outstanding
|
|
|
40,587
|
|
|
|
40,685
|
|
|
|
40,695
|
|
|
|
40,870
|
|
|
|
41,130
|
|
|
|
41,326
|
|
|
|
41,512
|
|
|
|
42,337
|
|
Dilutive restricted stock and stock options
|
|
|
2,044
|
|
|
|
1,708
|
|
|
|
1,949
|
|
|
|
2,506
|
|
|
|
3,680
|
|
|
|
5,410
|
|
|
|
5,051
|
|
|
|
5,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted common shares outstanding
|
|
|
42,631
|
|
|
|
42,393
|
|
|
|
42,644
|
|
|
|
43,376
|
|
|
|
44,810
|
|
|
|
46,736
|
|
|
|
46,563
|
|
|
|
47,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For the calculation of Adjusted Net Income, an estimated
statutory tax rate of 38.2% has been applied to stock-based
compensation for all periods presented.
|
Non-GAAP Adjusted
EBITDA, Adjusted Net Income and Adjusted Earnings Per
Share
Adjusted EBITDA represents net income (loss) before net interest
(income) expense, income tax expense (benefit), depreciation,
withdrawn offering expense, amortization of internal use
software, amortization of direct response advertising,
amortization of deferred sales commissions and amortization of
stock-based compensation. Adjusted Net Income represents net
income (loss) before stock-based compensation expense, net of
tax and certain other items such as the income tax benefit from
the release of valuation allowances. Adjusted Earnings Per Share
is defined as Adjusted Net Income divided by the
weighted-average of dilutive common share equivalents
outstanding. For all periods, the dilutive common share
equivalents outstanding also include on a non-weighted basis the
conversion of all preferred stock to common stock, the shares
associated with the stock dividend and the shares sold in the
initial public offering. This differs from the weighted average
diluted shares outstanding used for purposes of calculating GAAP
earnings per share.
Our management uses Adjusted EBITDA, Adjusted Net Income and
Adjusted Earnings Per Share as measures of operating
performance, for planning purposes (including the preparation of
annual budgets), to allocate resources to enhance the financial
performance of our business, to evaluate the effectiveness of
our business strategies and in communications with our board of
directors concerning our financial performance. Adjusted EBITDA,
among other factors, were used when determining incentive
compensation for employees, including management, for the year
ended December 31, 2010.
50
We also present Adjusted EBITDA, Adjusted Net Income and
Adjusted Earnings Per Share as supplemental performance measures
because we believe that these measures provide our board of
directors, management and investors with additional information
to measure our performance. Adjusted EBITDA provides comparisons
from period to period by excluding potential differences caused
by variations in the age and book depreciation of fixed assets
(affecting relative depreciation expense) and amortization of
internal use software, direct response advertising and
commissions, and changes in interest expense and interest income
that are influenced by capital structure decisions and capital
market conditions. Management also believes it is useful to
exclude stock-based compensation expense from Adjusted EBITDA,
Adjusted Net Income and Adjusted Earnings Per Share because
non-cash equity grants made at a certain price and point in
time, as well as certain other items such as the income tax
benefit from the release of valuation allowances, do not
necessarily reflect how our business is performing at any
particular time.
Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per
Share are not measurements of our financial performance under
GAAP and should not be considered as an alternative to net
income (loss), operating income, earnings per share or any other
performance measures derived in accordance with GAAP, or as an
alternative to cash flows from operating activities as a measure
of our profitability or liquidity.
We understand that, although Adjusted EBITDA, Adjusted Net
Income and Adjusted Earnings Per Share are frequently used by
securities analysts, lenders and others in their evaluation of
companies, Adjusted EBITDA, Adjusted Net Income and Adjusted
Earnings Per Share have limitations as an analytical tool, and
you should not consider them in isolation, or as a substitute
for an analysis of our results as reported under GAAP. In
particular you should consider:
|
|
|
|
|
Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per
Share do not reflect our cash expenditures, or future
requirements for capital expenditures or contractual commitments;
|
|
|
|
Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per
Share do not reflect changes in, or cash requirements for, our
working capital needs;
|
|
|
|
Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per
Share do not reflect the non-cash component of employee
compensation;
|
|
|
|
Although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized often will have to be
replaced in the future, and Adjusted EBITDA does not reflect any
cash requirements for such replacements; and
|
|
|
|
Other companies in our industry may calculate Adjusted EBITDA,
Adjusted Net Income and Adjusted Earnings Per Share differently
than we do, limiting their usefulness as a comparative measure.
|
Management compensates for the inherent limitations associated
with using Adjusted EBITDA, Adjusted Net Income and Adjusted
Earnings Per Share measures through disclosure of such
limitations, presentation of our financial statements in
accordance with GAAP and reconciliation of Adjusted EBITDA,
Adjusted Net Income and Adjusted Earnings Per Share to the most
directly comparable GAAP measure, net income (loss). Further,
management also reviews GAAP measures and evaluates individual
measures that are not included in Adjusted EBITDA, such as our
level of capital expenditures, equity issuance and interest
expense, among other measures.
51
The table below sets forth a reconciliation of net income (loss)
to Adjusted EBITDA based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
|
$
|
63,575
|
|
Interest expense, net
|
|
|
563
|
|
|
|
605
|
|
|
|
25
|
|
Income tax expense (benefit)
|
|
|
12
|
|
|
|
834
|
|
|
|
(50,729
|
)
|
Depreciation
|
|
|
1,641
|
|
|
|
1,729
|
|
|
|
1,816
|
|
Withdrawn offering expense
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
Amortization of internal use software
|
|
|
2,196
|
|
|
|
2,711
|
|
|
|
3,703
|
|
Amortization and impairment of direct response advertising
|
|
|
|
|
|
|
64
|
|
|
|
1,185
|
|
Amortization of deferred sales commissions
|
|
|
991
|
|
|
|
1,153
|
|
|
|
1,155
|
|
Stock-based compensation
|
|
|
3,589
|
|
|
|
6,768
|
|
|
|
7,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Adjusted EBITDA
|
|
$
|
8,409
|
|
|
$
|
19,553
|
|
|
$
|
28,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth a reconciliation of net income (loss)
to Adjusted Net Income and Adjusted Earnings Per Share on our
historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Net income (loss)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
|
$
|
63,575
|
|
Stock-based compensation, net of
tax(1)
|
|
|
2,218
|
|
|
|
4,183
|
|
|
|
4,733
|
|
Withdrawn offering expense
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
Income tax benefit from release of valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(50,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Adjusted Net Income
|
|
$
|
1,635
|
|
|
$
|
9,872
|
|
|
$
|
18,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Adjusted Earnings Per Share
|
|
$
|
0.04
|
|
|
$
|
0.23
|
|
|
$
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of common stock outstanding
|
|
|
40,448
|
|
|
|
40,807
|
|
|
|
41,601
|
|
Dilutive restricted stock and stock options
|
|
|
3,462
|
|
|
|
2,052
|
|
|
|
4,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted common shares outstanding
|
|
|
43,910
|
|
|
|
42,859
|
|
|
|
46,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the calculation of Adjusted Net Income, an estimated
statutory tax rate of 38.2% has been applied to stock-based
compensation for all periods presented. |
Liquidity
and Capital Resources
Sources
of Liquidity
Over the next 12 months, and in the longer term, we expect
that our cash and liquidity needs will be met by existing
resources which consists of cash generated from our initial
public offering and ongoing operations.
To date, our operations have been financed through the sale of
equity securities, including net cash proceeds in connection
with our initial public offering of common stock completed
March 16, 2010 of approximately $79.0 million, after
deducting underwriting discounts and offering costs, and more
recently from cash flows from operations. At December 31,
2010, we had total cash and cash equivalents of
$114.9 million, compared to $20.7 million at
December 31, 2009.
52
Cash
Flows
The following table presents information regarding our cash
flows, cash and cash equivalents for the years ended
December 31, 2008, 2009 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
3,188
|
|
|
$
|
17,057
|
|
|
$
|
21,580
|
|
Net cash used in investing activities
|
|
$
|
(6,548
|
)
|
|
$
|
(5,849
|
)
|
|
$
|
(9,171
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
3,202
|
|
|
$
|
(5,352
|
)
|
|
$
|
81,815
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(158
|
)
|
|
$
|
5,856
|
|
|
$
|
94,224
|
|
Cash and cash equivalents, end of year
|
|
$
|
14,857
|
|
|
$
|
20,713
|
|
|
$
|
114,937
|
|
Operating
Activities
Net cash provided by operating activities for the year ended
December 31, 2010 was $21.6 million compared to net
cash provided by operating activities of $17.1 million for
the year ended December 31, 2009. Net cash provided by
operating activities was a result of a net income of
$63.6 million for the year ended December 31, 2010,
compared to a $5.7 million net income for the year ended
December 31, 2009, plus adjustments for non-cash expenses.
These non-cash adjustments include $7.7 million in
amortization of stock-based compensation expense,
$3.7 million in amortization of internal use software,
$1.8 million of depreciation expense, $1.2 million in
amortization of direct response advertising expense,
$1.2 million in amortization of deferred commissions, a
$6.5 million increase in accrued compensation due primarily
to a higher anticipated cash incentive compensation accrual for
the year ended December 31, 2010, resulting from improved
financial results and a $1.3 million increase in accounts
payable offset by a $51.1 million increase in deferred tax
assets due to our valuation allowance release, a
$6.2 million increase in accounts receivable due primarily
to growth in member fees, a $4.3 million increase in
capitalization of direct response advertising costs and a
$2.7 million increase in other assets, primarily related to
deferred commission capitalization, a $0.8 million increase
in prepaid expenses and a $0.5 million increase in excess
tax benefit associated with stock-based compensation.
Net cash provided by operating activities for the year ended
December 31, 2009 was $17.1 million compared to net
cash provided by operating activities of $3.2 million for
the year ended December 31, 2008. Net cash provided by
operating activities was a result of a net income of
$5.7 million for the year ended December 31, 2009,
compared to a $3.6 million net loss for the year ended
December 31, 2008, plus adjustments for non-cash expenses.
These non-cash adjustments include $6.8 million in
amortization of stock-based compensation expense,
$2.7 million in amortization of internal use software,
$1.7 million of depreciation expense, $1.2 million in
amortization of deferred commissions, a $6.8 million
increase in accrued compensation due primarily to a higher
anticipated cash incentive compensation accrual for the year
ended December 31, 2009, resulting from improved financial
results and a $1.0 million increase in accounts payable
offset by a $5.2 million increase in accounts receivable
due primarily to growth in member fees, a $1.5 million
increase in capitalization of direct response advertising costs
effective July 1, 2009, a $1.0 million increase in
other assets due primarily to an increase in deferred commission
capitalization, a $0.3 million increase in prepaid expenses
and a $0.5 million decrease in deferred revenue. Net cash
provided by operating activities for the year ended
December 31, 2008 included approximately $2.9 million
of offering costs. The offering costs were expensed during the
quarter ended December 31, 2008, as a result of our
decision in November 2008 to cease efforts to pursue an initial
public offering.
Investing
Activities
Net cash used in investing activities was $9.2 million for
the year ended December 31, 2010 compared to
$5.8 million for the year ended December 31, 2009. For
the year ended December 31, 2010, we capitalized
$5.9 million of internal use software costs compared to
$4.7 million for the year ended December 31, 2009 and
we used $2.4 million for the purchase of property and
equipment compared to $1.2 million for the year ended
December 31, 2009. For the year ended December 31,
2010, we pledged $950,000 as collateral for letters of credit
issued in connection with certain operating lease contracts. We
expect to have ongoing capital expenditure
53
requirements to support technical operations and other
infrastructure needs. We expect to fund this investment with our
existing cash and cash equivalents.
