As filed with the Securities and Exchange Commission on
February 22, 2010
Registration No. 333-163581
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 3
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
FINANCIAL ENGINES,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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6282
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94-3250323
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(State or other jurisdiction
of
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(Primary Standard
Industrial
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(I.R.S. Employer
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incorporation or
organization)
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Classification Code
Number)
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Identification
No.)
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1804 Embarcadero Road
Palo Alto, California
94303
(650) 565-4900
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Jeffrey N.
Maggioncalda
Chief Executive
Officer
1804 Embarcadero Road
Palo Alto, California
94303
(650) 565-4900
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Jorge del Calvo, Esq.
Davina K. Kaile, Esq.
Pillsbury Winthrop Shaw Pittman LLP
2475 Hanover Street
Palo Alto, CA 94304
(650) 233-4500
(650) 233-4545
facsimile
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Douglas D. Smith, Esq.
Stewart L. McDowell, Esq.
Gibson, Dunn & Crutcher LLP
555 Mission Street, Suite 3000
San Francisco, CA 94105
(415) 393-8200
(415) 986-5309 facsimile
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box.
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large
accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
þ
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Smaller reporting
company
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(Do not check if a smaller
reporting company)
CALCULATION OF REGISTRATION FEE
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Title of Each Class of
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Amount to be
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Proposed Maximum
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Amount of
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Securities to be Registered
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Registered(1)
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Aggregate Offering Price(2)
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Registration Fee(3)
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Common Stock, $0.0001 par value per share
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12,535,000
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$
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137,885,000
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$
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8,821
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(1)
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Includes shares that the
underwriters have the option to purchase to cover
over-allotments, if any.
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(2)
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Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(a)
under the Securities Act of 1933.
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(3)
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The Registrant previously paid
filing fees of $5,580 in connection with the filing of this
Registration Statement on December 9, 2009. The aggregate
filing fee of $8,821 is being offset by the $5,580 payment
previously made in connection with the prior filing of this
Registration Statement.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We and the selling stockholders may not sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
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Subject to Completion. Dated
February 22, 2010.
10,900,000 Shares
Common Stock
This is an initial public offering of shares of common stock of
Financial Engines, Inc.
Financial Engines is offering 5,868,100 of the shares to be
sold in the offering. The selling stockholders identified in
this prospectus are offering an additional
5,031,900 shares. Financial Engines will not receive any of
the proceeds from the sale of the shares being sold by the
selling stockholders.
Prior to this offering, there has been no public market for the
common stock. It is currently estimated that the initial public
offering price per share will be between $9.00 and $11.00.
Financial Engines has applied to list the common stock on The
Nasdaq Global Market under the symbol FNGN.
See Risk Factors on page 15 to read about
factors you should consider before buying shares of the common
stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense
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Per Share
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Total
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Initial public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds, before expenses, to Financial Engines
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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To the extent that the underwriters sell more than
10,900,000 shares of common stock, the underwriters have
the option to purchase up to an additional 1,635,000 shares
from Financial Engines at the initial public offering price less
the underwriting discounts and commissions.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2010.
Goldman, Sachs &
Co.
UBS Investment Bank
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Piper
Jaffray
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Cowen and Company
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Prospectus
dated ,
2010
I dont know where How much to find help. will I need when I retire? I dont know how much to
save. Will I have enough money to retire? We promise to give everyone the personalized, trusted
retirement help they deserve. When can I retire and how much can I spend when I do? How should I
invest my money? I dont know where to start.
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TABLE OF
CONTENTS
No dealer, salesperson or other person is authorized to give
any information or to represent anything not contained in this
prospectus.
You should rely only on the information contained in this
prospectus and any free writing prospectus prepared by or on
behalf of us. This prospectus is an offer to sell only the
shares offered hereby but only under circumstances and in
jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
Through and
including ,
2010 (the 25th day after the date of this prospectus), all
dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealers obligation to
deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscriptions.
The market data and certain other statistical information
used throughout this prospectus are based on independent
industry publications, governmental publications, reports by
market research firms or other independent sources. Some data
are also based on our good faith estimates.
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 prospectus are the
property of their respective owners.
i
PROSPECTUS
SUMMARY
This summary highlights selected information contained
elsewhere in this prospectus. Because this is only a summary, it
does not contain all of the information you should consider
before investing in our common stock. You should carefully read
the entire prospectus, especially the risks set forth under the
heading Risk Factors and our consolidated financial
statements and related notes included elsewhere in this
prospectus, before making an investment decision. Our investment
advisory and management services are provided through our
subsidiary, Financial Engines Advisors L.L.C., a federally
registered investment adviser. References in this prospectus to
Financial Engines, our company,
we, us and our refer to
Financial Engines, Inc. and its consolidated subsidiaries during
the periods presented unless the context requires otherwise.
Financial
Engines, Inc.
Overview
Our company was founded to address the need for independent
investment advice. Traditionally, high quality, customized
investment advice had been available only to large institutions
and the affluent, and providing such advice to low asset balance
investors had been cost-prohibitive. We believe that our advice
technology platform allows us to cost-effectively service the
needs of individual investors with low asset balances, many of
whom are underserved by the financial services industry. We
believe shifting retirement industry trends present us with an
opportunity to provide independent portfolio management
services, investment advice and retirement help to retirement
plan participants who previously did not have access to these
services.
Our
Company
We are a leading provider of independent, technology-enabled
portfolio management services, investment advice and retirement
help to participants in employer-sponsored defined contribution
retirement plans, such as 401(k) plans. We help investors plan
for retirement by offering personalized plans for saving and
investing, as well as by providing assessments of retirement
income needs and readiness, regardless of the investors
personal wealth or investment account size. We use our
proprietary advice technology platform to provide our services
to millions of retirement plan participants on a cost-efficient
basis.
We target three key constituencies in the retirement plan
market: plan participants (employees of companies offering
401(k) plans), plan sponsors (employers offering 401(k) plans to
their employees) and plan providers (companies providing
administrative services to plan sponsors). We generate revenue
primarily from management fees based on the value of the assets
we manage for plan participants, which we refer to as
Professional Management revenue. We refer to the amount of
retirement plan assets that we manage for plan participants as
part of our Professional Management service as Assets Under
Management, or AUM. We also generate revenue from recurring,
subscription-based platform fees for access to either our full
suite of services, including Professional Management, Online
Advice and Retirement Evaluation, or our Online Advice service
only, which we refer to collectively as platform revenue.
Platform fees are paid by the plan sponsor, plan provider or the
retirement plan itself, depending on the plan structure.
We offer three principal services:
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Professional Management
is a discretionary managed
account service designed for plan participants who want
affordable, personalized and professional portfolio management
services, investment advice and retirement help from an
independent investment advisor without the conflicts of interest
that can arise when an advisor offers proprietary products. In
some cases, we provide this service by acting as a subadvisor to
a plan provider acting as the investment manager to plan
participants.
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Online Advice
is a nondiscretionary Internet-based
service that offers personalized advice to plan participants who
wish to take a more active role in personally managing their
retirement portfolios. In some cases, we provide this service by
acting as a subadvisor to a plan provider acting as the
investment advisor to plan participants.
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Retirement Evaluation
is a retirement readiness
assessment provided to plan participants upon plan rollout and
generally annually thereafter. Retirement Evaluations highlight
specific risks in a plan participants retirement account
and assess the likelihood of achieving the plan
participants retirement income goals. The assessment also
provides guidance on how to reduce these highlighted risks.
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Our total revenue for 2009 was $85.0 million, compared to
$71.3 million for 2008, an increase of 19%. We generated
Professional Management revenue of $52.6 million for 2009,
an increase of 35% from $39.0 million for 2008. We
generated platform revenue of $30.0 million for 2009, an
increase of 2% from $29.5 million for 2008. For the year
ended December 31, 2009, we had net income of approximately
$5.7 million. We have incurred net losses in each year
through 2008. As of December 31, 2009, we had an
accumulated deficit of approximately $157.4 million.
We target large plan sponsors across a wide range of industries.
As of December 31, 2009, we had signed contracts to make
our services available through 116 Fortune 500 companies
and eight Fortune 20 companies. As of December 31,
2009, we were under contract to provide either our full suite of
services or our Online Advice service only, through more than
760 plan sponsors with approximately 7.4 million plan
participants, whose retirement savings represented more than
$500 billion in assets. Within this group, we provide our
full suite of services to 354 plan sponsors representing
approximately 3.9 million participants and approximately
$269 billion of assets in retirement plans for which we
have rolled out our Professional Management service, which we
refer to as Assets Under Contract, or AUC. As of
December 31, 2009, we had approximately $25.7 billion
in AUM, and managed the accounts of approximately 391,000
members who have delegated investment decision-making authority
to us. We deliver our services to plan sponsors and plan
participants primarily through existing connections with eight
retirement plan providers. Based on information from Pensions
and Investments, as of March 31, 2009, and from one of the
plan providers, we estimate that these eight plan providers
collectively service plan sponsors representing more than $1.5
trillion in plan assets, or more than 80% of the assets
contained in plans with more than 10,000 participants.
The key steps associated with delivering our Professional
Management service are as follows:
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First, we sign a contract that allows us to provide our
Professional Management service to the plan sponsors
employees;
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Second, we obtain plan and plan participant data, set up the
plan on our systems and make our services available to all
eligible plan participants upon completion of plan rollout;
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Third, we deliver Retirement Evaluations and enrollment
materials to plan participants; and
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Fourth, for plan participants who elect to enroll in our
Professional Management service, at which time the
participants 401(k) assets become AUM, we allocate the
plan participants 401(k) assets pursuant to the
participants investment objectives and investment
alternatives available.
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We launched our Professional Management service in September
2004. From December 31, 2004 to December 31, 2009, we
had a compound annual growth rate, or CAGR, of 90% for AUM and
92% for membership.
2
The following tables illustrate the increase in our AUM and
membership, and the corresponding CAGR, from December 31,
2004 to December 31, 2009.
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Assets
Under Management
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Total
Members
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All data are shown
as of December 31 of the applicable year.
Our Market
Opportunity
We believe the following key market trends will continue to
drive the growth of our business and increase the value of our
service offerings:
Shifting Demographics Drive a Growing Need for Retirement
Assistance.