Net cash used in investing activities was $5.8 million for
the year ended December 31, 2009 compared to
$6.5 million for the year ended December 31, 2008. For
the year ended December 31, 2009, we capitalized
$4.7 million of internal use software costs, compared to
$4.1 million for the year ended December 31, 2008 and
we used $1.2 million for the purchase of property and
equipment, compared to $2.5 million for the year ended
December 31, 2008.
Financing
Activities
Net cash provided by financing activities was $81.8 million
for the year ended December 31, 2010 compared to net cash
used in financing activities of $5.4 million for the year
ended December 31, 2009. For the year ended
December 31, 2010, we received $90.3 million of net
proceeds from the issuance of common stock net of offering
costs, which includes both proceeds from our initial public
offering as well as the exercise of stock options. We also fully
repaid the $8.1 million outstanding balance on our debt
instruments and incurred increased cash payments of
$0.9 million associated with net share settlements for
stock-based awards minimum tax withholdings for the year ended
December 31, 2010.
Net cash used in financing activities was $5.4 million for
the year ended December 31, 2009. For the year ended
December 31, 2009, we repaid the outstanding balance under
both our $3.5 million revolving credit facility and our
$10.0 million promissory note, and also began paying down
the $10.0 million term loan.
Contractual
Obligations
The following table describes our contractual obligations as of
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
Years
|
|
|
Years
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3
|
|
|
3-5
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Operating
leases(1)
|
|
$
|
5,655
|
|
|
$
|
2,084
|
|
|
$
|
3,417
|
|
|
$
|
154
|
|
|
$
|
|
|
|
|
|
(1) |
|
As of December 31, 2010, we lease facilities under
non-cancelable operating leases expiring at various dates
through 2015. In February 2011, we extended our Phoenix facility
operating lease contract through 2015, which is not included in
the table above. |
Off-Balance
Sheet Arrangements
We have no off-balance sheet arrangements.
Recent
Accounting Pronouncements
In October 2009, the Financial Account Standards Board (FASB)
issued Accounting Standards Update (ASU)
2009-13
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues
Task Force (ASU
2009-13).
ASU 2009-13
addresses how to measure and allocate arrangement consideration
to one or more units of accounting within a multiple-deliverable
arrangement.
ASU 2009-13
modifies the requirements for determining whether a deliverable
can be treated as a separate unit of accounting by removing the
criteria that objective evidence of fair value exists for the
undelivered elements in order to account for those undelivered
elements as a single unit of accounting and also proscribes use
of the residual method. ASU
2009-13 is
effective for us prospectively for revenue arrangements entered
into or materially modified beginning January 1, 2011.
Early adoption is permitted. We have determined that the
adoption of
ASU 2009-13
will not have a material impact on our financial condition and
results of operations.
54
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market Risk. Our exposure to market risk is
directly related to our role as an investment manager for
investor accounts for which we provide portfolio management
services. For the year ended December 31, 2010, 63% of our
revenue was derived from fees based on the market value of AUM.
We expect this percentage to increase over time.
A substantial portion of the assets we manage is invested in
equity securities, the market prices of which can vary
substantially based on changes in economic conditions. An
additional portion is invested in fixed income securities, which
will generally have lower volatility than the equity market.
Therefore, while any changes in equity market performance would
significantly affect the value of our AUM, particularly for the
AUM invested in equity securities, such changes would typically
result in lower volatility for our AUM than the volatility of
the equity market as a whole. Because a substantial portion of
our revenue is derived from the value of our AUM, any changes in
fixed income or equity market performance would significantly
affect the amount of revenue in a given period. If any of these
factors reduces our AUM, the amount of member fees we would earn
for managing those assets would decline, which in turn could
negatively impact our revenue.
55
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The response to this Item is submitted as a separate section of
this
Form 10-K.
See Item 15.
|
|
Item 9.
|
Changes
and Disagreements with Accountants on Accounting and Financial
Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Based on our managements evaluation, with the
participation of our Chief Executive Officer (our principal
executive officer) and our Chief Financial Officer (our
principal financial officer), as of the end of the period
covered by this Annual Report on
Form 10-K,
our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, (or
Exchange Act)) are effective to ensure that information required
to be disclosed by us in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms and is accumulated and communicated
to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Managements
Report on Internal Control Over Financial
Reporting
This Annual Report on
Form 10-K
does not include a report of managements assessment
regarding internal control over financial reporting or an
attestation report of our registered public accounting firm due
to a transition period established by the rules of the
Securities and Exchange Commission for newly public companies.
Changes
in Internal Control over Financial Reporting
There was no change in our internal control over financial
reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act) during the three months ended
December 31, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 9B.
|
Other
Information
|
Not applicable.
PART III
|
|
Item 10.
|
Directors
and Executive Officers and Corporate Governance
|
The information required by Item 10 with respect to our
directors and executive officers is incorporated by reference
from the information set forth under the captions Election
of Directors Directors and Nominees and
Election of Directors Executive Officers and
Directors in our Definitive Proxy Statement in connection
with our 2011 Annual Meeting of Stockholders to be held on
May 11, 2011 (or the Proxy Statement), which will be filed
with the Securities and Exchange Commission no later than
120 days after December 31, 2010.
Item 405 of
Regulation S-K
calls for disclosure of any known late filing or failure by an
insider to file a report required by Section 16(a) of the
Exchange Act. This information is incorporated by reference from
the section called Section 16(a) Beneficial Ownership
Reporting Compliance in the Proxy Statement.
We have adopted a Code of Ethics for Senior Financial Officers
that applies to all of our directors, officers (including our
chief executive officer (our principal executive officer), chief
financial officer (our principal financial officer), chief
accounting officer (our principal accounting officer),
controller and any person performing similar functions) and
employees. The Code of Ethics for Senior Financial Officers is
available on our web site, free of charge, at
www.financialengines.com. We will disclose on our web site
amendments to, or waivers from, our
56
Code of Ethics for Senior Financial Officers applicable to our
directors and executive officers, including our chief executive
officer (our principal executive officer), our chief financial
officer (our principal financial officer) and our chief
accounting officer (our principal accounting officer), in
accordance with applicable laws and regulations.
We have a separately designated standing Audit Committee
established in accordance with Section 3(a) (58)
(A) of the Securities Exchange Act of 1934. The members of
the Audit Committee are Heidi K. Fields (Chairperson), Joseph A.
Grundfest, Robert A. Huret, C. Richard Kramlich and Mark A.
Wolfson. All of such members meet the independence standards
established by The NASDAQ Stock Market for serving on an audit
committee. SEC regulations require us to disclose whether a
director qualifying as an audit committee financial
expert serves on our Audit Committee. Our Board of
Directors has determined that each of Heidi K. Fields, Joseph A.
Grundfest, Robert A. Huret, C. Richard Kramlich and Mark A.
Wolfson qualifies as an audit committee financial
expert within the meaning of such regulations.
|
|
Item 11.
|
Executive
Compensation
|
The information required by Item 11 is incorporated by
reference from the information set forth under the captions
Compensation Discussion and Analysis,
Compensation Committee Report, Executive
Compensation, Corporate Governance
Compensation Committee Interlocks and Insider
Participation and Compensation of Directors in
the Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by Item 12 with respect to
security ownership of certain beneficial owners and management
is incorporated by reference from the information set forth
under the caption Security Ownership of Certain Beneficial
Owners and Management in the Proxy Statement.
The following chart sets forth certain information as of
December 31, 2010, with respect to our equity compensation
plans, specifically our 1998 Stock Plan and 2009 Stock Incentive
Plan. Each of the 1998 Stock Plan and the 2009 Stock Incentive
Plan (the 2009 Plan) has been approved by our
stockholders.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Securities to be
|
|
|
Weighted Average
|
|
|
Future Issuance Under
|
|
|
|
Issued Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Equity Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
9,741,469
|
|
|
$
|
6.49
|
|
|
|
2,993,225
|
(1)
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,741,469
|
|
|
$
|
6.49
|
|
|
|
2,993,225
|
(1)
|
|
|
|
(1) |
|
Includes 2,968,225 shares reserved for issuance under the
2009 Plan and 25,000 shares reserved for issuance under the
Special Executive Restricted Stock Purchase Plan as of
December 31, 2010. The 2009 Plan provides for the grant of
options to purchase shares of common stock, restricted stock,
stock appreciation rights and stock units. The number of shares
reserved for issuance under the 2009 Plan is automatically
increased on January 1st of each year by the lesser of
(i) 2,000,000 shares, (ii) four percent (4%) of
the number of shares of our common stock outstanding on the last
day of the immediately preceding fiscal year or (iii) the
number of shares determined by the board of directors. In
December 2010, our Board of Directors determined not to make any
increase in the shares reserved for issuance under the 2009 Plan
for 2011. In addition, the number of shares reserved for
issuance under the 2009 Plan is increased from time to time in
an amount equal to the number of shares subject to outstanding
options under the 1998 Stock Plan that are subsequently
forfeited or terminate for any other reason before being
exercised and unvested shares that are forfeited pursuant to the
1998 Stock Plan. |
57
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by Item 13 is incorporated by
reference from the information set forth under the captions
Certain Relationships and Related Person
Transactions and Corporate Governance
Organization of our Board of Directors in the Proxy
Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by Item 14 is incorporated by
reference from the information set forth under the caption
Ratification of the Appointment of Independent Registered
Public Accountants Principal Accounting Fees and
Services in the Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
|
|
(a)
|
1.
Financial Statements
|
The financial statements filed as part of this report are
identified in the Index to Consolidated Financial Statements on
page F-1.
|
|
2.
|
Financial
Statement Schedules
|
See Item 15(c) below.
See Item 15(b) below.
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Securities and
Exchange Commission. Financial Engines, Inc. (the Registrant)
shall furnish copies of exhibits for a reasonable fee (covering
the expense of furnishing copies) upon request.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.(i)
|
|
Restated Certificate of Incorporation of the Registrant (filed
as Exhibit 3.1 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010, and incorporated
herein by reference).
|
|
3
|
.(ii)
|
|
Bylaws of the Registrant (filed as Exhibit 3.(ii)2 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (filed as Exhibit 4.1 to
the Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.1#
|
|
Financial Engines, Inc. 1998 Stock Plan (as amended on
October 20, 2009) and related form stock option plan
agreements (filed as Exhibit 10.1 to the Registrants
Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.2#
|
|
Financial Engines, Inc. Amended and Restated 2009 Stock
Incentive Plan.
|
|
10
|
.3
|
|
Financial Engines, Inc. Special Executive Restricted Stock
Purchase Plan and related form stock purchase agreements (filed
as Exhibit 10.3 to the Registrants Registration
Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.4
|
|
Form of Indemnification Agreement between the Registrant and its
officers and directors (filed as Exhibit 10.4 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.5
|
|
Financial Engines, Inc. Consulting Agreement between the
Registrant and William F. Sharpe dated as of March 5, 1998,
including amendments thereto (filed as Exhibit 10.5 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
58
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.6#
|
|
Financial Engines, Inc. Third Amended and Restated Consulting
Agreement between the Registrant and E. Olena Berg-Lacy dated as
of October 1, 2009 (filed as Exhibit 10.6 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.7.1
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of July 14, 1997, including
amendments thereto (filed as Exhibit 10.7.1 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.7.2
|
|
Partial Lease Termination Agreement between Registrant and
Harbor Investment Partners dated as of May 16, 2001 (filed
as Exhibit 10.7.2 to the Registrants Registration
Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.8
|
|
Second Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank dated as of
April 20, 2009 (filed as Exhibit 10.8 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.9#
|
|
Offer letter to Lawrence M. Raffone dated December 21, 2000
(filed as Exhibit 10.9 to the Registrants
Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.10
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of December 7, 1999, including
amendments thereto (filed as Exhibit 10.10 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.11#
|
|
Form of 2009 Stock Incentive Plan Stock Option Agreement
(Employees) (filed as Exhibit 10.2 to the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2010, and incorporated
herein by reference).