The ongoing growth in retirement
assets, especially 401(k) assets, is driven in part by
individuals seeking to supplement retirement funds they expect
to receive from Social Security and corporate defined benefit
plans. According to data contained in the Federal Reserve
Boards Survey of Consumer Finances for 2007, households
headed by individuals age 45 through 64 represented 45% of all
retirement account holders, but accounted for 56% of the assets
in retirement accounts. Members of the Baby Boomer generation,
which refers to individuals born between 1946 and 1964, will
start to reach traditional retirement age in 2011. However,
studies suggest that many Baby Boomers are not financially
prepared to support themselves in retirement. The Employee
Benefits Research Institute, or EBRI, 2009 Retirement Confidence
Survey indicates that approximately 36% of workers age 45
through 54, and approximately 30% of workers age 55 or older,
report total savings and investments, excluding the value of
their primary residence and any defined benefit plans, of less
than $10,000. Despite the increased reliance on defined
contribution plans, we believe many investors are not equipped
to adequately formulate an investment strategy for their
retirement assets.
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 $2.6 trillion and constituted
more than 20% of total retirement assets in the United States,
excluding Social Security, in 2008. According to Cerulli
Associates, there were approximately 58 million active
401(k) plan participants as of December 31, 2008.
Changing Legal and Regulatory
Framework.
As the burden of retirement
investing shifts to the individual, we believe that there is an
increasing need for assistance and guidance on how to maximize
retirement wealth. However, according to a 2009 survey by Hewitt
Associates, the primary reason cited by plan sponsors for not
making investment advice available to employees has been the
fear of increased fiduciary or legal risk. We believe the
Pension Protection Act of 2006 and subsequent Department of
Labor regulations can reduce these concerns 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.
Automatic 401(k).
As a result of the
Pension Protection Act of 2006 and Department of Labor
guidelines, plan sponsors are now actively seeking automatic
retirement savings solutions for their employees. According to a
2009 401(k) plan survey conducted by Hewitt Associates, the
percentage of employers that automatically enroll new
participants has increased from 19% in 2005 to 58% in
3
2009. Similarly, automatic contribution escalation, where
employees contribution rates are automatically increased
over time unless the employee affirmatively elects otherwise,
increased from 9% in 2005 to 44% in 2009.
Our Competitive
Strengths
We believe that our market-leading position results from the
following key competitive strengths:
Independent and Unconflicted Advice.
We
believe that many plan participants value an investment advisor
that is independent and free from potential conflicts of
interests. We also believe that many plan fiduciaries similarly
value making independent and unconflicted advice available to
their plan participants. We do not receive differential
compensation based on the investments we recommend. We offer no
proprietary investment products. We are not affiliated with or
controlled by any broker-dealer, registered investment company,
insurance company or financial services organization. We base
our investment advice on quantitative criteria applied through a
computerized model that is consistently applied across plan
participants, plan sponsors, plan providers and investment
choices.
Proprietary Investment Advice
Technology.
Our Advice Engines, which consist
of our Optimization and Simulation Engines, incorporate
portfolio analysis methods commonly used by large institutional
investors and pioneered by our co-founder and Nobel Laureate,
Professor William F. Sharpe. Our technology-based investment
approach incorporates the following:
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Our Optimization Engine allows us to make personalized
investment recommendations, chosen from the investment options
available within each plan, with consideration of the plan
participants individual circumstances including investment
horizon, existing investment allocations and characteristics of
his or her 401(k) plan, as well as the participants other
financial assets and risk tolerance. In addition, we provide
personalized savings recommendations to help plan participants
reach their retirement objectives;
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Our Simulation Engine allows us to model the risk and return
characteristics of more than 30,000 securities, including the
funds and employer stocks in the plans to which we provide
services, taking into consideration factors such as asset class
exposures, expenses, turnover, manager performance, active
management risk, stock specific risk and the securitys
tax-efficiency;
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Our Advice Engines ability to manage a plan
participants employer stock holdings is an attractive
feature to plan sponsors seeking to reduce the risk of fiduciary
liability that can arise when employer stock is included in a
401(k) plan. The advice produced by our Advice Engines also
generally reduces plan participants undiversified exposure
to the equity risk that results from holding an overly-high
concentration in employer stock; and
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Our Advice Engines are able to provide advice that takes into
consideration after-tax returns by taking into account the
specific tax characteristics of securities and the tax
attributes of investor households.
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Scalable Technology Platform.
We
believe our technology platform allows us to
cost-effectively
service the needs of large numbers of individual investors with
low asset balances while providing sophisticated, personalized
investment advice. As of December 31, 2009, approximately
45% of our Professional Management members had less than $20,000
of retirement assets in their accounts.
Significant Invested Capital.
Our
services are based on our proprietary technology, which we
developed over a number of years, and in which we have invested
significant financial and personnel resources. We believe that
any potential competitor will face significant challenges in
terms of the human capital, time, money and technology required
to develop a competitive offering. Furthermore, the technology
interfaces that we have established with our retirement plan
providers and plan
4
sponsors are complex and would be time-consuming and costly for
our plan providers and plan sponsors to replicate.
Established Relationships and Data Connections with
Retirement Plan Providers.
We have built data
retrieval, transaction processing and fee deduction interfaces
with a number of retirement plan providers, including these
eight primarily: ACS, Fidelity, Hewitt, ING, JPMorgan, Mercer,
T. Rowe Price and Vanguard.
Large, Industry-Leading Retirement Plan Sponsor
Clients.
We believe our brand recognition and
experience serving large plan sponsors from a wide variety of
industries provide us with a competitive advantage and enhance
our position as an acknowledged leader in our markets. We
believe that many plan sponsors that contemplate switching plan
providers consider the availability of our services on
alternative plan provider platforms in making their decisions.
We believe that this in turn provides incentives to the plan
providers to maintain ongoing relationships with Financial
Engines.
Our Business
Model
Recurring and Resilient Revenue
Base.
We believe our business model has
structural advantages that allow us to demonstrate resiliency in
difficult environments. We currently serve investors with 401(k)
accounts that, unlike other non-retirement investment accounts,
generally receive consistent automatic contributions from
participants and have adverse tax treatment on early
withdrawals. We create portfolios with a diversified mix of
equity and fixed income exposure designed to reduce volatility.
Our contracts with plan sponsors typically have initial terms of
three years and evergreen clauses that extend the initial term
until terminated by either party after a specified notice
period. In a given year, a significant portion of our
Professional Management revenue consists of recurring revenue
earned from contracts in place prior to the beginning of that
year. Revenue from contracts in place as of December 31,
2008 accounted for approximately 99% of our total revenue for
the year ended December 31, 2009.
While market declines may impact the value of our AUM, we
believe our business model may mitigate the effects of market
declines. From December 31, 2007 to December 31, 2008,
our AUM declined approximately 4%. This was a challenging time
for the equity markets, as shown by a decline in the S&P
500 of approximately 38% over the same period. We believe the
effect on our AUM during this period was mitigated as a result
of new business, ongoing participant contributions and less
volatile investment performance, among other factors.
Attractive Economic Model.
We believe
the scalability of our technology platform results in attractive
per-member economics. We believe that our investments in
technology allow us to manage existing member accounts at
significantly lower costs and to add new plan sponsors and plan
participants with less than pro rata incremental expenses.
Sole Access and Customer Retention.
Our
business model enjoys a number of structural advantages that
result in sole access to plan participants and high plan sponsor
retention levels. The 354 plan sponsors representing
approximately $269 billion in AUC who make available our
Professional Management service have each made us the sole
provider of these services to their plans. We believe this
reflects the desire of plan sponsors to avoid inconsistent
methodologies, to simplify choices for plan participants, and to
avoid building new data connections with multiple investment
advice vendors.
Since the launch of our Professional Management service in
September 2004, we have retained over 96% of our plan sponsors
each year. We believe this reflects the desire of plan sponsors
to maintain continuous and consistent provision of investment
advisory services for their employees.
Significant Growth Opportunity Within Our Existing
Customer Base.
We believe our business has a
significant opportunity for growth from our existing customer
base. As of December 31, 2009, we had approximately
$25.7 billion in AUM and approximately 391,000 members,
5
while our Professional Management service was available to
employees representing a total of approximately
$269 billion in AUC and approximately 3.9 million
potential members. This implies a participant enrollment rate of
approximately 10.0% across all plans where Professional
Management is available, including plans where enrollment
campaigns are not yet concluded or have not been commenced.
Our Growth
Strategy
Increase Penetration Within Our Existing Professional
Management Plan Sponsors.
We plan to increase
enrollment by both continuing to promote our services to
participants in Active Enrollment campaigns and encouraging plan
sponsors to initiate Passive Enrollment campaigns. Active
Enrollment campaigns require that plan participants proactively
sign up for our Professional Management service. Passive
Enrollment campaigns automatically enroll some or all of a plan
sponsors plan participants into our Professional
Management service unless the individual participant declines or
opts-out of the service. 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. We believe Passive
Enrollment is attractive to plan sponsors due to the lower fees
payable by plan participants who are passively enrolled, the
fiduciary protection afforded to plan sponsors by participants
having to affirmatively elect not to receive professional advice
and the relatively higher number of participants likely to be
enrolled and receiving professional management upon rollout.
Depending on the proportion of the plans participants who
are passively enrolled, we eliminate or reduce our platform
fees, as well as reducing the fees payable by plan participants.
Enhance and Extend Our Services as Baby Boomers Enter
Retirement.
We intend to expand our portfolio
management, investment advisory and retirement planning services
to help individual investors as they near and enter retirement.
We also intend to expand our services to help members of our
Professional Management program who roll over their 401(k) into
an IRA account available through the plan provider and to help
other individual IRA investors manage and draw down income from
their IRAs. We also plan to expand our services to more fully
serve the defined contribution market. We believe our
established investment methodology, technology and relationships
with plan providers, plan sponsors and plan participants provide
us with the distribution and technological capabilities to help
individuals who want ongoing, lifetime payouts from their
retirement accounts.
Expand Number of Retirement Plan
Sponsors.
We intend to sell our services to
other plan sponsors that are not current clients but are
serviced by the plan providers with which 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.