|
|
10
|
.12#
|
|
Form of 2009 Stock Incentive Plan Restricted Stock Award
Agreement (Employees) (filed as Exhibit 10.12 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.13#
|
|
Form of 2009 Stock Incentive Plan Restricted Stock Award
Agreement (Executives) (filed as Exhibit 10.13 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.14#
|
|
Form of 2009 Stock Incentive Plan RSU Agreement (filed as
Exhibit 10.14 to the Registrants Registration
Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.15#
|
|
Form of 2009 Stock Incentive Plan Stock Option Agreement
(Executives) (filed as Exhibit 10.1 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2010, and incorporated
herein by reference).
|
|
10
|
.16#
|
|
Form of 2009 Stock Incentive Plan Stock Option Agreement
(Outside Directors).
|
|
10
|
.17#
|
|
Summary of Financial Engines Inc. Cash Incentive Plan.
|
|
21
|
.1
|
|
List of Subsidiaries of the Registrant (filed as
Exhibit 21.1 to the Registrants Registration
Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
23
|
.1
|
|
Consent of KPMG LLP, independent registered public accounting
firm.
|
|
24
|
.1
|
|
Power of Attorney (see page 62).
|
|
31
|
.1
|
|
Certificate of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
31
|
.2
|
|
Certificate of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
32
|
.1(1)
|
|
Certificate of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
32
|
.2(1)
|
|
Certificate of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
59
|
|
|
(#) |
|
Indicates management contract or compensatory plan or
arrangement. |
|
(1) |
|
The material contained in Exhibit 32.1 and
Exhibit 32.2 is not deemed filed with the SEC
and is not to be incorporated by reference into any filing of
the Registrant under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after
the date hereof and irrespective of any general incorporation
language contained in such filing, except to the extent that the
registrant specifically incorporates it by reference. |
|
|
(c)
|
Financial
Statement Schedules.
|
Schedules not listed above have been omitted because they are
not applicable or required, or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes hereto.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 21, 2011
FINANCIAL ENGINES, INC.
/s/ Jeffrey
N. Maggioncalda
Jeffrey N.
Maggioncalda
President and Chief Executive Officer
(Duly authorized officer and principal executive officer)
Raymond J.
Sims
Executive Vice President and Chief Financial
Officer (Duly authorized officer and principal
financial officer)
Jeffrey C.
Grace
Vice President and Controller
(Duly authorized officer and principal accounting officer)
61
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Jeffrey N.
Maggioncalda and Raymond J. Sims and each of them, such
persons true and lawful attorneys-in-fact and agents, each
with full power of substitution and resubstitution, for such
person and in such persons name, place and stead, in any
and all capacities, to sign any and all amendments to this
Annual Report on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as such person might or could
do in person, hereby ratifying and confirming all that each of
said attorneys-in-fact and agents, or such persons
substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Jeffrey
N. Maggioncalda
Jeffrey
N. Maggioncalda
|
|
Chief Executive Officer (Principal Executive Officer), President
and Director
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Raymond
J. Sims
Raymond
J. Sims
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer)
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Jeffrey
C. Grace
Jeffrey
C. Grace
|
|
Vice President and Controller (Principal Accounting Officer)
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Paul
G. Koontz
Paul
G. Koontz
|
|
Chairman
|
|
March 21, 2011
|
|
|
|
|
|
/s/ E.
Olena Berg-Lacy
E.
Olena Berg-Lacy
|
|
Director
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Heidi
K. Fields
Heidi
K. Fields
|
|
Director
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Joseph
A. Grundfest
Joseph
A. Grundfest
|
|
Director
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Robert
A. Huret
Robert
A. Huret
|
|
Director
|
|
March 21, 2011
|
|
|
|
|
|
/s/ C.
Richard Kramlich
C.
Richard Kramlich
|
|
Director
|
|
March 21, 2011
|
|
|
|
|
|
/s/ John
B. Shoven
John
B. Shoven
|
|
Director
|
|
March 21, 2011
|
|
|
|
|
|
/s/ Mark
A. Wolfson
Mark
A. Wolfson
|
|
Director
|
|
March 21, 2011
|
62
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.(i)
|
|
Restated Certificate of Incorporation of the Registrant (filed
as Exhibit 3.1 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010, and incorporated
herein by reference).
|
|
3
|
.(ii)
|
|
Bylaws of the Registrant (filed as Exhibit 3.(ii)2 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
4
|
.1
|
|
Specimen Common Stock Certificate (filed as Exhibit 4.1 to
the Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.1#
|
|
Financial Engines, Inc. 1998 Stock Plan (as amended on
October 20, 2009) and related form stock option plan
agreements (filed as Exhibit 10.1 to the Registrants
Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.2#
|
|
Financial Engines, Inc. Amended and Restated 2009 Stock
Incentive Plan.
|
|
10
|
.3
|
|
Financial Engines, Inc. Special Executive Restricted Stock
Purchase Plan and related form stock purchase agreements (filed
as Exhibit 10.3 to the Registrants Registration
Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.4
|
|
Form of Indemnification Agreement between the Registrant and its
officers and directors (filed as Exhibit 10.4 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.5
|
|
Financial Engines, Inc. Consulting Agreement between the
Registrant and William F. Sharpe dated as of March 5, 1998,
including amendments thereto (filed as Exhibit 10.5 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.6#
|
|
Financial Engines, Inc. Third Amended and Restated Consulting
Agreement between the Registrant and E. Olena Berg-Lacy dated as
of October 1, 2009 (filed as Exhibit 10.6 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.7.1
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of July 14, 1997, including
amendments thereto (filed as Exhibit 10.7.1 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.7.2
|
|
Partial Lease Termination Agreement between Registrant and
Harbor Investment Partners dated as of May 16, 2001 (filed
as Exhibit 10.7.2 to the Registrants Registration
Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.8
|
|
Second Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank dated as of
April 20, 2009 (filed as Exhibit 10.8 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.9#
|
|
Offer letter to Lawrence M. Raffone dated December 21, 2000
(filed as Exhibit 10.9 to the Registrants
Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.10
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of December 7, 1999, including
amendments thereto (filed as Exhibit 10.10 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.11#
|
|
Form of 2009 Stock Incentive Plan Stock Option Agreement
(Employees) (filed as Exhibit 10.2 to the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2010, and incorporated
herein by reference).
|
|
10
|
.12#
|
|
Form of 2009 Stock Incentive Plan Restricted Stock Award
Agreement (Employees) (filed as Exhibit 10.12 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.13#
|
|
Form of 2009 Stock Incentive Plan Restricted Stock Award
Agreement (Executives) (filed as Exhibit 10.13 to the
Registrants Registration Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.14#
|
|
Form of 2009 Stock Incentive Plan RSU Agreement (filed as
Exhibit 10.14 to the Registrants Registration
Statement on
Form S-1,
file
no. 333-163581,
and incorporated herein by reference).
|
|
10
|
.15#
|
|
Form of 2009 Stock Incentive Plan Stock Option Agreement
(Executives) (filed as Exhibit 10.1 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2010, and incorporated
herein by reference).
|
|
10
|
.16#
|
|
Form of 2009 Stock Incentive Plan Stock Option Agreement
(Outside Directors).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.17#
|
|
Summary of Financial Engines Inc. Cash Incentive Plan.
|
|
23
|
.1
|
|
Consent of KPMG LLP, independent registered public accounting
firm.
|
|
24
|
.1
|
|
Power of Attorney (see page 62).
|
|
31
|
.1
|
|
Certificate of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
31
|
.2
|
|
Certificate of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
32
|
.1(1)
|
|
Certificate of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
32
|
.2(1)
|
|
Certificate of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350).
|
|
|
|
(#) |
|
Indicates management contract or compensatory plan or
arrangement. |
|
(1) |
|
The material contained in Exhibit 32.1 and
Exhibit 32.2 is not deemed filed with the SEC
and is not to be incorporated by reference into any filing of
the Registrant under the Securities Act of 1933 or the
Securities Exchange Act of 1934, whether made before or after
the date hereof and irrespective of any general incorporation
language contained in such filing, except to the extent that the
registrant specifically incorporates it by reference. |
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Financial Engines, Inc.:
We have audited the accompanying consolidated balance sheets of
Financial Engines, Inc. and subsidiaries (the Company) as of
December 31, 2009 and 2010, and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2010.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Financial Engines, Inc. and subsidiaries as of
December 31, 2009 and 2010, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, in conformity
with U.S. generally accepted accounting principles.
(signed) KPMG LLP
Mountain View, California
March 21, 2011
F-2
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,713
|
|
|
$
|
114,937
|
|
Accounts receivable, net of allowance of $48 in 2009 and $69 in
2010
|
|
|
17,975
|
|
|
|
23,942
|
|
Prepaid expenses
|
|
|
1,922
|
|
|
|
2,802
|
|
Deferred tax assets
|
|
|
|
|
|
|
11,685
|
|
Other current assets
|
|
|
3,391
|
|
|
|
2,189
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
44,001
|
|
|
|
155,555
|
|
Property and equipment, net
|
|
|
2,558
|
|
|
|
3,148
|
|
Internal use software, net
|
|
|
8,743
|
|
|
|
11,130
|
|
Long-term deferred tax assets
|
|
|
|
|
|
|
39,460
|
|
Direct response advertising, net
|
|
|
1,426
|
|
|
|
4,615
|
|
Other assets
|
|
|
1,624
|
|
|
|
3,708
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
58,352
|
|
|
$
|
217,616
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,579
|
|
|
$
|
7,384
|
|
Accrued compensation
|
|
|
9,101
|
|
|
|
15,607
|
|
Deferred revenue
|
|
|
7,354
|
|
|
|
7,457
|
|
Bank borrowings
|
|
|
3,333
|
|
|
|
|
|
Other current liabilities
|
|
|
72
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
27,439
|
|
|
|
30,585
|
|
Long-term bank borrowings
|
|
|
4,722
|
|
|
|
|
|
Long-term deferred revenue
|
|
|
1,487
|
|
|
|
1,494
|
|
Other liabilities
|
|
|
438
|
|
|
|
317
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
34,086
|
|
|
|
32,396
|
|
|
|
|
|
|
|
|
|
|
Contingencies (see Note 10)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value
24,192 and 10,000 authorized as of December 31, 2009 and
2010, respectively; 22,442 and 0 shares issued and
outstanding as of December 31, 2009 and 2010, respectively;
aggregate liquidation preference of $139,404 and $0 as of
December 31, 2009 and 2010, respectively
|
|
|
2
|
|
|
|
|
|
Common stock, $0.0001 par value 47,650 and
500,000 authorized as of December 31, 2009 and 2010,
respectively; 10,647 and 43,116 shares issued and
outstanding at December 31, 2009 and 2010, respectively
|
|
|
1
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
182,018
|
|
|
|
279,038
|
|
Deferred compensation
|
|
|
(394
|
)
|
|
|
(36
|
)
|
Accumulated deficit
|
|
|
(157,361
|
)
|
|
|
(93,786
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
24,266
|
|
|
|
185,220
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
58,352
|
|
|
$
|
217,616
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional management
|
|
$
|
38,963
|
|
|
$
|
52,579
|
|
|
$
|
79,137
|
|
Platform
|
|
|
29,498
|
|
|
|
30,048
|
|
|
|
29,717
|
|
Other
|
|
|
2,810
|
|
|
|
2,355
|
|
|
|
2,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
71,271
|
|
|
|
84,982
|
|
|
|
111,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of amortization of internal use
software)
|
|
|
27,588
|
|
|
|
29,573
|
|
|
|
37,599
|
|
Research and development
|
|
|
13,663
|
|
|
|
15,618
|
|
|
|
19,343
|
|
Sales and marketing
|
|
|
21,157
|
|
|
|
22,515
|
|
|
|
26,403
|
|
General and administrative
|
|
|
6,613
|
|
|
|
7,679
|
|
|
|
11,644
|
|
Withdrawn offering expense
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
Amortization of internal use software
|
|
|
2,258
|
|
|
|
2,813
|
|
|
|
3,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
74,310
|
|
|
|
78,198
|
|
|
|
98,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(3,039
|
)
|
|
|
6,784
|
|
|
|
12,871
|
|
Interest expense
|
|
|
(799
|
)
|
|
|
(612
|
)
|
|
|
(46
|
)
|
Interest and other income, net
|
|
|
236
|
|
|
|
351
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(3,602
|
)
|
|
|
6,523
|
|
|
|
12,846
|
|
Income tax expense (benefit)
|
|
|
12
|
|
|
|
834
|
|
|
|
(50,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(3,614
|
)
|
|
|
5,689
|
|
|
|
63,575
|
|
Less: Stock dividend (see Note 5)
|
|
|
2,362
|
|
|
|
1,082
|
|
|
|
5,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of common stock
|
|
$
|
(5,976
|
)
|
|
$
|
4,607
|
|
|
$
|
58,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to holders of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.61
|
)
|
|
$
|
0.46
|
|
|
$
|
1.66
|
|
Diluted
|
|
$
|
(0.61
|
)
|
|
$
|
0.13
|
|
|
$
|
1.30
|
|
Shares used to compute net income (loss) per share attributable
to holders of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,767
|
|
|
|
10,106
|
|
|
|
35,096
|
|
Diluted
|
|
|
9,767
|
|
|
|
34,866
|
|
|
|
44,826
|
|
See accompanying notes to the consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Preferred
|
|
|
Deferred
|
|
|
|
|
|
Total
|
|
|
|
preferred stock
|
|
|
Common stock
|
|
|
paid-in
|
|
|
Stock
|
|
|
stock
|
|
|
Accumulated
|
|
|
stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Warrant
|
|
|
compensation
|
|
|
deficit
|
|
|
equity
|
|
|
|
(In thousands, except share data)
|
|
|
Balance, January 1, 2008
|
|
|
22,142,791
|
|
|
$
|
2
|
|
|
|
10,138,300
|
|
|
$
|
1
|
|
|
$
|
171,728
|
|
|
$
|
1,191
|
|
|
$
|
(923
|
)
|
|
$
|
(160,485
|
)
|
|
$
|
11,514
|
|
Antidilution issuance of Series E preferred stock
|
|
|
207,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of options
|
|
|
|
|
|
|
|
|
|
|
236,042
|
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552
|
|
Net share settlements for stock-based awards minimum tax
withholdings
|
|
|
|
|
|
|
|
|
|
|
(86,461
|
)
|
|
|
|
|
|
|
(830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(830
|
)
|
Amortization of deferred stock compensation under the intrinsic
value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
|
|
|
|
|
|
348
|
|
Stock-based compensation under the fair value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,299
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,614
|
)
|
|
|
(3,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
22,349,972
|
|
|
|
2
|
|
|
|
10,287,881
|
|
|
|
1
|
|
|
|
174,749
|
|
|
|
1,191
|
|
|
|
(575
|
)
|
|
|
(164,099
|
)
|
|
|
11,269
|
|
Cumulative adjustment to beginning balance upon adoption of
ASC 815-40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,191
|
)
|
|
|
|
|
|
|
1,049
|
|
|
|
(142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance at January 1, 2009
|
|
|
22,349,972
|
|
|
|
2
|
|
|
|
10,287,881
|
|
|
|
1
|
|
|
|
174,749
|
|
|
|
|
|
|
|
(575
|
)
|
|
|
(163,050
|
)
|
|
|
11,127
|
|
Antidilution issuance of Series E preferred stock
|
|
|
91,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of options
|
|
|
|
|
|
|
|
|
|
|
1,199,896
|
|
|
|
|
|
|
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
691
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net share settlements for stock-based awards minimum tax
withholdings
|
|
|
|
|
|
|
|
|
|
|
(890,554
|
)
|
|
|
|
|
|
|
(396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(396
|
)
|
Amortization of deferred stock compensation under the intrinsic
value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
181
|
|
Stock-based compensation under the fair value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,886
|
|
Income tax associated with stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Net income and comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,689
|
|
|
|
5,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
22,441,623
|
|
|
|
2
|
|
|
|
10,647,223
|
|
|
|
1
|
|
|
|
182,018
|
|
|
|
|
|
|
|
(394
|
)
|
|
|
(157,361
|
)
|
|
|
24,266
|
|
Conversion of preferred stock to common stock effective upon
initial public offering
|
|
|
(22,441,623
|
)
|
|
|
(2
|
)
|
|
|
22,441,623
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend to Series E shareholders
|
|
|
|
|
|
|
|
|
|
|
456,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon exercise of options
|
|
|
|
|
|
|
|
|
|
|
2,166,335
|
|
|
|
|
|
|
|
10,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,959
|
|
Initial public offering of common stock, net of offering costs
of $10.5 million
|
|
|
|
|
|
|
|
|
|
|
7,458,100
|
|
|
|
1
|
|
|
|
78,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,954
|
|
Net share settlements for stock-based minimum tax withholdings
|
|
|
|
|
|
|
|
|
|
|
(53,746
|
)
|
|
|
|
|
|
|
(921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(921
|
)
|
Amortization of deferred stock-based compensation under the
intrinsic value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
358
|
|
|
|
|
|
|
|
358
|
|
Stock-based compensation under the fair value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,573
|
|
Income tax associated with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
Net income and comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,575
|
|
|
|
63,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
|
|
|
$
|
|
|
|
|
43,116,178
|
|
|
$
|
4
|
|
|
$
|
279,038
|
|
|
$
|
|
|
|
$
|
(36
|
)
|
|
$
|
(93,786
|
)
|
|
$
|
185,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
|
$
|
63,575
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,641
|
|
|
|
1,729
|
|
|
|
1,816
|
|
Amortization of internal use software
|
|
|
2,196
|
|
|
|
2,711
|
|
|
|
3,703
|
|
Stock-based compensation
|
|
|
3,589
|
|
|
|
6,768
|
|
|
|
7,659
|
|
Amortization of deferred sales commissions
|
|
|
991
|
|
|
|
1,153
|
|
|
|
1,155
|
|
Amortization and impairment of direct response advertising
|
|
|
|
|
|
|
64
|
|
|
|
1,185
|
|
Repayment discount on note payable
|
|
|
|
|
|
|
(200
|
)
|
|
|
|
|
Fair value adjustment of convertible warrant
|
|
|
|
|
|
|
(142
|
)
|
|
|
|
|
Provision for doubtful accounts
|
|
|
136
|
|
|
|
20
|
|
|
|
191
|
|
Loss on fixed asset disposal
|
|
|
2
|
|
|
|
5
|
|
|
|
7
|
|
Excess tax benefit associated with stock-based compensation
|
|
|
|
|
|
|
(88
|
)
|
|
|
(456
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,828
|
|
|
|
(5,168
|
)
|
|
|
(6,158
|
)
|
Prepaid expenses
|
|
|
45
|
|
|
|
(335
|
)
|
|
|
(842
|
)
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
(51,144
|
)
|
Direct response advertising
|
|
|
|
|
|
|
(1,528
|
)
|
|
|
(4,330
|
)
|
Other assets
|
|
|
(1,466
|
)
|
|
|
(971
|
)
|
|
|
(2,665
|
)
|
Accounts payable
|
|
|
1,726
|
|
|
|
998
|
|
|
|
1,319
|
|
Accrued compensation
|
|
|
(4,469
|
)
|
|
|
6,818
|
|
|
|
6,506
|
|
Deferred revenue
|
|
|
(419
|
)
|
|
|
(470
|
)
|
|
|
110
|
|
Other liabilities
|
|
|
2
|
|
|
|
4
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,188
|
|
|
|
17,057
|
|
|
|
21,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,456
|
)
|
|
|
(1,167
|
)
|
|
|
(2,361
|
)
|
Capitalization of internal use software
|
|
|
(4,092
|
)
|
|
|
(4,682
|
)
|
|
|
(5,860
|
)
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
(950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(6,548
|
)
|
|
|
(5,849
|
)
|
|
|
(9,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from term loan payable
|
|
|
|
|
|
|
9,950
|
|
|
|
|
|
Payments on term loan payable
|
|
|
|
|
|
|
(1,944
|
)
|
|
|
(8,056
|
)
|
Repayment of note payable
|
|
|
|
|
|
|
(9,800
|
)
|
|
|
|
|
Proceeds from bank borrowings
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
Repayment of bank borrowings
|
|
|
|
|
|
|
(3,500
|
)
|
|
|
|
|
Payments on capital lease obligations
|
|
|
(20
|
)
|
|
|
(15
|
)
|
|
|
(2
|
)
|
Net share settlements for stock-based awards minimum tax
withholdings
|
|
|
(830
|
)
|
|
|
(396
|
)
|
|
|
(921
|
)
|
Excess tax benefit associated with stock-based compensation
|
|
|
|
|
|
|
88
|
|
|
|
456
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
552
|
|
|
|
265
|
|
|
|
90,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
3,202
|
|
|
|
(5,352
|
)
|
|
|
81,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(158
|
)
|
|
|
5,856
|
|
|
|
94,224
|
|
Cash and cash equivalents, beginning of period
|
|
|
15,015
|
|
|
|
14,857
|
|
|
|
20,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
14,857
|
|
|
$
|
20,713
|
|
|
$
|
114,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flows information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds
|
|
$
|
150
|
|
|
$
|
48
|
|
|
$
|
1,154
|
|
Interest paid
|
|
$
|
867
|
|
|
$
|
645
|
|
|
$
|
184
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend
|
|
$
|
2,362
|
|
|
$
|
1,082
|
|
|
$
|
5,480
|
|
Capitalized stock-based compensation for internal use software
|
|
$
|
120
|
|
|
$
|
399
|
|
|
$
|
439
|
|
Capitalized stock-based compensation for direct response
advertising
|
|
$
|
|
|
|
$
|
|
|
|
$
|
60
|
|
See accompanying notes to the consolidated financial statements.
F-6
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
|
|
NOTE 1
|
Organization
and Description of the Business
|
The
Company
Financial Engines, Inc. (the Company) was incorporated on
May 13, 1996 under the laws of the state of California and
is headquartered in Palo Alto, California. In February 2010, the
Company was reincorporated under the laws of the State of
Delaware.
Financial Engines is a provider of independent,
technology-enabled portfolio management services, investment
advice and retirement income services to participants in
employer-sponsored defined contribution plans, such as 401(k)
plans. The Company helps investors plan for retirement by
offering personalized plans for saving and investing, as well as
by providing assessments of retirement income needs and
readiness, regardless of personal wealth or investment account
size. The Company uses proprietary advice technology platform to
provide advisory services to millions of retirement plan
participants on a cost-efficient basis.
The Company continues to devote the majority of its resources to
the growth of the Companys business in accordance with its
business plan. The Companys activities have been financed
primarily through the sale of equity securities and more
recently from cash provided by operating activities.
|
|
NOTE 2
|
Basis of
Presentation and Principles of Consolidation
|
The accompanying consolidated financial statements were prepared
in accordance with accounting principles generally accepted in
the United States of America (GAAP).
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated in
consolidation.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expense during the reporting period. Significant items subject
to such estimates and assumptions include revenue recognition,
income taxes, stock-based compensation, direct response
advertising, the carrying amount and useful lives of property,
equipment and internal use software cost, and deferred sales
commissions. Actual results could differ from those estimates
under different assumptions or conditions.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less from date of purchase
to be cash equivalents. The carrying amount of these instruments
approximates fair value because of their short-term maturity.
Concentration
of Credit Risk and Fair Value of Financial
Instruments
The Company believes the fair value of its financial
instruments, principally cash and cash equivalents, accounts
receivable, bank borrowings and accounts payable, approximate
their recorded values due to the short-term nature of the
instruments or interest rates, which are comparable with current
rates.
The Company measures and reports its investments in money market
funds at fair value on a recurring basis. The fair value of the
Companys investments in certain money market funds
approximates their face value. Such instruments are classified
as Level 1 and are included in cash and cash equivalents.