Offer Professional Management to Online Only
Plan Sponsors.
We have an
online-services-only relationship with many of our plan sponsor
customers. We plan to pursue growth by seeking to convert these
plan sponsors to our full Professional Management, Online Advice
and Retirement Evaluation suite of services.
Risks Related to
Our Business
Investing in our common stock involves substantial risk,
including those risks described under the heading Risk
Factors immediately following this summary. Our ability to
execute our strategy is also subject to significant risks. Risks
related to our business include, but are not limited to,
fluctuations in our revenue and operating results, our reliance
on fees earned on the value of assets we manage for a
substantial portion of our revenue, the impact of the financial
markets on our revenue and earnings, our history of losses and
accumulated deficit, unanticipated delays in rollouts of our
services, our ability to increase enrollment, our ability to
introduce new services and accurately estimate the impact of any
future services on our business, our relationships with plan
providers and
6
plan sponsors, the fees we can charge for our Professional
Management service, our reliance on accurate and timely data
from plan providers and plan sponsors, system failures, errors
or unsatisfactory performance of our services, our reputation,
our ability to protect the confidentiality of plan provider,
plan sponsor and plan participant data and other privacy
concerns, acquisition activity involving plan providers or plan
sponsors, our ability to compete and risks associated with our
fiduciary obligations. We also face risks related to complex
regulations and changes in laws applicable to our business,
including where we act as a subadvisor. Before you invest in our
common stock, you should carefully consider all the information
in this prospectus including matters set forth under the heading
Risk Factors.
Corporate
Information
We were incorporated in California in May 1996 and were
reincorporated in Delaware in February 2010. Our principal
executive offices are located at 1804 Embarcadero Road, Palo
Alto, California 94303. Our telephone number at that location is
(650) 565-4900.
Our website address is
www.FinancialEngines.com
.
Information on our website is not part of this prospectus and
should not be relied upon in determining whether to make an
investment decision.
7
Terminology
References in this prospectus to the following terms shall have
the meanings set forth below:
AUC:
AUC, or Assets Under Contract, is
defined as the amount of assets in retirement plans under
contract for our Professional Management services that have been
rolled out. Our AUC does not include assets in plans where we
have signed contracts but for which we have not yet rolled out
our Professional Management service. The value of assets is
reported by plan providers as of various points in time and is
not always updated or marked to market. Some plan participants
may not be eligible for our services due to plan sponsor
limitations on employees treated as insiders for purposes of
securities laws or other characteristics of the plan
participant. Certain securities within a plan participants
account may be ineligible for management by us, such as employer
stock subject to trading restrictions, and we do not manage or
charge a fee for that portion of the account. We believe that
AUC both is a useful approximation of the additional plan assets
available for enrollment efforts that, if successful, result in
these assets becoming AUM, and also indicates the benefit of
increasing our enrollment rates since this will lead to
additional AUM.
AUM:
AUM, or Assets Under Management,
is defined as the amount of retirement plan assets that we
manage as part of our Professional Management service. Our
quarter-end AUM is the value of assets under management as
reported by plan providers at or near the end of each quarter.
Enrollment Rate:
When used in reference
to participant enrollment rate, enrollment rate is defined as
the percentage of plan participants who use our Professional
Management service across all plans in which Professional
Management is available, including plans in which enrollment
campaigns are not concluded or have not yet commenced.
When used in reference to asset enrollment rate, enrollment rate
is defined as AUM as a percentage of AUC across all plans in
which Professional Management is available, including plans in
which enrollment campaigns are not concluded or have not yet
commenced.
In addition to measuring enrollment in all plans that have been
rolled out, we measure enrollment in plans that have been
actively rolled out for at least 14 months and in plans
that have been actively rolled out for at least 26 months.
We consider a plan to be actively rolled out upon mailing of
initial enrollment materials. We measure enrollment in plans
that have been rolled out for at least 14 months and at
least 26 months because we generally seek to commence
annual campaigns 12 months after the start of the prior
campaign, and each campaign typically lasts
45-60 days.
We may not always maintain this schedule.
Members:
Members are defined as plan
participants who are enrolled in our Professional Management
service.
401(k) Plans:
401(k) plans collectively
refer to defined contribution plans, such as 401(k), 403(b) and
457 plans, in which participants contribute a specified dollar
amount into the plan on a regular basis and, upon retirement,
can draw from the amount of money resulting from these
contributions and the investment return earned on those
contributions.
8
THE
OFFERING
|
|
|
Shares of common stock offered by Financial Engines
|
|
5,868,100 Shares
|
|
|
|
Shares of common stock offered by the selling stockholders
|
|
5,031,900 Shares
|
|
|
|
Total shares of common stock offered
|
|
10,900,000 Shares
|
|
|
|
Shares of common stock to be outstanding immediately after this
offering
|
|
39,505,577 Shares
|
|
|
|
Option to purchase additional shares offered by Financial Engines
|
|
1,635,000 Shares
|
|
|
|
Use of proceeds
|
|
We intend to use the net proceeds from this offering for general
corporate purposes, including working capital and capital
expenditures. See Use of Proceeds.
|
|
|
|
Dividend Policy
|
|
We do not currently intend to declare dividends on shares of our
common stock. See Dividend Policy.
|
|
Risk Factors
|
|
You should carefully read the Risk Factors section
of this prospectus for a discussion of factors that you should
consider carefully before deciding to invest in shares of our
common stock.
|
|
Proposed Nasdaq Global Market symbol
|
|
FNGN
|
The number of shares of common stock to be outstanding
immediately after this offering is based on
33,088,846 shares outstanding on an as-converted basis as
of December 31, 2009, and excludes:
|
|
|
|
|
11,630,440 shares of common stock issuable upon the
exercise of options outstanding as of December 31, 2009, at
a weighted average exercise price of $6.07 per share;
|
|
|
|
|
|
2,000,000 shares of common stock reserved for future
issuance under our 2009 Stock Incentive Plan following the date
of this offering, as well as shares originally reserved for
issuance under our 1998 Stock Plan, but which may become
available for awards under our 2009 Stock Incentive Plan as
described below; and
|
|
|
|
|
|
25,000 shares reserved for future issuance under our
Special Executive Restricted Stock Purchase Plan.
|
The number of shares to be outstanding immediately after this
offering will include 456,643 shares of common stock to be
issued to holders of Series E preferred stock upon the
completion of this offering and 91,988 shares to be issued
and sold in this offering upon the exercise of vested stock
options.
Unless otherwise stated, all information in this prospectus
assumes:
|
|
|
|
|
the conversion of all of our outstanding shares of preferred
stock into an aggregate of 22,441,623 shares of common
stock effective upon the completion of this offering, assuming a
one-to-one
conversion ratio of our outstanding shares of preferred stock
into common stock;
|
|
|
|
|
|
the filing of our restated certificate of incorporation prior to
the completion of this offering; and
|
|
|
|
|
|
no exercise of the option to purchase additional shares granted
to the underwriters.
|
As of December 31, 2009, 1,326,788 shares remained
available for future issuance under our 1998 Stock Plan. Upon
the completion of this offering, no shares of our common stock
will remain available for future issuance under our 1998 Stock
Plan. Shares originally reserved for issuance under our 1998
Stock Plan, but which are not subject to outstanding options on
the effective date of our 2009 Stock Incentive Plan, and shares
subject to outstanding options under our 1998 Stock Plan on the
effective date of our 2009 Stock Incentive Plan that are
subsequently forfeited or terminated for any reason before being
exercised, up to a number of additional shares not to exceed
2,000,000, will also become available for awards under our 2009
Stock Incentive Plan.
9
SUMMARY
CONSOLIDATED FINANCIAL INFORMATION
The information set forth below should be read together with
Capitalization, Selected Consolidated
Financial Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and related notes
included elsewhere in this prospectus.
The summary consolidated statements of operations data for the
years ended December 31, 2007, 2008 and 2009 have been
derived from our audited consolidated financial statements,
which are included elsewhere in this prospectus. Historical
results are not necessarily indicative of the results to be
expected in the future, and results of interim periods are not
necessarily indicative of results for the entire year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
63,350
|
|
|
$
|
71,271
|
|
|
$
|
84,982
|
|
Costs and expenses
|
|
|
64,849
|
|
|
|
74,310
|
|
|
|
78,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,499
|
)
|
|
|
(3,039
|
)
|
|
|
6,784
|
|
Interest income (expense) and other, net
|
|
|
(274
|
)
|
|
|
(563
|
)
|
|
|
(261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(1,773
|
)
|
|
|
(3,602
|
)
|
|
|
6,523
|
|
Income tax expense
|
|
|
31
|
|
|
|
12
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(1,804
|
)
|
|
|
(3,614
|
)
|
|
|
5,689
|
|
Less: Preferred stock dividend
|
|
|
|
|
|
|
2,362
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of common stock
|
|
$
|
(1,804
|
)
|
|
$
|
(5,976
|
)
|
|
$
|
4,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to holders of common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.13
|
|
Shares used to compute net income (loss) per share attributable
to holders of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
10,106
|
|
Diluted:
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
34,866
|
|
Pro forma net income per share (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
Diluted
(1)
|
|
|
|
|
|
|
|
|
|
$
|
0.16
|
|
Shares used to compute pro forma net income per share
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
|
|
|
|
|
|
|
|
|
33,005
|
|
Diluted
(1)
|
|
|
|
|
|
|
|
|
|
|
35,401
|
|
|
|
(1)
|
See Note 2 to our consolidated financial statements for an
explanation of the method used to calculate basic and diluted
net income per share and the unaudited pro forma basic and
diluted net income per share for the year ended
December 31, 2009. All shares to be issued in the offering
were excluded from the unaudited pro forma basic and diluted net
income per share calculation since the proceeds will be used for
general corporate purposes.