F-7
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys financial
assets measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Other
|
|
|
|
|
|
|
Markets
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Total Fair
|
|
|
for Identical
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Value
|
|
|
Assets (Level
1)(1)
|
|
|
(Level
2)(2)
|
|
|
(Level
3)(3)
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
20,428
|
|
|
$
|
20,428
|
|
|
$
|
|
|
|
$
|
|
|
December 31,
2010(4)
|
|
$
|
110,622
|
|
|
$
|
110,622
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
(1) |
|
Level 1: Observable inputs that reflect quoted prices
(unadjusted) for identical assets or liabilities in active
markets. |
|
(2) |
|
Level 2: Inputs reflect quoted prices for identical assets
or liabilities in markets that are not active; quoted prices for
similar assets or liabilities in active markets; inputs other
than quoted prices that are observable for the assets or
liabilities; or inputs that are derived principally from or
corroborated by observable market data by correlation or other
means. |
|
(3) |
|
Level 3: Unobservable inputs reflecting the Companys
own assumptions incorporated in valuation techniques used to
determine fair value. These assumptions are required to be
consistent with market participant assumptions that are
reasonably available. |
|
(4) |
|
Included in this balance is $950,000 of restricted cash being
held in a money market account pledged as collateral for letters
of credit issued in connection with certain operating lease
contracts. |
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of
cash, cash equivalents and accounts receivable. The Company
deposits its cash and cash equivalents primarily with a major
bank, in which deposits may exceed federal deposit insurance
limits.
The Companys customers are concentrated in the United
States of America. The Company performs ongoing credit
evaluations of its customers and does not require collateral.
The Company reviews the need for allowances for potential credit
losses and such losses have been insignificant to date.
Significant customer information is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Percentage of accounts receivable:
|
|
|
|
|
|
|
|
|
JPMorgan
|
|
|
20%
|
|
|
|
21%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
JPMorgan
|
|
|
17%
|
|
|
|
18%
|
|
|
|
19%
|
|
Vanguard
|
|
|
11%
|
|
|
|
10%
|
|
|
|
9%
|
|
ING
|
|
|
10%
|
|
|
|
8%
|
|
|
|
6%
|
|
Allowance
for Doubtful Accounts
The Company maintains an allowance for doubtful accounts to
reserve for potentially uncollectible trade receivables. The
Company reviews its trade receivables by aging category to
identify significant customers with
F-8
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
collection issues. For accounts not specifically identified, the
Company provides reserves based on historical bad debt loss
experience.
Property
and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets and
allocated to the department of benefit in the accompanying
consolidated statements of operations. Leasehold improvements
are amortized over the shorter of the remaining lease term or
the useful life of the asset. Software purchased for internal
use is amortized over its useful life. Expenditures for
maintenance and repairs are charged to expense as incurred.
|
|
|
|
|
|
|
Estimated
|
|
|
|
Useful Lives
|
|
|
|
in Years
|
|
|
Computer equipment
|
|
|
3
|
|
Computer software
|
|
|
2
|
|
Furniture, fixtures, and equipment
|
|
|
5
|
|
Deferred
Initial Public Offering Costs
Deferred initial public offering costs of $1.6 million are
included in other assets in the accompanying consolidated
balance sheet as of December 31, 2009. Upon the effective
date of the initial public offering of March 16, 2010,
these amounts were offset against the proceeds of the offering
and included in stockholders equity. There were no amounts
capitalized as of December 31, 2010.
Internal
Use Software
Certain direct development costs associated with internal use
software are capitalized and include external direct consulting
costs and payroll costs for employees devoting time to the
software projects principally related to software coding,
designing system interfaces and installation and testing of the
software. Internal use software includes engineering costs
associated with (1) enhancing the Companys advisory
service platform and (2) developing internal systems for
tracking member data, including AUM, member cancellations and
other related member statistics. The capitalized costs are
amortized using the straight-line method over an estimated life
of three to five years, beginning when the asset is
substantially ready for use. Costs related to preliminary
project activities and post implementation activities are
expensed as incurred. A portion of internal use software relates
to cost of revenue, as well as the Companys other
functional departments. However the Company is not able to
meaningfully allocate the costs among cost of revenue and
operations. Accordingly, amortization is presented as a separate
line item on the accompanying consolidated statement of
operations.
During the years ended December 31, 2008, 2009 and 2010,
the Company capitalized $4.2 million, $5.1 million and
$6.3 million, respectively, of development costs, including
interest and stock compensation expense, relating to technology
to be used to enhance the Companys internal use software
and advisory service platform. For the years ended
December 31, 2008, 2009 and 2010, the Company capitalized
$0.1 million, $0.1 million and $42,000, respectively,
of interest and $0.1 million, $0.4 million and
$0.4 million, respectively, of noncash stock-based
compensation costs related to internal use software.
Long-Lived
Assets
Long-lived assets, such as property, equipment and capitalized
internal use software subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset group may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset
group to estimated undiscounted future cash flows expected to be
generated by the asset
F-9
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
group. If the carrying amount of an asset group exceeds its
estimated future cash flows, an impairment charge is recognized
by the amount by which the carrying amount of the asset group
exceeds the fair value of the asset group.
Management evaluates the useful lives of these assets on an
annual basis and tests for impairment whenever events or changes
in circumstances occur that could impact the recoverability of
these assets. There were no impairments to long-lived assets
during the years ended December 31, 2008, 2009 and 2010.
Deferred
Sales Commissions
Deferred sales commissions consist of incremental costs paid to
the Companys sales force associated with the execution of
non-cancelable customer contracts. The deferred sales commission
amounts are recoverable through future revenue streams under the
non-cancelable customer contracts. The Company believes this is
the preferable method of accounting as the commission charges
are so closely related to the revenue from the non-cancelable
customer contracts that they should be recorded as an asset and
charged to expense over the life of the related non-cancelable
customer contracts, which is typically three years. Amortization
of deferred sales commissions is included in marketing and sales
expense in the accompanying consolidated statements of
operations.
The Company capitalized sales commission of $1.0 million,
$0.8 million and $2.6 million during the years ended
December 31, 2008, 2009 and 2010, respectively, and
amortized $1.0 million, $1.2 million and
$1.2 million of deferred sales commissions during the years
ended December 31, 2008, 2009 and 2010, respectively.
Restricted
Cash
Restricted cash is in the form of a money market account pledged
as collateral for letters of credit issued in connection with
certain operating lease contracts. Upon signing the pledge
agreement in August 2010, the Company classified $950,000 of
restricted cash in other assets in the accompanying consolidated
balance sheet as of December 31, 2010.
Comprehensive
Income (Loss)
Comprehensive income (loss) is defined as the change in equity
of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources.
Comprehensive income (loss) is the same as net income (loss) for
all periods presented.
Segment
Information
The Company operates in one reportable segment. The
Companys chief operating decision-maker, its chief
executive officer, reviews its operating results on an aggregate
basis and manages its operations as a single operating segment.
In addition, all of the Companys operations and assets are
based in the United States.
Revenue
Recognition
The Company recognizes revenue when all of the following
conditions are met:
|
|
|
|
|
There is persuasive evidence of an arrangement, as evidenced by
a signed contract;
|
|
|
|
Delivery has occurred or the service has been made available to
the customer, which occurs upon completion of implementation and
connectivity services and acceptance by the customer;
|
|
|
|
The collectibility of the fees is reasonably assured; and
|
|
|
|
The amount of fees to be paid by the customer is fixed or
determinable.
|
The Company generates its revenue through three primary sources:
professional management, platform and other revenue.
F-10
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Professional Management. The Company derives
professional management revenue from member fees paid by plan
participants who are enrolled in its Professional Management
service for the management of their account assets. This
discretionary investment management service includes a
Retirement Plan analyzing investments, contribution rate and
projected retirement income, and a Retirement Checkup designed
to help plan participants to develop a strategy for closing the
gap, if any, between the participants retirement goal and
current retirement income forecast. The services are generally
made available to plan participants in a 401(k) plan by written
agreements between the Company and the plan provider, plan
sponsor and the plan participant; and may be provided on a
subadvised basis. The arrangement generally provides for member
fees based on the value of assets the Company manages for plan
participants, and is generally payable quarterly in arrears.
Revenue derived from Professional Management services is
recognized as the services are performed. In order to encourage
enrollment into the Professional Management service, the Company
uses a variety of promotional techniques, some of which can
potentially impact the amount of revenue recognized, the timing
of revenue recognition or both.
In certain instances, fees payable by plan participants are
deferred for a specified period, and are waived if the plan
participant cancels within the specified period. Effective
January 1, 2009, the Company commenced recognizing revenue
during certain of these fee deferral periods based on the
estimate of the expected retention and cancellation rates
determined by historical experience of similar arrangements. As
a result of recognizing revenue during the fee deferral periods,
revenue during the years ended December 31, 2009 and 2010
was higher by approximately $0.3 million and
$0.5 million, respectively, compared to the year ended
December 31, 2008.
Platform. The Company derives platform revenue
from recurring, subscription-based fees for access to either its
full suite of services, including Professional Management,
Online Advice service and Retirement Evaluation, or to its
Online Advice service only, and to a lesser extent, from setup
fees. Online Advice is a nondiscretionary Internet-based
investment advisory service, which includes features such as:
recommendations among the investment alternatives available in
the employer sponsored retirement plan; a summary of the current
value of the plan account; a forecast of how much the plan
account investments might be worth at retirement; whether a
change is recommended to the contribution rate, risk and
diversification
and/or
unrestricted employer stock holdings; and a projection of how
much the participant may spend at retirement. Plan participants
may use the service as frequently as they choose to monitor
progress toward their financial goals, receive forecasts and
investment recommendations and access educational content at the
Companys website. The arrangements generally provide for
the Companys fees to be paid by the plan sponsor, plan
provider or the retirement plan itself, depending on the plan
structure. Platform revenue is generally paid annually in
advance and recognized ratably over the term of the subscription
period beginning after the completion of customer setup and data
connectivity. Setup fees are recognized ratably over the
estimated average life of sponsor contracts, which is usually
three to five years.
Other. Other revenue includes reimbursement
for marketing and member materials from certain subadvisory
relationships, and reimbursement for providing personal
statements to participants from a limited number of plan
sponsors. A small portion of other revenue is derived from a
defined benefit consulting business. Revenue is recognized as
the related services are performed, in accordance with the
specific terms of the contract with the customers.
Deferred
Revenue
Deferred revenue consists primarily of billings or payments
received in advance of revenue recognition generated by the
Companys platform service and setup fees described above.
For these services, the Company generally invoices its customers
in annual or quarterly installments payable in advance.
Accordingly, the deferred revenue balance does not represent the
total contract value of annual or multiyear, noncancelable
subscription contracts.
F-11
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cost
of Revenue
Cost of revenue includes fees paid to plan providers for
connectivity to plan and plan participant data, printed
materials fulfillment costs for certain subadvisory
relationships for which we are reimbursed, printed member
materials, and employee-related costs for technical operations,
implementations, operations, advisor call center operations,
portfolio management and customer support. The expenses included
in cost of revenue are shared across the different revenue
categories, and we are not able to meaningfully allocate such
costs between separate categories of revenue. Consequently, all
costs and expenses applicable to our revenue are included in the
category cost of revenue in our statements of operations. Costs
in this area are related primarily to payments to third parties,
employee compensation and related expenses, and purchased
materials. Amortization of internal use software, a portion of
which relates to our cost of revenue, is not included in cost of
revenue but is reflected as a separate line item in our
statement of operations.
Direct
Response Advertising
The Companys advertising costs consist primarily of print
materials associated with new customer solicitations. Print
materials costs relate primarily to either Active Enrollment
campaigns, where marketing materials are sent to solicit
enrollment in the Companys Professional Management
service, or Passive Enrollment campaigns, where the plan sponsor
defaults all eligible members into the Professional Management
service unless they decline. Advertising costs relating to
Passive Enrollment campaigns and other general marketing
materials sent to participants do not qualify as direct response
advertising and are expensed to sales and marketing in the
period the advertising activities first take place. Print
fulfillment costs relating to subadvisory campaigns do not
qualify as direct response advertising and are expensed to cost
of revenue in the period in which the expenses were incurred.
Advertising costs associated with direct advisory Active
Enrollment campaigns qualify for capitalization as direct
response advertising. The capitalized costs are amortized over
the estimated three-year period of probable future benefits
following the enrollment of a member into the Professional
Management service based on the ratio of current period net
revenue for the direct response advertising cost pool as
compared to the total estimated net revenue expected for the
direct response advertising cost pool over the remaining period
of probable future benefits.
Effective July 1, 2009, the Company commenced
capitalization of direct response advertising costs associated
with direct advisory Active Enrollment campaigns on a
prospective basis as the Company first concluded it had
sufficient and verifiable historical patterns over a reasonable
period of time to demonstrate the probable future benefits of
such campaigns. Advertising expense was $2.6 million,
$2.2 million and $2.0 million for the years ended
December 31, 2008, 2009 and 2010, respectively, of which
direct advisory Active Enrollment campaign expense was
$2.5 million, $2.0 million and $1.4 million,
respectively.
Deferred
Income Taxes
Deferred tax assets and liabilities are determined based on
temporary differences between financial reporting and the tax
bases of assets and liabilities. Deferred tax assets are also
recognized for tax net operating loss carryforwards. These
deferred tax assets and liabilities are measured using the
enacted tax rates and laws that are expected to be in effect
when such amounts are expected to reverse or be utilized. The
realization of total deferred tax assets is contingent upon the
generation of future taxable income. Valuation allowances are
provided to reduce such deferred tax assets to amounts more
likely than not to be ultimately realized. The Company
recognizes interest and penalties related to unrecognized tax
benefits as a component of income tax expense. See Note 7
for additional information.
F-12
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-based
Compensation
Employee stock-based compensation expense is based on the
following: (1) the grant date fair value of stock option
awards granted or modified after January 1, 2006 and
(2) the balance of deferred stock-based compensation
related to stock awards granted prior to January 1, 2006,
which was calculated using the intrinsic value method.
The Company estimates the fair value of stock options granted
using the Black-Scholes option pricing model. The Company
amortizes stock-based compensation expense using a graded
vesting method over the requisite service periods of the awards,
which is generally the vesting period. The expected term
represents the period that stock-based awards are expected to be
outstanding, giving consideration to the contractual terms of
the stock-based awards, vesting schedules and expectations of
future employee behavior as influenced by changes to the terms
of the Companys stock-based awards. The Company currently
uses the simplified method in developing an estimate of expected
term of stock options. The computation of expected volatility is
based on a combination of the historical and implied volatility
of comparable companies from a representative peer group based
on industry and market capitalization data. Management estimates
expected forfeitures and recognizes compensation costs only for
those stock-based awards expected to vest. Amortization of
stock-based compensation is presented in the same line item as
the cash compensation to those employees in the accompanying
consolidated statement of operations.
The Companys current practice is to issue new shares to
settle stock option exercises.
Net
Income (Loss) per Common Share
Basic net income (loss) per common share is computed by dividing
net income (loss) attributable to common stockholders by the
weighted average number of common shares outstanding during the
period less the weighted average number of unvested restricted
common shares subject to the right of repurchase. Diluted net
income (loss) per common share is computed by giving effect to
all potential dilutive common shares, including options,
unvested restricted common stock subject to repurchase, warrants
and convertible preferred stock.
Recent
Accounting Pronouncements
In October 2009, the Financial Account Standards Board (FASB)
issued Accounting Standards Update (ASU)
2009-13
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues
Task Force (ASU
2009-13).
ASU 2009-13
addresses how to measure and allocate arrangement consideration
to one or more units of accounting within a multiple-deliverable
arrangement. ASU
2009-13
modifies the requirements for determining whether a deliverable
can be treated as a separate unit of accounting by removing the
criteria that objective evidence of fair value exists for the
undelivered elements in order to account for those undelivered
elements as a single unit of accounting and also proscribes use
of the residual method. ASU
2009-13 is
effective for the Company prospectively for revenue arrangements
entered into or materially modified beginning January 1,
2011. Early adoption is permitted. The Company has determined
that the adoption of
ASU 2009-13
will not have a material impact on its financial condition and
results of operations.
|
|
NOTE 3
|
Balance
Sheet Items
|
Cash
and Cash Equivalents
Cash and cash equivalents consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Cash
|
|
$
|
285
|
|
|
$
|
5,265
|
|
Money market fund
|
|
|
20,428
|
|
|
|
109,672
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
20,713
|
|
|
$
|
114,937
|
|
|
|
|
|
|
|
|
|
|
F-13
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Allowance
for Doubtful Accounts
The following table summarizes the changes to the allowance for
doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
309
|
|
|
$
|
180
|
|
|
$
|
48
|
|
Add: Provisions for doubtful accounts
|
|
|
136
|
|
|
$
|
20
|
|
|
$
|
191
|
|
Less: Write-offs
|
|
|
(265
|
)
|
|
|
(152
|
)
|
|
|
(170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
180
|
|
|
$
|
48
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Computer equipment
|
|
$
|
8,238
|
|
|
$
|
8,183
|
|
Computer software
|
|
|
3,601
|
|
|
|
3,651
|
|
Office equipment, furniture and fixtures
|
|
|
2,332
|
|
|
|
2,357
|
|
Leasehold improvements
|
|
|
675
|
|
|
|
762
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
14,846
|
|
|
|
14,953
|
|
Less: Accumulated depreciation
|
|
|
(12,288
|
)
|
|
|
(11,805
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,558
|
|
|
$
|
3,148
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $1.6 million,
$1.7 million and $1.8 million for the years ended
December 31, 2008, 2009 and 2010, respectively.
Internal
Use Software
Internal use software consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Capitalized internal use software
|
|
$
|
29,533
|
|
|
$
|
35,832
|
|
Accumulated amortization
|
|
|
(20,790
|
)
|
|
|
(24,702
|
)
|
|
|
|
|
|
|
|
|
|
Internal use software, net
|
|
$
|
8,743
|
|
|
$
|
11,130
|
|
|
|
|
|
|
|
|
|
|
Other
Current Assets
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Deferred sales commissions
|
|
$
|
1,195
|
|
|
$
|
1,520
|
|
Initial public offering issuance costs
|
|
|
1,579
|
|
|
|
|
|
Other
|
|
|
617
|
|
|
|
669
|
|
|
|
|
|
|
|
|
|
|
Total other current assets
|
|
$
|
3,391
|
|
|
$
|
2,189
|
|
|
|
|
|
|
|
|
|
|
F-14
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued
Compensation
Accrued compensation consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Accrued bonus
|
|
$
|
6,544
|
|
|
$
|
10,640
|
|
Accrued vacation
|
|
|
1,785
|
|
|
|
2,156
|
|
Accrued commission
|
|
|
611
|
|
|
|
1,690
|
|
Accrued payroll
|
|
|
106
|
|
|
|
1,052
|
|
Other
|
|
|
55
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Total accrued compensation
|
|
$
|
9,101
|
|
|
$
|
15,607
|
|
|
|
|
|
|
|
|
|
|
Revolving
Line of Credit
The Companys $7.0 million revolving line of credit
with an interest rate set at 0.75% points above the banks
prime rate expired in April 2010. There was no balance
outstanding under this line of credit as of December 31,
2009 and 2010.
Note
Payable and Term Loan
In September 2006, the Company borrowed $10.0 million under
a promissory note. The promissory note had a stated interest
rate of LIBOR plus 5.00% and a maturity date of
September 29, 2009. In May 2009, the Company prepaid the
outstanding balances of this promissory note for an agreed
amount of $9.8 million and recognized the prepayment
discount of $200,000 as a component of other income in the
accompanying consolidated statement of operations for the year
ended December 31, 2009.
In April 2009, the Company executed an agreement to add a
$10.0 million term loan with the same lender that provided
the revolving line of credit. The interest rate on the term loan
was set at 1.50% above the banks prime rate for prime rate
loans, with a minimum 4.00% prime rate, and 4.00% above the
LIBOR rate for LIBOR rate loans, with a minimum 1.50% LIBOR
rate. The term loan was repayable in 36 equal installments
through May 1, 2012. The Company repaid the outstanding
term loan balance in May 2010.
|
|
NOTE 5
|
Stockholders
Equity
|
Initial
Public Offering of Common Stock
On March 16, 2010, the Company completed its initial public
offering whereby the Company sold 7,458,100 shares of
common stock for a price of $12.00 per share, which resulted in
proceeds before underwriters discounts and offering costs
of $89.5 million. Approximately $10.5 million in
offering costs, including underwriters commissions, were
incurred and have been deducted from additional paid-in capital.
Common
Stock
As of December 31, 2010, there were 500,000,000 shares
of common stock authorized, and 43,116,178 shares issued
and outstanding. Common stockholders are entitled to dividends
if and when declared by the board of directors.
F-15
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Convertible
Preferred Stock
Prior to the initial public offering, the Company had
22,441,623 shares of preferred stock outstanding. Each
share of preferred stock was convertible into one share of
common stock. The conversion of all the shares of preferred
stock into 22,441,623 shares of common stock occurred upon
the Companys initial public offering on March 16,
2010. Upon the initial public offering, the Company authorized
10,000,000 shares of undesignated preferred stock. No
preferred stock shares were outstanding as of December 31,
2010.
Stock
Dividend
In accordance with certain antidilution provisions contained in
the Series E preferred stock agreements, certain increases
to the number of shares available for issuance under the 1998
Stock Plan resulted in an antidilution adjustment for the
holders of those preferred shares during the years ended
December 31, 2008 and 2009. Rather than adjust the
conversion ratio as provided in the Companys Articles of
Incorporation, the board of directors approved a preferred stock
dividend of 207,181 and 91,651 shares of Series E
preferred stock during the year ended December 31, 2008 and
2009, respectively, such that each of those series maintained a
one-for-one
conversion ratio to common stock. The fair value of the dividend
was determined to be $2.4 million and $1.1 million
during the years ended December 31, 2008 and 2009,
respectively.
Upon the initial public offering on March 16, 2010, the
Company issued 456,643 shares of common stock as a dividend
to the holders of Series E preferred stock so that each
share of preferred stock would maintain the
one-to-one
conversion ratio to common stock. The fair value of the dividend
at $12.00 per share was determined to be $5.5 million.
Warrant
Issued
In October 1999, the Company issued a warrant to purchase
100,000 shares of Series D preferred stock at a price
of $10.00 per share to a company in connection with an
interactive marketing and services agreement. The fair value of
the warrant, as determined using the Black-Scholes option
pricing model, was approximately $1.2 million and was
amortized to marketing expense over the underlying performance
period, until the date at which the service agreement was
terminated in 2000. As part of the Series D antidilution
adjustments in 2005, the warrant was adjusted up to
108,290 shares at an exercise price of $9.23 per share. The
warrant expired unexercised in October 2009. There were no
warrants outstanding as of December 31, 2010.
Common
Stock Reserved for Future Issuance
As of December 31, 2010, the Company has reserved the
following shares of common stock for issuance in connection with:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
Stock option and stock purchase plans
|
|
|
9,741,469
|
|
Stock options available for grant
|
|
|
2,968,225
|
|
Restricted stock awards
|
|
|
25,000
|
|
|
|
|
|
|
Total shares reserved
|
|
|
12,734,694
|
|
|
|
|
|
|
F-16
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option and Restricted Stock Plans
1998
Stock Plan
The Company has reserved a total of 17,802,301 shares of
its common stock for issuance under its 1998 Stock Plan. Under
the 1998 Stock Plan, the board of directors may grant stock
purchase rights and incentive and nonstatutory stock options to
employees, consultants and directors at fair market value on the
date of grant. Vesting provisions of stock purchase rights and
options granted under the 1998 Stock Plan are determined by the
board of directors. Stock purchase rights have a
30-day
expiration period, and options expire no later than
10 years from the date of grant. In the event of voluntary
or involuntary termination of employment with the Company for
any reason, with or without cause, all unvested options are
forfeited and all vested options must be exercised within three
months or they are forfeited. Stock purchase rights or options
acquired under the 1998 Stock Plan are exercisable upon grant;
however, they generally vest over a period of four years.