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
as Adjusted
|
|
|
|
(In thousands, unaudited)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
(1)
|
|
$
|
20,713
|
|
|
$
|
20,713
|
|
|
$
|
73,386
|
|
Working capital
|
|
|
16,562
|
|
|
|
16,562
|
|
|
|
68,809
|
|
Total
assets
(1)
|
|
|
58,352
|
|
|
|
58,352
|
|
|
|
109,446
|
|
Bank borrowings
|
|
|
8,055
|
|
|
|
8,055
|
|
|
|
8,055
|
|
Total liabilities
|
|
|
34,086
|
|
|
|
34,086
|
|
|
|
32,933
|
|
Total stockholders
equity
(1)
|
|
|
24,266
|
|
|
|
24,266
|
|
|
|
76,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, unaudited)
|
|
|
Non-GAAP Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
(2)
|
|
$
|
8,333
|
|
|
$
|
8,409
|
|
|
$
|
19,553
|
|
Adjusted net
income
(2)
|
|
|
2,612
|
|
|
|
3,006
|
|
|
|
11,592
|
|
Notes to Summary
Balance Sheet Data and Other Data
|
|
(1)
|
The table above presents a summary of our balance sheet data as
of December 31, 2009:
|
|
|
|
|
|
on a pro forma basis to give effect to the issuance of
22,441,623 shares of common stock issuable upon the
conversion of all of our outstanding shares of preferred stock
upon completion of this offering and 456,643 shares of
common stock to be issued to holders of Series E preferred stock
upon the completion of this offering; and
|
|
|
|
|
|
on a pro forma basis to give effect to the issuance of
22,441,623 shares of common stock issuable upon the
conversion of all of our outstanding shares of preferred stock
upon completion of this offering and 456,643 shares of
common stock to be issued to holders of Series E preferred stock
upon the completion of this offering, as adjusted to further
reflect the sale by stockholders of 91,988 shares of common
stock to be issued upon exercise of vested stock options
immediately prior to the completion of this offering with net
proceeds to us of $0.3 million and the sale by us of
5,868,100 shares of common stock in this offering at an
assumed initial public offering price of $10.00 per share, the
mid-point of the price range set forth on the cover of this
prospectus, after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
This amount will increase cash and cash equivalents, working
capital, total assets and total stockholders equity by
$52.7 million, $52.2 million, $51.1 million and
$52.2 million, respectively.
|
Upon completion of the offering, each share of our preferred
stock will convert into one share of our common stock in
accordance with the automatic conversion provisions under
Section 4 of our charter in effect upon completion of the
offering. Specifically, in accordance with Section 4(b) of
our charter, a majority of the outstanding shares of our
Series A, Series B, Series C and Series D
preferred stock, voting together as a class, and of the
Series D, Series E and Series F preferred stock,
each voting as a separate class, have approved the automatic
conversion of each share of preferred stock into common stock on
a one-for-one basis. In January 2010, our board of directors and
shareholders approved the issuance of an aggregate of
456,643 shares of our common stock to holders of
Series E preferred stock immediately following the closing
of this offering such that each share of preferred stock,
including the Series E preferred stock, would maintain a
one-for-one conversion ratio to
11
common stock. Accordingly, the same exchange ratio of 1:1 will
be used for all holders of all series of preferred stock and no
holders of preferred stock will increase or decrease their
proportionate ownership levels relative to other owners as a
result of these conversion terms except to the extent that the
aggregate ownership level of holders of Series E preferred
stock will increase upon the issuance of the 456,643 shares
of common stock.
A $1.00 increase (decrease) in the assumed initial public
offering price of $10.00 per share would increase (decrease), on
a pro forma as adjusted basis, each of cash and cash
equivalents, total assets and total stockholders equity by
approximately $5.5 million, assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us.
|
|
(2)
|
Adjusted EBITDA
represents net income
(loss) before interest (income) expense, net, income tax
expense, depreciation, withdrawn offering expense, amortization
of internal use software, direct response advertising and
deferred sales commissions and stock-based compensation.
|
Adjusted Net Income (Loss)
represents
net income (loss) before stock-based compensation expense, net
of tax, and withdrawn offering expense.
Our management uses adjusted EBITDA and adjusted net income
(loss):
|
|
|
|
|
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.
|
Management may also consider adjusted EBITDA and adjusted net
income (loss), among other factors, when determining
managements incentive compensation beginning in 2010.
We also present adjusted EBITDA and adjusted net income (loss)
as supplemental performance measures because we believe that
these measures provide our board of directors, management and
investors with additional information to measure our
performance. Adjusted EBITDA provides comparisons from period to
period by excluding potential differences caused by variations
in the age and book depreciation of fixed assets (affecting
relative depreciation expense) and amortization of internal use
software, direct response advertising and commissions, and
changes in interest expense and interest income that are
influenced by capital structure decisions and capital market
conditions. Management also believes it is useful to exclude
stock-based compensation expense from adjusted EBITDA and
adjusted net income (loss) because non-cash equity grants made
at a certain price and point in time do not necessarily reflect
how our business is performing at any particular time.
We believe adjusted EBITDA and adjusted net income (loss) are
useful to investors in evaluating our operating performance
because securities analysts use adjusted EBITDA and adjusted net
income (loss) as supplemental measures to evaluate the overall
performance of companies and we anticipate that our investor and
analyst presentations after we are public will include adjusted
EBITDA and adjusted net income (loss).
Adjusted EBITDA and adjusted net income (loss) are not
measurements of our financial performance under U.S. GAAP
and should not be considered as an alternative to net income
(loss), operating loss or any other performance measures derived
in accordance with U.S. GAAP, or as an alternative to cash
flows from operating activities as a measure of our
profitability or liquidity.
12
We understand that, although adjusted EBITDA and adjusted net
income (loss) are frequently used by securities analysts,
lenders and others in their evaluation of companies, adjusted
EBITDA and adjusted net income (loss) have limitations as an
analytical tool, and you should not consider them in isolation,
or as a substitute for an analysis of our results as reported
under U.S. GAAP. In particular you should consider:
|
|
|
|
|
Adjusted EBITDA and adjusted net income (loss) do not reflect
our cash expenditures, or future requirements for capital
expenditures or contractual commitments;
|
|
|
|
Adjusted EBITDA and adjusted net income (loss) do not reflect
changes in, or cash requirements for, our working capital needs;
|
|
|
|
Adjusted net income (loss) does not reflect the interest expense
or the cash requirements necessary to service interest or
principal payments on our debt;
|
|
|
|
Adjusted EBITDA and adjusted net income (loss) do not reflect
the non-cash component of employee compensation;
|
|
|
|
Although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized often will have to be
replaced in the future, and adjusted EBITDA does not reflect any
cash requirements for such replacements;
|
|
|
|
|
|
Due to either net losses before income tax expenses or the use
of federal and state net operating loss carryforwards in 2007,
2008 and 2009, we had income tax payments of approximately
$9,000, $150,000 and $48,000, respectively. Income tax payments
will be higher if we generate net income before income tax
expenses and our existing net operating loss carryforwards for
federal and state income taxes of approximately
$134 million and $60 million, respectively, as of
December 31, 2009, have been fully utilized or
expired; and
|
|
|
|
|
|
Other companies in our industry may calculate adjusted EBITDA
and adjusted net income (loss) differently than we do, limiting
their usefulness as a comparative measure.
|
Management compensates for the inherent limitations associated
with using adjusted EBITDA and adjusted net income (loss)
measures through disclosure of such limitations, presentation of
our financial statements in accordance with GAAP and
reconciliation of adjusted EBITDA and adjusted net income (loss)
to the most directly comparable GAAP measure, net income (loss).
Further, management also reviews GAAP measures and evaluates
individual measures that are not included in adjusted EBITDA,
such as our level of capital expenditures, equity issuance and
interest expense, among other measures.
The table below sets forth a reconciliation of net income (loss)
to adjusted EBITDA based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, unaudited)
|
|
|
Net income (loss)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
|
5,689
|
|
Interest expense, net
|
|
|
352
|
|
|
|
563
|
|
|
|
605
|
|
Income tax expense
|
|
|
31
|
|
|
|
12
|
|
|
|
834
|
|
Depreciation
|
|
|
1,284
|
|
|
|
1,641
|
|
|
|
1,729
|
|
Withdrawn offering
expense
(1)
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
Amortization of internal use
software
(2)
|
|
|
3,020
|
|
|
|
2,196
|
|
|
|
2,711
|
|
Amortization of direct response advertising
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Amortization of deferred sales commissions
|
|
|
1,034
|
|
|
|
991
|
|
|
|
1,153
|
|
Stock-based compensation
expense
(3)
|
|
|
4,416
|
|
|
|
3,589
|
|
|
|
6,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
8,333
|
|
|
$
|
8,409
|
|
|
$
|
19,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
(1)
|
As of November 2008, we had incurred approximately
$3.0 million of costs directly attributable to a planned
initial public offering. These costs were being deferred until
the completion of the offering. In the quarter ended
December 31, 2008, these costs were charged to expense as a
result of our decision in November 2008 to cease efforts to
pursue an initial public offering because of the disruption in
the equity capital markets and general adverse economic
conditions present at that time.
|
|
(2)
|
Amortization of internal use software expense excluding
stock-based compensation includes engineering costs associated
with developing and enhancing our internal software systems as
well as our advisory service platform. Associated direct
development costs are capitalized and amortized using the
straight-line method over their estimated lives. Costs in this
area include compensation and related expenses and fees for
external consulting services.
|
|
(3)
|
Stock-based compensation expense is included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, unaudited)
|
|
|
Cost of revenue
|
|
$
|
648
|
|
|
$
|
817
|
|
|
$
|
1,391
|
|
Research and development
|
|
|
1,134
|
|
|
|
796
|
|
|
|
1,721
|
|
Sales and marketing
|
|
|
1,150
|
|
|
|
1,112
|
|
|
|
1,942
|
|
General and administrative
|
|
|
1,434
|
|
|
|
801
|
|
|
|
1,612
|
|
Amortization of internal use software
|
|
|
50
|
|
|
|
63
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
4,416
|
|
|
$
|
3,589
|
|
|
$
|
6,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth a reconciliation of net income (loss)
to adjusted net income (loss) on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, unaudited)
|
|
|
Net income (loss)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
Stock-based compensation expense, net of
tax
(1)
|
|
|
4,416
|
|
|
|
3,589
|
|
|
|
5,903
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss)
|
|
$
|
2,612
|
|
|
$
|
3,006
|
|
|
$
|
11,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) In 2009, we adjusted stock-based compensation at our
effective tax rate of 12.8%. In 2007 and 2008, we did not adjust
stock-based compensation as income taxes were minimal for each
of these periods.
14
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the risks described below before
making a decision to buy our common stock. If any of the
following risks actually occurs, our business, financial
condition, results of operations or growth prospects could be
harmed. In that case, the trading price of our common stock
could decline and you might lose all or part of your investment
in our common stock. You should also refer to the other
information set forth in this prospectus, including our
consolidated financial statements and the related notes.
Risks Related to
Our Business
Our revenue
and operating results can fluctuate from period to period, which
could cause our share price to fluctuate.
Our revenue and operating results have fluctuated in the past
and may fluctuate from
period-to-period
in the future due to a variety of factors, many of which are
beyond our control. Factors relating to our business that may
contribute to these fluctuations include the following factors,
as well as other factors described elsewhere in this prospectus:
|
|
|
|
|
a decline or slowdown of the growth in the value of financial
market assets, which may reduce the value of assets we have
under management and therefore our revenue and cash flows;
|
|
|
|
negative public perception and reputation of the financial
services industry;
|
|
|
|
variations in expected enrollment rates for our Professional
Management service;
|
|
|
|
unanticipated delays of anticipated rollouts of our services;
|
|
|
|
unanticipated changes to economic terms in contracts with plan
providers or plan sponsors, including renegotiations;
|
|
|
|
downward pressure on fees we charge for our portfolio
management, investment advisory and retirement planning services;
|
|
|
|
changes in laws or regulatory policy that could impact our
ability to offer services to plan providers as a subadvisor;
|
|
|
|
failure to enter into contracts with new plan sponsors;
|
|
|
|
cancellations or non-renewal of existing contracts with plan
providers or plan sponsors;
|
|
|
|
fluctuations in quarterly revenue due to changes in fees paid by
Professional Management members based on performance incentives
in contract terms;
|
|
|
|
changes in fees paid by us to plan providers for whom we are not
acting as a subadvisor for data retrieval, transaction
processing and fee deduction interfaces based on performance
incentives in contract terms;
|
|
|
|
mix in plan sponsors that choose our Active Enrollment or
Passive Enrollment options;
|
|
|
|
changes in the number of Professional Management members who
withdraw all assets from their 401(k) plan, effectively
terminating their relationship with us, or who decide to cancel
their Professional Management program participation;
|
|
|
|
elimination or reduction of sponsor matching contributions into
members 401(k) plans, which could reduce the growth rate
of assets under management;
|
|
|
|
|
|
unanticipated changes in 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;
|
15
|
|
|
|
|
unanticipated delays in recognizing revenue based on timing of
meeting specified milestones under contracts with customization
and consulting services; and
|
|
|
|
changes in our pricing policies or the pricing policies of our
competitors to which we have to adapt.
|
As a result of these and other factors, the results of any prior
quarterly or annual periods should not be relied upon as
indications of our future revenue or operating performance.
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, 2009, we had an accumulated deficit of
approximately $157.4 million. We have incurred net losses
in each year through 2008. We may continue to incur net losses
in the future.
A substantial
portion of our revenue is based on fees earned on the value of
assets we manage. Our revenue and earnings could suffer if the
financial markets experience a downturn or a slowdown in
growth that reduces the value, or slows the growth, of our
Assets Under Management.
We derive a significant and growing portion of our revenue from
asset management fees based on the assets in the retirement
accounts we manage, which we refer to as Assets Under
Management, or AUM. We allocate these assets among the
investments available to each particular plan participant. The
investment alternatives for a particular plan are selected by
the plans fiduciary, not by us, and may include retail
mutual funds, institutional funds, exchange-traded funds,
fixed-income investments and potentially higher volatility
employer stock, if it is an investment alternative in a
particular plan. In addition, our business is highly
concentrated in the 401(k) plans of plan sponsors in the United
States and the United States subsidiaries of international
companies. The value of these investments can be affected by the
performance of the financial markets globally, currency
fluctuations, interest rate fluctuations and other factors.
Currently, our fees are generally based on AUM on a day within
the last 10 days of a quarter. The exact date is agreed to
in advance with the plan provider, but varies by plan provider.
As a result, a decline in the financial markets at the end of a
quarter could have an adverse effect on our revenue, even if the
financial markets had performed well earlier in the quarter. In
addition, an economic downturn or slowdown in growth could cause
plan participants or their employers to contribute less to their
401(k) plans and cause fewer eligible employees to participate
in 401(k) plans, which could adversely affect the amount of AUM.
If plan participants are not satisfied with the performance of
their retirement portfolios due to a decline in the financial
markets or otherwise, our cancellation rates could increase,
which in turn would cause our AUM to decline. As of
October 1, 2008, our voluntary cancellation rate over the
preceding 12 months was 6.7% of our total number of
members, and as of April 30, 2009, our voluntary
cancellation rate had increased to 8.7% of our total number of
members. As of December 31, 2009, our voluntary
cancellation rate over the preceding 12 months was 5.2% of
our total number of members. A voluntary cancellation occurs
when a member proactively terminates their membership in our
Professional Management service. This differs from a rollover or
involuntary cancellation when a member is no longer eligible for
our Professional Management service, either because the member
has rolled out of the retirement plan or because the plan
sponsor has cancelled the Professional Management service. If
any of these factors reduces the value of assets we have under
management, the amount of fees we would earn for managing those
assets would decline, which in turn would harm our revenue,
operating results and financial condition. These percentages may
not be indicative of future voluntary cancellation rates, which
may increase.
Our revenue
could be harmed if we experience unanticipated delays in
rollouts of our services.
We generally do not earn platform fees from a plan sponsor until
our services are available to plan participants and we do not
earn fees for our Professional Management service until we begin
to
16
manage a participants account. If rollouts are delayed,
our receipt of revenue would be delayed. This in turn would
affect our operating results for a particular period.
Our revenue
could suffer if we experience unanticipated variations in new
enrollment campaigns or if we fail to enroll plan
participants.
Unanticipated variations in the number, size or timing of new
enrollment campaigns as well as ongoing annual campaigns at our
existing plan sponsors could also affect our revenue for a
particular period.
Our revenue
could be harmed if we do not grow enrollment in our Professional
Management service.
Our enrollment rate, and therefore our revenue, depend on plan
participants signing up for or, in the case of a Passive
Enrollment campaign, not declining, the Professional Management
service. If we are unable to continue to grow our enrollment,
our business may not grow as we anticipate. Increasing plan
participant enrollment in our Professional Management service
increases the AUM on which we earn fees. We may not be able to
generate expected enrollment under a particular contract, which
would negatively affect our revenue growth. For example, we have
found that if plan sponsors do not use our standard enrollment
campaign, enrollment rates tend to be lower. If fewer plan
sponsors elect Passive Enrollment for their plan participants,
which typically generates higher enrollment rates, our revenue
may not grow at anticipated rates. Even when we have rolled out
our Professional Management service at a particular plan
sponsor, some plan participants may not be eligible for our
services due to plan sponsor limitations on employees treated as
insiders for purposes of securities laws or other
characteristics of the plan participant. Certain securities
within a plan participants account may be ineligible for
management by us, such as employer stock subject to trading
restrictions, and we do not manage or charge a fee for that
portion of the account. Further, individual plan participants
whose accounts we manage may choose at any time to stop having
us manage those accounts. If large numbers of plan participants
choose to stop using or are not able to continue using our
Professional Management service, our revenue, operating results
and financial condition would suffer. The voluntary cancellation
rate by plan participants whose accounts we manage, measured as
a percentage of AUM, was approximately 15% in 2008 and has
averaged approximately 1% per month during our history and less
than 1% per month during 2009. The overall average voluntary
cancellation rate during the first year of membership in our
Professional Management service is approximately 7.4% of such
members. The overall average voluntary cancellation rate is
approximately 6.6% of such members and approximately 3.2% of
such members in the second and third year of service,
respectively. These percentages may not be indicative of future
voluntary cancellation rates, which may increase.
We plan to
extend and expand our services and may not accurately estimate
the impact of developing and introducing these services on our
business.
We plan to extend our services into new areas, including helping
investors turn their retirement assets into retirement income.
For example, we intend to work within the existing 401(k) plans
we service to help our Professional Management members manage
their defined contribution assets and maintain their retirement
goals while directing payouts from their retirement accounts. We
also recently introduced the Financial Engines Retirement
Evaluation, a personalized retirement assessment designed to let
plan participants know how close they are to reaching their
retirement income goals based on their current savings and
investments. We intend to invest significant resources to the
research, development, sales and marketing of these new
services. We have limited experience in these areas, including
the determination of income payments from defined contribution
accounts. If our assessments or forecasts with respect to the
expected duration and sufficiency of assets to support
retirement income payments to participants are inaccurate, or if
we fail to ensure that payouts are made at the times expected,
our business and reputation could suffer. We may not
17
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. If we do not realize
the anticipated benefits of these services, our business would
suffer.
Our revenue is
highly dependent upon a small number of plan providers with
which we have relationships, and the renegotiation or
termination of our relationship with any of these plan providers
could significantly impact our business.
Our relationships and data connections with plan providers allow
us to effectively manage plan participant accounts and integrate
our services into plan providers current service
platforms. These relationships also provide us with an advantage
in trying to sign potential plan sponsors. If a plan provider
were to terminate our contract, reduce its volume of business or
substantially renegotiate the terms of its contract with us, our
revenue could be reduced.
Of our eight primary retirement plan provider relationships, we
refer to three as subadvisory relationships. For the full suite
of services offered in these subadvisory relationships, we
generally act as subadvisor to the plan provider acting as
investment advisor, even though we may contract directly with
the plan sponsor to act as investment advisor for online-only
service offerings. The fees we earn through these three
subadvisory relationships are based on services to more than 640
plan sponsors as of December 31, 2009. However, among the
plan sponsors that work with these three providers, in those
cases 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, and for online-only sponsors, we
may be less able to influence plan sponsor decisions to add our
full suite of services. We have historically earned, and expect
to continue to earn on a combined basis, a significant portion
of our revenue through these three retirement plan providers.