In the event of voluntary or involuntary termination of
employment with the Company for any reason, with or without
cause, the Company shall, upon the date of such termination,
have an irrevocable, exclusive option to repurchase the unvested
shares purchased prior to vesting, at the original exercise
price. This repurchase option exists for a period of
60 days from termination. As of December 31, 2010, no
shares were subject to repurchase under the 1998 Stock Plan.
Since the initial public offering, 1,152,975 shares
originally reserved for issuance under the 1998 Stock Plan but
which were not subject to outstanding options as of the initial
public offering, and shares subject to outstanding options under
the 1998 Stock Plan as of the initial public offering that were
subsequently forfeited or terminated for any reason before being
exercised became available for awards under the 2009 Stock
Incentive Plan.
In October 2009, the Company obtained stockholder approval to
extend the 1998 Stock Plan for an additional year to expire in
April 2011. The Company does not currently intend to grant any
additional shares under the 1998 Stock Plan before its
expiration.
2009
Stock Incentive Plan
The Company has reserved a total of 3,152,975 shares of its
common stock for issuance under its 2009 Stock Incentive Plan.
The 2009 Stock Incentive Plan became effective immediately prior
to the initial public offering. Under the 2009 Stock Incentive
Plan, 2,000,000 shares of the Companys common stock
had been authorized for issuance. In addition,
1,152,975 shares originally reserved for issuance under the
1998 Stock Plan but which are not subject to outstanding options
as of the initial public offering, and shares subject to
outstanding options under the 1998 Stock Plan upon the initial
public offering that were subsequently forfeited or terminated
for any reason before being exercised, up to a number of
additional shares not to exceed 2,000,000, also became available
for awards under the 2009 Stock Incentive Plan.
Under the 2009 Stock Incentive Plan, the board of directors may
grant restricted stock awards, restricted stock units, stock
appreciation rights and incentive and nonstatutory stock options
to employees, consultants and directors at fair market value on
the date of grant. Vesting provisions of equity awards granted
under the 2009 Stock Incentive Plan are determined by the board
of directors. Options acquired under the 2009 Stock Incentive
Plan will generally vest over a period of four years. Restricted
shares and restricted stock units awarded under the 2009 Stock
Incentive Plan will vest according to the terms of the award on
the date of the grant.
In the event of termination of service with the Company for any
reason, except death or total and permanent disability, all
unvested options are forfeited and all vested options must be
exercised within three months or they are forfeited. In the
event of a termination of service with the Company for any
reason, all unvested restricted shares and restricted stock
units will expire immediately and do not vest as a result of the
termination. Options expire no later than 10 years from the
date of grant. As of December 31, 2010, no shares were
subject to repurchase and 2,968,225 shares were available
for future grant.
F-17
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Option Plans
The following table summarizes option activity under the 1998
Stock Plan and the 2009 Stock Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Balance, January 1, 2008
|
|
|
8,822,910
|
|
|
$
|
0.67 - $10.00
|
|
|
$
|
5.12
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,026,850
|
|
|
|
6.51 - 9.60
|
|
|
|
7.06
|
|
|
|
|
|
|
|
|
|
Exercised(1)
|
|
|
(237,042
|
)
|
|
|
0.07 - 8.00
|
|
|
|
2.37
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(540,435
|
)
|
|
|
0.83 - 10.00
|
|
|
|
6.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
11,072,283
|
|
|
|
1.00 - 10.00
|
|
|
|
5.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,202,120
|
|
|
|
5.79 - 8.75
|
|
|
|
7.78
|
|
|
|
|
|
|
|
|
|
Exercised(1)
|
|
|
(1,199,894
|
)
|
|
|
1.00 - 9.00
|
|
|
|
5.13
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(444,069
|
)
|
|
|
1.00 - 10.00
|
|
|
|
6.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
11,630,440
|
|
|
|
1.00 - 10.00
|
|
|
|
6.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
409,850
|
|
|
|
8.75 - 17.61
|
|
|
|
11.82
|
|
|
|
|
|
|
|
|
|
Exercised(1)
|
|
|
(2,247,534
|
)
|
|
|
1.00 - 10.00
|
|
|
|
5.27
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(51,287
|
)
|
|
|
5.79 - 9.60
|
|
|
|
8.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
9,741,469
|
|
|
$
|
1.00 - $17.61
|
|
|
$
|
6.49
|
|
|
|
6.12 years
|
|
|
$
|
129,992,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable, December 31, 2010
|
|
|
6,522,104
|
|
|
$
|
1.00 - $10.00
|
|
|
$
|
5.78
|
|
|
|
5.00 years
|
|
|
$
|
91,643,796
|
|
|
|
|
(1) |
|
Exercises for the years ended December 31, 2008, 2009 and
2010 include 1,000 shares, 890,554 shares and
81,199 shares respectively, which were tendered in exchange
for option exercises and related minimum tax withholding. |
The aggregate intrinsic values in the table above represent the
total pre-tax intrinsic value (the aggregate difference between
the fair value of the Companys common stock on
December 31, 2010 of $19.83, and the exercise price of
in-the-money
options) that would have been received by the option holders had
all option holders exercised their options as of that date. The
total intrinsic value of options exercised during the years
ended December 31, 2009 and 2010 was $4.3 million and
$32.7 million, respectively. The weighted average fair
value per share of options granted to employees for the years
ended December 31, 2008, 2009 and 2010 was approximately
$3.63, $4.07 and $5.95, respectively. Total cash received from
employees as a result of employee stock option exercises for the
years ended December 31, 2008, 2009 and 2010 was
$0.6 million, $0.7 million and $11.0 million,
respectively.
The following weighted average assumptions were used to value
options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Expected life in years
|
|
|
6.06
|
|
|
|
6.07
|
|
|
|
5.99
|
|
Risk-free interest rate
|
|
|
2.58
|
%
|
|
|
2.62
|
%
|
|
|
2.60
|
%
|
Volatility
|
|
|
52%
|
|
|
|
53%
|
|
|
|
51%
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, there was $4.9 million of
unrecognized compensation cost, adjusted for estimated
forfeitures, related to unvested stock options and restricted
stock purchase rights granted after January 1, 2006, to be
recognized over the weighted average period of 1.2 years.
F-18
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about outstanding and
exercisable options as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Price
|
|
Outstanding
|
|
|
Life (years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$ 1.00 - $ 2.50
|
|
|
1,040,587
|
|
|
|
1.67
|
|
|
$
|
1.63
|
|
|
|
1,040,587
|
|
|
$
|
1.63
|
|
$ 2.51 - $ 4.25
|
|
|
1,335,757
|
|
|
|
3.72
|
|
|
|
3.66
|
|
|
|
1,335,757
|
|
|
|
3.66
|
|
$ 4.25 - $ 6.95
|
|
|
2,552,773
|
|
|
|
7.55
|
|
|
|
6.45
|
|
|
|
1,279,933
|
|
|
|
6.43
|
|
$ 6.96 - $10.00
|
|
|
4,627,602
|
|
|
|
6.91
|
|
|
|
8.05
|
|
|
|
2,865,827
|
|
|
|
7.98
|
|
$10.01 - $13.27
|
|
|
7,200
|
|
|
|
9.76
|
|
|
|
13.27
|
|
|
|
|
|
|
|
|
|
$13.27 - $17.61
|
|
|
177,550
|
|
|
|
9.16
|
|
|
|
15.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 1.00 - $17.61
|
|
|
9,741,469
|
|
|
|
6.12
|
|
|
$
|
6.49
|
|
|
|
6,522,104
|
|
|
$
|
5.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
Executive Restricted Stock Purchase Plan
The Company originally reserved 1,000,000 shares of its
common stock for issuance under its Special Executive Restricted
Stock Purchase Plan (the Special Restricted Plan). Under the
Special Restricted Plan, the board of directors may grant stock
purchase rights to employees and consultants at an exercise
price determined by the board of directors at the date of grant.
The shares cliff vest over an initial vesting period of three to
seven years. The restrictions lapse over a period of six to
twelve months upon a change of control or following an initial
public offering.
Upon termination of employment or consulting relationship with
the Company, for any reason, the Company has an irrevocable,
exclusive option to repurchase the unvested shares purchased
prior to vesting at the original exercise price. This repurchase
option exists for a period of 90 days from termination. In
connection with the issuances of stock purchase rights, the
Company recorded $0.3 million, $0.2 million and
$0.4 million as amortization of deferred compensation in
the years ended December 31, 2008, 2009 and 2010,
respectively. As of December 31, 2010, 175,000 shares
are subject to repurchase until the restrictions lapsed on
March 15, 2011 and 25,000 shares were available for
future grant.
The following table summarizes restricted stock purchase right
activity under the Special Restricted Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Balance, January 1, 2008
|
|
|
550,000
|
|
|
$
|
6.86
|
|
Granted
|
|
|
|
|
|
|
|
|
Released(1)
|
|
|
(250,000
|
)
|
|
|
10.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
300,000
|
|
|
|
4.25
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
50,000
|
|
|
|
6.15
|
|
Released(1)
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
350,000
|
|
|
|
4.52
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Released(1)
|
|
|
(175,000
|
)
|
|
|
4.25
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
175,000
|
|
|
$
|
4.47
|
|
|
|
|
|
|
|
|
|
|
F-19
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Shares released on vesting for the years ended December 31,
2008, 2009 and 2010 include 86,461 shares, 0 shares
and 53,746 shares, respectively, which were tendered in
exchange for minimum tax withholding. |
The balance in deferred stock-based compensation of
$0.4 million and $36,000 as of December 31, 2009 and
2010, respectively, comprises executive restricted stock
purchase rights issued prior to December 31, 2005. As of
December 31, 2010, the unamortized deferred stock
compensation related to restricted stock granted in 2005 will be
amortized over 3 months.
Equity
Instruments Issued to Non-Employees
The fair value of the options issued to non-employees was
determined using the Black-Scholes option-pricing model. The
Company did not grant stock options to non-employees during the
year ended December 31, 2010. As of December 31, 2010,
there was no unrecognized compensation cost related to unvested
stock options granted to non-employees. Compensation expense for
equity instruments issued to non-employees recognized in the
years ended December 31, 2008, 2009 and 2010 was $(4,000),
$0.1 million and $0.1 million, respectively.
The following weighted average assumptions were used to value
options to non-employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
Expected life in years
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
5.00
|
|
Risk-free interest rate
|
|
|
2.86
|
%
|
|
|
2.20
|
%
|
|
|
1.97
|
%
|
Volatility
|
|
|
44%
|
|
|
|
60%
|
|
|
|
50%
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
Compensation
The following table summarizes the stock-based compensation by
functional area as presented in the statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
817
|
|
|
$
|
1,391
|
|
|
$
|
826
|
|
Research and development
|
|
|
796
|
|
|
|
1,721
|
|
|
|
2,084
|
|
Sales and marketing
|
|
|
1,112
|
|
|
|
1,942
|
|
|
|
2,042
|
|
General and administrative
|
|
|
801
|
|
|
|
1,612
|
|
|
|
2,499
|
|
Amortization of internal use software
|
|
|
63
|
|
|
|
102
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
3,589
|
|
|
$
|
6,768
|
|
|
$
|
7,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 6
|
Net
Income (Loss) Per Common Share
|
The following table sets forth the computation of basic and
diluted net income (loss) per share attributable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands, except per share data)
|
|
|
Numerator (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
|
$
|
63,575
|
|
Less: Stock dividend
|
|
|
2,362
|
|
|
|
1,082
|
|
|
|
5,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of common stock
|
|
$
|
(5,976
|
)
|
|
$
|
4,607
|
|
|
$
|
58,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (basic):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
10,183
|
|
|
|
10,450
|
|
|
|
35,384
|
|
Less: Weighted average unvested restricted common shares subject
to repurchase
|
|
|
(416
|
)
|
|
|
(344
|
)
|
|
|
(288
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net weighted average common shares outstanding
|
|
|
9,767
|
|
|
|
10,106
|
|
|
|
35,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
9,767
|
|
|
|
10,106
|
|
|
|
35,096
|
|
Dilutive stock options and awards outstanding
|
|
|
|
|
|
|
2,052
|
|
|
|
4,831
|
|
Weighted average unvested restricted common shares subject to
repurchase
|
|
|
|
|
|
|
344
|
|
|
|
288
|
|
Weighted average common shares from preferred stock
|
|
|
|
|
|
|
22,364
|
|
|
|
4,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net weighted average common shares outstanding
|
|
|
9,767
|
|
|
|
34,866
|
|
|
|
44,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to holders of common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.61
|
)
|
|
$
|
0.46
|
|
|
$
|
1.66
|
|
Diluted
|
|
$
|
(0.61
|
)
|
|
$
|
0.13
|
|
|
$
|
1.30
|
|
Diluted net income (loss) per share does not include the effect
of the following antidilutive common equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Stock options and awards outstanding
|
|
|
9,169
|
|
|
|
5,722
|
|
|
|
633
|
|
Common equivalent shares from preferred stock warrant
|
|
|
108
|
|
|
|
86
|
|
|
|
|
|
Unvested restricted common shares subject to repurchase
|
|
|
416
|
|
|
|
|
|
|
|
|
|
Common shares from preferred stock
|
|
|
22,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total antidilutive common equivalent shares
|
|
|
31,856
|
|
|
|
5,808
|
|
|
|
633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is subject to income taxes only in the United
States. Provision for income tax expense (benefit) consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Current expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(3
|
)
|
|
$
|
(183
|
)
|
|
$
|
(31
|
)
|
State
|
|
|
15
|
|
|
|
1,017
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
834
|
|
|
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
(48,833
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
(2,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
12
|
|
|
$
|
834
|
|
|
$
|
(50,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between income tax expense (benefit) and the
amount resulting from applying the federal statutory rate of 35%
to net income (loss) is attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Federal tax at statutory rate
|
|
$
|
(1,261
|
)
|
|
$
|
2,283
|
|
|
$
|
4,496
|
|
State taxes, net of federal benefit
|
|
|
15
|
|
|
|
1,017
|
|
|
|
348
|
|
Nondeductible expenses
|
|
|
38
|
|
|
|
27
|
|
|
|
27
|
|
Nondeductible stock compensation
|
|
|
559
|
|
|
|
1,056
|
|
|
|
880
|
|
Research and development credit
|
|
|
(12
|
)
|
|
|
(448
|
)
|
|
|
(812
|
)
|
Change in valuation allowance
|
|
|
673
|
|
|
|
(3,051
|
)
|
|
|
(55,385
|
)
|
Other
|
|
|
|
|
|
|
(50
|
)
|
|
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
12
|
|
|
$
|
834
|
|
|
$
|
(50,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the Companys deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
50,222
|
|
|
$
|
45,633
|
|
Research and other credits
|
|
|
2,396
|
|
|
|
2,983
|
|
Deferred revenue
|
|
|
477
|
|
|
|
464
|
|
Stock-based compensation
|
|
|
3,224
|
|
|
|
4,157
|
|
Other temporary differences
|
|
|
4,379
|
|
|
|
6,127
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
60,698
|
|
|
|
59,364
|
|
Valuation allowance
|
|
|
(57,914
|
)
|
|
|
(2,529
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
2,784
|
|
|
|
56,835
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Intangible amortization
|
|
|
(2,784
|
)
|
|
|
(5,690
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(2,784
|
)
|
|
|
(5,690
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
|
|
|
$
|
51,145
|
|
|
|
|
|
|
|
|
|
|
Prior to September 30, 2010, the Company maintained a full
valuation allowance for its net deferred tax assets since the
likelihood of the realization of those assets had not become
more likely than not. The Company continuously
evaluates additional facts representing positive and negative
evidence in the determination of the realizability of the
deferred tax assets. As of September 30, 2010, and
December 31, 2010, the Company believed that sufficient
positive evidence existed from historical operations and future
projections to conclude that it was more likely than not to
fully realize its federal deferred tax assets and to partially
realize its state of California deferred tax assets. Therefore,
the Company released valuation allowances of $55.4 million
during the year ended December 31, 2010. The Company
continues to apply a valuation allowance on certain deferred tax
assets in the amount of $2.5 million relating to the state
of California as it is not more likely than not that the Company
will be able to realize these assets prior to their expiration.
As of December 31, 2010, the Company has net operating loss
carryforwards for federal and state income tax purposes of
approximately $120.0 million and $63.5 million,
respectively, available to reduce future income subject to
income taxes. The federal and state net operating loss
carryforwards expire through 2028.
As of December 31, 2010, approximately $25.4 million
of the net operating losses will benefit additional paid in
capital when realized. As of December 31, 2010, the Company
also has research credit carryforwards for federal and
California income tax purposes of approximately
$2.2 million and $1.1 million, respectively, available
to reduce future income taxes. The federal research credit
carryforwards expire through 2030. The California research
credit carries forward indefinitely.
Section 382 of the Internal Revenue Code (Section 382)
imposes limitations on a corporations ability to utilize
its net operating losses if it experiences an ownership
change. In general terms, an ownership change results from
transactions increasing the ownership of certain existing
stockholders and, or, new stockholders in the stock of a
corporation by more than 50 percentage points during a three
year testing period. Any unused annual limitation may be carried
over to later years, and the amount of the limitation may, under
certain circumstances, be increased to reflect both recognized
and deemed recognized built-in gains that occur
during the sixty-month period after the ownership change. The
Company does not anticipate a change in ownership under
Section 382 of the Internal Revenue Code of 1986, as
amended, that would result in limitations on the use of the tax
net operating losses, or tax credits. However, there can be no
assurance that future issuances of the Companys securities
will not trigger limitations under Section 382 of the
Internal Revenue Code.
F-23
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010, unrecognized tax benefits
approximated $6.2 million all of which would affect the
effective tax rate if recognized. Included in the balance at
December 31, 2010 is $0.5 million of current year tax
positions, which would affect the Companys income tax
expense if recognized. As of December 31, 2010, the Company
has no uncertain tax positions that would be reduced as a result
of a lapse of the applicable statute of limitations. The Company
does not anticipate adjustments to unrecognized tax benefits
which would result in a material change to its financial
position. The Company recognizes accrued interest and penalties
related to unrecognized tax benefits as a component of income
tax expense. During the years ended December 31, 2008, 2009
and 2010, the accrued interest and penalties were immaterial.
The Companys income taxes payable have been reduced by
employee stock-based awards. The Company receives an income tax
benefit calculated as the difference between the fair market
value of the stock issued at the time of exercise and the
options price, tax effected. If an incremental tax benefit is
realized as a reduction of income tax payable, such excess tax
benefit is recognized as an increase to additional paid-in
capital. The excess tax benefits from employee stock-based
awards transactions in the years ended December 31, 2009
and 2010 were $0.1 million and $0.5 million,
respectively and there were no excess tax benefits related to
employee stock-based awards for the year ended December 31,
2008.
A reconciliation of the beginning and ending balances of the
total amounts of gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
8,444
|
|
|
$
|
9,588
|
|
Increase in tax positions for prior years
|
|
|
748
|
|
|
|
|
|
Decrease in tax positions for prior years
|
|
|
|
|
|
|
(3,828
|
)
|
Increase in tax positions for current year
|
|
|
396
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
9,588
|
|
|
$
|
6,244
|
|
|
|
|
|
|
|
|
|
|
The Company is subject to income taxes in the U.S. federal
jurisdiction and various state jurisdictions. All tax years
since inception are open due to loss carryforwards and may be
subject to examination in one or more jurisdictions. The Company
has undergone a federal tax examination for fiscal years 2006
and 2007. As a result, the Company received a Notice of Proposed
Adjustment (NOPA) dated August 24, 2010 from
the Internal Revenue Service (IRS) which reduced its
gross unrecognized tax benefits associated with research credits
related to prior returns. The Company has determined that the
NOPA will not have a material impact on its financial condition
and results of operations.
The Company maintains a savings plan under Section 401(k)
of the Internal Revenue Code. Under the plan, employees may
contribute up to 75% of their pre-tax salaries per year, but not
more than the statutory limits. The Company may, at its
discretion, make matching contributions to the 401(k) Plan. For
the year ended December 31, 2009, the Company made no
matching contributions. For the years ended December 31,
2008 and 2010, the Company made matching contributions of 50% of
employee contributions up to 3% of salary (including
commissions), which totaled $0.7 million and
$0.9 million, respectively.
|
|
NOTE 9
|
Related
Party Transactions
|
One of the Companys founders, who also served as a
director during a portion of this period, provided consulting
services to the Company for which compensation was provided. The
Company incurred consulting expenses of $0.3 million,
$0.3 million and $0.1 million during the years ended
December 31, 2008, 2009 and 2010,
F-24
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively. As of December 31, 2009 and 2010,
respectively, the Company had accrued liabilities of
$0.1 million and $0.1 million, respectively, for
consulting fees payable to this founder. As of June 2009, this
founder resigned from his director position and effective
December 31, 2010, this founder is no longer providing
consulting services to the Company.
Entities affiliated with Goldman, Sachs & Co., one of
the Companys underwriters in the Companys initial
public offering, owned 1,324,014 shares of Series E
preferred stock as of December 31, 2009 and did not hold
any shares of common stock as of December 31, 2010.
|
|
NOTE 10
|
Commitments
and Contingencies
|
Commitments
The Company leases its facilities under non-cancelable operating
leases expiring at various dates through the year 2015. Rent
expense for all operating leases totaled approximately
$2.0 million for each of the years ended December 31,
2008, 2009 and 2010. Certain of the Companys facility
leases provide for a free rent period or escalating rent
payments. Accordingly, the Company has straight-lined the rental
payments over the respective lease terms, resulting in accrued
rent of $0.4 million and $0.4 million as of
December 31, 2009 and 2010, respectively.
Minimum future lease payments under all non-cancelable operating
leases as of December 31, 2010 are as follows:
|
|
|
|
|
|
|
Operating
|
|
|
|
Lease Payments
|
|
|
|
(In thousands)
|
|
|
Year ending December 31,
|
|
|
|
|
2011
|
|
$
|
2,084
|
|
2012
|
|
|
1,673
|
|
2013
|
|
|
869
|
|
2014
|
|
|
875
|
|
2015
|
|
|
154
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
5,655
|
|
|
|
|
|
|
Contingencies
The Company is a party to certain consulting agreements pursuant
to which it may be obligated to indemnify the other party with
respect to certain matters. Typically, these obligations arise
in the context of contracts entered into by the Company under
which the Company customarily agrees to hold the other party
harmless against losses arising from a breach of representation
and covenants. To date, the Company has not incurred any costs
as a result of such commitments and has not accrued any
liabilities related to such obligations.
The Company includes service level commitments to its customers
warranting certain levels of reliability and performance. To
date, the Company has not incurred any material costs as a
result of such commitments and has not accrued any liabilities
related to such obligations.
|
|
NOTE 11
|
Subsequent
Events
|
In February 2011, the Company extended its operating lease
contract for its Phoenix facility through May 2015 and added
additional space. Future minimum payments associated with the
additional space are estimated to be $0.5 million over the
lease term.
F-25