The renegotiation or termination of our relationship with any of
these plan providers could negatively impact our business. In
2009, 19%, 12% and 10% of our total revenue was attributable to
JPMorgan, ING and Vanguard, respectively, the three retirement
plan providers with whom we have subadvisory relationships.
Revenue attributable to these three plan providers includes
subadvisory fees they pay to us directly, as well as revenue
from certain plan sponsors that work with these plan providers
but pay us directly. JPMorgan, Vanguard and ING directly
accounted for approximately 18%, 10% and 8%, respectively, of
our total revenue in 2009.
Our contracts with plan providers generally have terms ranging
from three to five years, and have successive automatic renewal
terms of one year unless terminated in accordance with prior
notice requirements. Certain of the plan provider agreements are
in or will soon be in renewal periods. For example, our contract
with Fidelity will enter a renewal period on April 1, 2010,
and our contract with Vanguard will enter a renewal period on
December 31, 2010, unless a notice of termination is
received by June 30, 2010. A plan provider may also
terminate its contract with us at any time for specified
breaches. In addition, there are unpredictable factors, other
than our performance, that could cause the loss of a plan
provider. If we lose one of our plan providers with whom we have
a relationship or if one of those plan providers significantly
reduces its volume of business with us or renegotiates the
economic terms of its contract with us, our revenue, operating
results and financial condition could be harmed.
Some plan
providers with whom we have relationships also provide or may
provide competing services.
Some plan providers with whom we have relationships, such as
Fidelity, offer or may offer directly competing investment
guidance, advice and portfolio management services to plan
participants. We also face indirect competition from products
that could potentially substitute for our
18
portfolio management, investment advisory and retirement
planning services, most notably target-date retirement funds,
which are offered by a number of plan providers with whom we
have relationships, including J.P. Morgan, Fidelity and
Vanguard.
Our revenue is
highly dependent upon the plan sponsors with whom we have
relationships, and the renegotiation or termination of our
relationship with any of these plan sponsors could significantly
impact our business.
A substantial portion of our revenue is generated as a result of
contracts with plan sponsors. Under these contracts, we earn
annual platform fees that are paid by the plan sponsor, plan
provider or the retirement plan itself as well as fees based on
AUM that are generally paid by plan participants. Revenue from
contracts in place as of December 31, 2008 accounted for
approximately 99% of our total revenue for the year ended
December 31, 2009. Our contracts with plan sponsors
typically have initial terms of three years and evergreen
clauses that extend the initial term until terminated by either
party after a specified notice period. At any time during the
initial term or thereafter, a plan sponsor can cancel a contract
for fiduciary reasons or breach of contract. A plan sponsor can
generally terminate a contract after the initial term upon
90 days notice. As of December 31, 2009, the
cancellation rate for plan sponsors that offered our
Professional Management service over the past 12 months was
approximately 3% of our plan sponsors. If a plan sponsor cancels
or does not renew a contract, we would no longer earn platform
fees under that contract. In addition, we would no longer manage
any assets in that plan, and consequently would no longer earn
fees based on AUM in that plan. If a significant number of plan
sponsors were to cancel their contracts with us or fail to renew
those contracts, our revenue, operating results and financial
condition would be adversely affected.
Our
Professional Management service makes up a significant and
growing part of our revenue base. Our business could suffer if
fees we can charge for these services decline.
We earn fees for our Professional Management service based on
the value of assets in the accounts we manage. In 2009, asset
management fees from our Professional Management service
accounted for approximately 62% of our total revenue. We believe
that these services will continue to make up a substantial and
growing portion of our revenue for the foreseeable future. There
are many investment advisory and management services and other
financial products available in the market place, which could
result in downward pressure on fees for our Professional
Management service. Government regulation, such as legislative
constraints on fees, could also limit the fees we can charge for
our Professional Management service. Performance incentives in
contract terms may reduce the fees we charge for our
Professional Management service. If we are forced to lower the
fees we charge for our Professional Management service, it could
harm our revenue, operating results and financial condition.
Our failure to
increase the number of plan sponsors with whom we have
relationships could harm our business.
Our future success depends on increasing the number of plan
sponsors with whom we have relationships. If the market for our
services declines or develops more slowly than we expect, or the
number of plan sponsors that choose to provide our services to
their plan participants declines or fails to increase as we
expect, our revenue, operating results or financial condition
could suffer.
We rely on
plan providers and plan sponsors to provide us with accurate and
timely plan and plan participant data in order for us to provide
our portfolio management services, investment advice and
retirement help, and we rely on plan providers to execute
transactions in the accounts we manage.
Our ability to provide high-quality portfolio management
services, investment advice and retirement help depends on plan
sponsors and plan providers supplying us with accurate and
timely data. Errors or delays in the data we receive from plan
providers or plan sponsors, or missing data,
19
could lead us to make advisory or transaction errors that could
harm our reputation or lead to financial liability, or may
prevent us from providing our services to, or earning revenue
from, otherwise eligible plan participants. In addition, when we
make changes in an account we manage, we instruct the plan
provider to execute the transactions. If a plan provider fails
to execute transactions in an accurate and timely manner, it
could harm our reputation or lead to financial liability.
We may be
liable to our plan sponsors, plan participants or plan providers
for damages caused by system failures, errors or unsatisfactory
performance of services.
If we fail to prevent, detect or resolve errors in our services,
our business and reputation could suffer. Errors in inputs or
processing, such as plan
set-ups,
transaction instructions or plan participant data, could be
magnified across many accounts. Concentrated positions held by
many plan participants, particularly in employer stock, could
result in a large liability if a systematic input or processing
error was to cause us to make errors in transactions relating to
those positions. We may not be able to identify or resolve these
errors in a timely manner. Since inception of the Professional
Management service in 2004 through December 31, 2009, we
have made payments to plan participants in an aggregate amount
of approximately $360,000 due to system errors and other
incidents. In addition, failure to perform our services for
Professional Management members on a timely basis could result
in liability. We may also have liability to the plan provider
where we have a subadvisory relationship with the plan provider.
After an error is identified, resolving the error and
implementing remedial measures would likely divert the attention
and resources of our management and key technical personnel from
other business concerns. Any errors in the performance of
services for a plan sponsor or plan provider, or poor execution
of these services, could result in a plan sponsor or plan
provider terminating its agreement. Although we attempt to limit
our contractual liability for consequential damages in rendering
our services, these limitations on liability may be
unenforceable in some cases, or may be insufficient to protect
us from liability for damages. ERISA and other applicable laws
require that we meet a fiduciary obligation to plan
participants. We maintain general liability insurance coverage,
including coverage for errors or omissions; however, this
coverage may not continue to be available on reasonable terms or
may be unavailable in sufficient amounts to cover one or more
large claims. An insurer might disclaim coverage as to any
future claim. A successful assertion of one or more large claims
against us that exceeds our available insurance coverage or
changes in our insurance policies, including premium increases
or the imposition of a large deductible or co-insurance
requirement, could harm our operating results and financial
condition.
If our
reputation is harmed, we could suffer losses in our business and
revenue.
Our reputation, which depends on earning and maintaining the
trust and confidence of plan providers, plan sponsors and plan
participants that are current and potential customers, is
critical to our business. Our reputation is vulnerable to many
threats that can be difficult or impossible to control, and
costly or impossible to remediate. Regulatory inquiries or
investigations, lawsuits initiated by other plan fiduciaries or
plan participants, employee misconduct, perceptions of conflicts
of interest and rumors, among other developments, could
substantially damage our reputation, even if they are baseless
or satisfactorily addressed. In addition, any perception that
the quality of our investment advice may not be the same or
better than that of other providers can also damage our
reputation. Any damage to our reputation could harm our ability
to attract and retain plan providers, plan sponsor customers and
key personnel. This damage could also cause plan participants to
stop using or enrolling in our Professional Management service,
which would adversely affect the amount of AUM on which we earn
fees.
20
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 have
increased the frequency and thoroughness of their audits. If we
fail to meet these standards, our plan sponsors and plan
providers may seek to terminate their agreements with us.
Unauthorized disclosure of sensitive or confidential data,
whether through breach of our computer systems, systems failure
or otherwise, could damage our reputation, expose us to
litigation, cause us to lose business, harm our revenue,
operating results or financial condition and subject us to
regulatory action, which could include sanctions and fines.
Privacy
concerns could require us to modify our
operations.
As part of our business, we use plan participants personal
data. For privacy or security reasons, privacy groups,
governmental agencies and individuals may seek to restrict or
prevent our use of this data. We have incurred, and will
continue to incur, expenses to comply with privacy and security
standards and protocols imposed by law, regulation, industry
standards or contractual obligations. Increased domestic or
international regulation of data utilization and distribution
practices, including self-regulation, could require us to modify
our operations and incur significant additional expense, which
could have an adverse effect on our business, financial
condition and results of operations.
Acquisition
activity involving plan providers or plan sponsors could
adversely affect our business.
Acquisitions or similar transactions involving our plan
providers or plan sponsors could negatively affect our business
in a number of ways. After such a transaction, the plan provider
or plan sponsor might terminate, not renew or seek to
renegotiate the economic terms of 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 rollout of our
services. Any of our existing plan sponsors may be acquired by
an organization or a plan sponsor with no relationship with us,
effectively terminating our relationship, or be acquired by a
plan sponsor with an online services-only relationship rather
than a Professional Management relationship which might cause us
to lose business and harm our revenue, operating results or
financial condition. Plan providers could be
21
acquired by a company offering competing services to ours,
which could increase the risk that they terminate their
relationship with us, or be acquired by an organization with no
relationship with us which might cause us to lose that plan
provider, have to renegotiate the economic terms of their
contract with us and harm our revenue, operating results or
financial condition. For example, in late 2009, ING Groep N.V.
announced a restructuring of its business to reduce debt,
including the potential sale of certain divisions. Twelve
percent of our total revenue in 2009 was attributable to ING
Investment Advisors, L.L.C., an indirect subsidiary of ING Groep
N.V. We cannot predict the impact, if any, that these corporate
actions may have on our revenue, operating results or financial
condition.
Our ability to
compete, succeed and generate profits depends, in part, on our
ability to obtain accurate and timely data from third-party
vendors on commercially reasonable terms.
We currently obtain market and other financial data we use to
generate our investment advice from a number of third-party
vendors. Termination of one or more of our agreements or
exclusion from, or restricted use of a data providers
information could decrease the information available for us to
use and offer our clients and may have a material adverse effect
on our business, financial condition or results of operations.
For example, we obtain mutual fund data from Lipper, corporate
action data from Interactive Data, stock data from MSCI
Inc.s Barra unit and stock price data from FTID. We do not
currently have secondary sources or other suppliers for some of
these data items. If these data feed agreements were terminated,
backup services would take time to set up and our business and
results of operations would be harmed. We rely on these data
suppliers to provide timely and accurate information and their
failure to do so could harm our business.
In addition, some data suppliers may seek to increase licensing
fees for providing content to us. If we are unable to
renegotiate acceptable licensing arrangements with these data
suppliers or find alternative sources of equivalent content, we
may experience a reduction in our profit margins or market share.
Our portfolio
management and investment advisory operations may subject us to
liability for losses that result from a breach of our fiduciary
duties.
Our portfolio management and investment advisory operations
involve fiduciary obligations that require us to act in the best
interests of the plan participants to whom we provide advice or
for whom we manage accounts. We may face liabilities for actual
or claimed breaches of our fiduciary duties. We may not be able
to prevent plan participants, plan sponsors or the plan
providers to or through whom we provide investment advisory
services from taking legal action against us for an actual or
claimed breach of a fiduciary duty. Because we currently provide
investment advisory services on substantial assets, we could
face substantial liability to plan participants or plan sponsors
if we breach our fiduciary duties. In addition, we may face
liabilities for actual or claimed deficiencies in the quality or
outcome of our investment advisory recommendations, investment
management and other services, even in the absence of an actual
or claimed breach of fiduciary duty. While we believe that we
would have substantial and meritorious defenses against such a
claim, we cannot predict the outcome or consequences of any such
potential litigation.
Competition
could reduce our share of the portfolio management, investment
advisory and retirement planning market and hurt our financial
performance.
We operate in a highly competitive industry, with many
investment advice providers competing for business from
individual investors, financial advisors and institutional
customers. Direct competitors that offer independent portfolio
management and investment advisory services to plan participants
in the workplace include Morningstar, Inc., GuidedChoice and
ProManage LLC. Plan providers that offer directly competing
portfolio management and investment advisory services to
investors in the workplace include Fidelity and Merrill Lynch.
We currently have a relationship with Fidelity that allows us to
provide our services to plan sponsors 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
22
management services, investment advice and retirement help, most
notably target-date retirement funds. Target-date funds are
offered by multiple financial institutions, including BlackRock
(formerly Barclays Global Investors), T. Rowe Price, Fidelity
and 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. 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, either of which could hurt
our business.
Our future
success depends on our ability to recruit and retain qualified
employees, including our executive officers.
Our ability to provide portfolio management services, investment
advice and retirement help and maintain and develop
relationships with plan participants, plan providers and plan
sponsors depends largely on our ability to attract, train,
motivate and retain highly skilled professionals, particularly
professionals with backgrounds in sales, technology and
financial and investment services. We believe that success in
our business will continue to be based upon the strength of our
intellectual capital. For example, due to the complexity of our
services and the intellectual capital invested in our investment
methodology and technology, the loss of personnel integral to
our investment research, product development and engineering
efforts would harm our ability to maintain and grow our
business. Consequently, we must hire and retain employees with
the technical expertise and industry knowledge necessary to
continue to develop our services and effectively manage our
growing sales and marketing organization to ensure the growth of
our operations. We believe there is significant competition for
professionals with the skills necessary to perform the services
we offer. We experience competition for analysts and other
employees from financial institutions and financial services
organizations such as hedge funds and investment management
companies that generally have greater resources than we do and
therefore may be able to offer higher compensation packages.
Competition for these employees is intense, and we may not be
able to retain our existing employees or be able to recruit and
retain other highly qualified personnel in the future. If we
cannot hire and retain qualified personnel, our ability to
continue to expand our business would be impaired and our
revenue could decline.
If our
intellectual property and technology are not adequately
protected to prevent use or appropriation by our competitors,
our business and competitive position would
suffer.
Our future success and competitive position depend in part on
our ability to protect our proprietary technology and
intellectual property. We rely and expect to continue to rely on
a combination of trademark, copyright, patent and trade secret
protection laws to protect our proprietary technology and
intellectual property. We also require our employees,
consultants, vendors, plan sponsors and plan providers to enter
into confidentiality agreements with us. We have nine issued
U.S. patents, three of which have been issued on our user
interface, four of which relate to outcomes-based investing,
including our financial advisory system, our pricing module and
load-aware optimization, and two of which have been issued on
advice palatability. We also have seven pending U.S. patent
applications. In addition, we have issued patents and pending
applications in foreign jurisdictions. One or more of our issued
patents or pending patent applications may be deemed to be
directed to methods of doing or conducting business, and may
therefore be categorized as so-called
23
business method patents. The general validity of
software patents and business method patents has
been challenged in a number of jurisdictions, including the
United States. The United States Supreme Court is currently
considering a case that may impact the scope of patent eligible
subject matter. Our patents may become less valuable if software
or business methods are found to be a non-patentable subject
matter or if additional requirements are imposed that our
patents do not meet.
The steps we have taken may be inadequate to prevent the
misappropriation of our proprietary technology. Our patent and
trademark applications may not lead to issued patents and
registered trademarks. There can be no assurance that others
will not develop or patent similar or superior technologies,
products or services, or that our patents, trademarks and other
intellectual property will not be challenged, invalidated or
circumvented by others. The legal standards relating to the
validity, enforceability and scope of protection of intellectual
property rights are uncertain and still evolving. Unauthorized
copying or other misappropriation of our proprietary
technologies could enable third parties to benefit from our
technologies without paying us for doing so, which could harm
our business. Policing unauthorized use of proprietary
technology is difficult and expensive and our monitoring and
policing activities may not be sufficient to identify any
misappropriation and protect our proprietary technology. In
addition, third parties may knowingly or unknowingly infringe
our patents, trademarks and other intellectual property rights,
and litigation may be necessary to protect and enforce our
intellectual property rights. If litigation is necessary to
protect and enforce our intellectual property rights, any such
litigation could be very costly and could divert management
attention and resources.
We also expect that the more successful we are, the more likely
it becomes that competitors will try to develop products that
are similar to ours, which may infringe on our proprietary
rights. If we are unable to protect our proprietary rights or if
third parties independently develop or gain access to our or
similar technologies, our business, revenue, reputation and
competitive position could be harmed.
Third parties
may assert intellectual property infringement claims against us,
or our services may infringe the intellectual property rights of
third parties, which may subject us to legal liability and
harm our reputation.
Assertion of intellectual property infringement claims against
us, plan providers or plan sponsors could result in litigation.
We might not prevail in any such litigation or be able to obtain
a license for the use of any infringed intellectual property
from a third party on commercially reasonable terms, or at all.
Even if obtained, we may be unable to protect such licenses from
infringement or misuse, or prevent infringement claims against
us in connection with our licensing efforts. We expect that the
risk of infringement claims against us will increase if more of
our competitors are able to obtain patents for software products
and business processes, and if we hire employees who possess
third party proprietary information. Any such claims, regardless
of their merit or ultimate outcome, could result in substantial
cost to us, divert managements attention and our resources
away from our operations and otherwise harm our reputation. Our
process for controlling employees use of third party
proprietary information may not be sufficient to prevent
assertions of intellectual property infringement claims against
us.
Any inability
to manage our growth could disrupt our business and harm our
operating results.
We expect our growth to place significant demands on our
management and other resources. Our success will depend in part
upon the ability of our senior management to manage growth
effectively. Expansion creates new and increased management and
training responsibilities for our employees. In addition,
continued growth increases the challenges involved in:
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recruiting, training and retaining sufficient skilled technical,
marketing, sales and management personnel;
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preserving our culture, values and entrepreneurial environment;
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successfully expanding the range of services offered to our plan
sponsors and plan participants;
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developing and improving our internal administrative
infrastructure, particularly our financial, operational,
compliance, recordkeeping, communications and other internal
systems; and
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maintaining high levels of satisfaction with our services among
plan sponsors and plan participants.
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Our ability to
raise capital in the future may be limited, and our failure to
raise capital when needed could prevent us from executing our
growth strategy.
In the absence of this offering, we believe that our existing
cash and cash equivalents will be sufficient to fund our planned
capital expenditures and other anticipated cash needs for at
least the next 12 months. If our capital resources are
insufficient to satisfy our liquidity requirements, we may seek
to sell additional equity or debt securities or obtain debt
financing. We have not made arrangements to obtain additional
financing and there is no assurance that financing, if required,
will be available in amounts or on terms acceptable to us, if at
all.
We will be
subject to additional regulatory compliance requirements,
including section 404 of the Sarbanes-Oxley Act of 2002, as
a result of becoming a public company, and our management has
limited experience managing a public company.
We have never operated as a public company and will incur
significant legal, accounting and other expenses that we did not
incur as a private company. The individuals who constitute our
management team have limited experience managing a publicly
traded company, and limited experience complying with the
increasingly complex and changing laws pertaining to public
companies. Our management team and other personnel will need to
devote a substantial amount of time to new compliance
initiatives, and we may not successfully or efficiently manage
our transition into a public company. We expect rules and
regulations such as the Sarbanes-Oxley Act of 2002 to increase
our legal and finance compliance costs and to make some
activities more time-consuming and costly. We will need to hire
a number of additional employees with public accounting and
disclosure experience in order to meet our ongoing obligations
as a public company. For example, Section 404 of the
Sarbanes-Oxley Act of 2002 requires that our management report
on, and our independent auditors to attest to, the effectiveness
of our internal control structure and procedures for financial
reporting in our annual report on
Form 10-K
for the fiscal year ending December 31, 2011.
Section 404 compliance may divert internal resources and
will take a significant amount of time and effort to complete.
We may not be able to successfully complete the procedures and
certification and attestation requirements of Section 404
by the time we will be required to do so. If we fail to do so,
or if in the future our chief executive officer, chief financial
officer or independent registered public accounting firm
determines that our internal controls over financial reporting
are not effective as defined under Section 404, we could be
subject to sanctions or investigations by The NASDAQ Stock
Market, the Securities and Exchange Commission, or the SEC, or
other regulatory authorities. Furthermore, investor perceptions
of our company may suffer, and this could cause a decline in the
market price of our stock. Irrespective of compliance with
Section 404, any failure of our internal controls could
have a material adverse effect on our stated results of
operations and harm our reputation. If we are unable to
implement these changes effectively or efficiently, it could
harm our operations, financial reporting or financial results
and could result in an adverse opinion on internal controls from
our independent auditors.
Our insiders
who are significant stockholders may control the election of our
board and may have interests that conflict with those of other
stockholders.
Our directors and executive officers, together with members of
their immediate families, beneficially owned, in the aggregate,
approximately 47% of our outstanding capital stock as of
25
February 1, 2010. As a result, acting together, this group
has the ability to exercise significant control over most
matters requiring our stockholders approval, including the
election and removal of directors and significant corporate
transactions.
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 portfolio management, investment advisory
and retirement planning services may adversely affect our
business.
We may be adversely affected as a result of new or revised
legislation or regulations imposed by the SEC, Department of
Labor or other U.S. regulatory authorities or
self-regulatory organizations that supervise the financial
markets and retirement industry. In addition, we may be
adversely affected by
26
changes in the interpretation of existing laws and rules by
these governmental authorities and self-regulatory
organizations. It is impossible to determine the extent of the
impact of any new laws, regulations or initiatives that may be
proposed, or whether any of the proposals will become law. It is
difficult to predict the future impact of the broad and
expanding legislative and regulatory requirements affecting our
business. For example, legislation or regulation regarding fees
may affect our business. Future legislation or regulation could
change or eliminate certain existing restrictions relating to
conflicts of interest, which might lower the relative value of
our independence. Changes to laws or regulations could increase
our potential liability for offering portfolio management
services, investment advice and retirement help, affect our
ability to offer our Passive Enrollment option or invalidate
pre-dispute arbitration clauses in our agreements, leading to
increased costs to litigate any claims against us. Changes to
laws or regulations could also increase our legal compliance
costs, divert internal resources and make some activities more
time-consuming and costly. The laws, rules and regulations
applicable to our business may change in the future, and we may
not be able to comply with any such changes. If we fail to
comply with any applicable law, rule or regulation, we could be
fined, sanctioned or barred from providing investment advisory
services in the future, which could materially harm our business
and reputation.
We are subject
to complex regulation, and any compliance failures or regulatory
action could adversely affect our business.
The financial services industry is subject to extensive
regulation at the federal and state levels. It is very difficult
to predict the future impact of the legislative and regulatory
requirements affecting our business. The securities laws and
other laws that govern our activities as a registered investment
advisor are complex and subject to rapid change. The activities
of our investment advisory and management operations are
primarily subject to provisions of the Investment Advisers Act
of 1940, referred to as the Investment Advisers Act, and the
Employee Retirement Income Security Act of 1974, as amended,
referred to as ERISA, as well as certain state laws. We are a
fiduciary under ERISA. Our investment advisory services are also
subject to state laws including anti-fraud laws and regulations.
The Investment Advisers Act addresses, among other things,
fiduciary duties, recordkeeping and reporting requirements 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.
27
In addition, our subadvisory arrangements are structured to
follow Advisory Opinion
2001-09A,
a
Department of Labor opinion provided to SunAmerica Retirement
Markets. Although an advisory opinion provides guidance about
the Department of Labors interpretation of ERISA, it is
directly applicable only to the entity to whom it is issued.
SunAmerica Retirement Markets is an entity unrelated to us or
the plan providers to 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 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
28
and cost-effective manner, and our failure to do so could harm
our business, including materially reducing our revenue and
operating results. Further, a key aspect of our growth strategy
is to expand our investment research capabilities and introduce
new services. In 2009, our research and development expense
represented 18% of our total revenue, as compared to 19% in
2008. We expect that our research and development expense will
continue to represent a meaningful percentage of our revenue in
the future. A viable market for our new service offerings may
not exist or develop, and our offerings may not be well received
by potential plan sponsor customers or individual plan
participants or investors.
Risks Related to
this Offering and our Common Stock
Our share
price may be volatile and you may be unable to sell your shares
at or above the offering price.
Prior to this offering, there has not been a public market for
our common stock. We cannot predict the extent to which a
trading market will develop or how liquid that market might
become. The initial public offering price for our shares will be
determined by negotiations between us and the representative of
the underwriters and may not be indicative of prices that will
prevail in the trading market. The market price of shares of our
common stock could be subject to wide fluctuations in response
to many risk factors listed in this section, 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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changes in the economic performance or market valuations of
other companies engaged in providing portfolio management
services, investment advice and retirement help;
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loss of a significant amount of existing business;
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actual or anticipated changes in our growth rate relative to our
competitors;
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actual or anticipated fluctuations in our competitors
operating results or changes in their growth rates;
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issuance of new or updated research or reports by securities
analysts;
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our announcement of actual results for a fiscal period that are
higher or lower than projected results or our announcement of
revenue or earnings guidance that is higher or lower than
expected;
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regulatory developments in our target markets affecting us, our
plan sponsors or our competitors;
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fluctuations in the valuation of companies perceived by
investors to be comparable to us;
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share price and volume fluctuations attributable to inconsistent
trading volume levels of our shares;
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sales or expected sales of additional common stock;
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terrorist attacks or natural disasters or other such events
impacting countries where we or our plan sponsors have
operations; and
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general economic and market conditions.
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Furthermore, the stock markets have experienced extreme price
and volume fluctuations that have affected and continue to
affect the market prices of equity securities of many companies.
These fluctuations often have been unrelated or disproportionate
to the operating performance of those companies. These broad
market and industry fluctuations, as well as general economic,
political and market conditions such as recessions, interest
rate changes or international currency fluctuations, may cause
the market price of shares of our common stock to decline. If
the market price of shares of our common stock after this
offering does not exceed the initial public offering price, you
may not
29
realize any return on your investment in us and may lose some or
all of your investment. In the past, companies that have
experienced volatility in the market price of their stock have
been subject to securities class action litigation. We may be
the target of this type of litigation in the future. Securities
litigation against us could result in substantial costs and
divert our managements attention from other business
concerns, which could seriously harm our business.
If securities
or industry analysts do not publish research or reports about
our business, or if they change their recommendations regarding
our stock adversely, our stock price and trading volume could
decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us or our business. If one or more of the analysts
who cover us downgrade our stock, our stock price would likely
decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could
cause our stock price or trading volume to decline.
Substantial
future sales of our common stock in the public market could
cause our stock price to fall.
Additional sales of our common stock in the public market after
this offering, or the perception that these sales could occur,
could cause the market price of our common stock to decline.
Upon completion of this offering, we will have
39,505,577 shares of common stock outstanding. All shares
sold in this offering will be freely transferable without
restriction or additional registration under the Securities Act
of 1933. The remaining 28,605,577 shares of common stock
outstanding after this offering will be available for sale as
follows:
|
|
|
Number of Shares
|
|
Date of Availability for
Sale
|
|
|
|
|
28,148,934
|
|
163 days after the date of this prospectus, subject to
extension as described below, due to the release of the lock-up
agreements these stockholders have with the underwriters.
|
|
|
|
456,643
|
|
At some point after 163 days after the date of this
prospectus, subject to extension as described below, and subject
to vesting requirements and the requirements of Rule 144
(subject, in the case of affiliates, to volume limitations) or
Rule 701.
|
Our directors, executive officers and substantially all of our
stockholders have agreed, with limited exceptions, that they
will not sell any shares of common stock owned by them without
the prior written consent of Goldman, Sachs & Co., on
behalf of the underwriters, for a period of 163 days from
the date of this prospectus; provided, however, that if
(1) during the last 17 days of the initial
lock-up
period, we release earnings results or announce material news or
a material event or (2) prior to the expiration of the
initial
lock-up
period, we announce that we will release earnings results during
the
15-day
period following the last day of the initial
lock-up
period, then in each case the
lock-up
period will be automatically extended until the expiration of
the
17-day
period beginning on the date of release of the earnings results
or the announcement of the material news or material event, as
applicable, unless Goldman, Sachs & Co. waives, in
writing, such extension. As a result, the maximum possible
lock-up
period is 180 days beginning on the date of this
prospectus. At any time and without public notice, Goldman,
Sachs & Co. may in its sole discretion release some or
all of the securities from these
lock-up
agreements. As resale restrictions end, the market price of our
common stock could decline if the holders of those shares sell
them or are perceived by the market as intending to sell them.
In addition, after this offering, the holders of approximately
23,688,603 shares of common stock, excluding the shares
sold in this offering by the selling stockholders, including
shares of common stock issuable upon conversion of our preferred
stock upon the completion of this offering, will be entitled to
rights to cause us to register the sale of those shares under
the Securities
30
Act. All of these shares are subject to the
163-day
lock-up,
subject to extension as described above. Registration of these
shares under the Securities Act would result in these shares
becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of the
registration.
We intend to file a registration statement under the Securities
Act covering 3,326,788 shares of common stock reserved for
issuance under our stock plans. This registration statement is
expected to be filed soon after the date of this prospectus and
will automatically become effective upon filing. Accordingly,
shares registered under this registration statement will be
available for sale in the open market unless those shares are
subject to vesting restrictions with us or the contractual
restrictions described above.
As a new
investor, you will experience immediate and substantial
dilution.
Purchasers in this offering will immediately experience
substantial dilution in net tangible book value. Because our
common stock has been sold in the past at prices substantially
lower than the initial public offering price that you will pay,
you will suffer immediate dilution of $8.39 per share in net
tangible book value, based on an assumed initial offering price
of $10.00 per share of common stock. The exercise of outstanding
options may result in further dilution. In addition, we may
raise additional capital through public or private equity or
debt offerings, subject to market conditions. To the extent that
additional capital is raised through the sale of equity or
convertible debt securities, the issuance could result in
further dilution to our stockholders.
Management may
apply our net proceeds from this offering to uses that do not
increase our market value or improve our operating
results.
We intend to use our net proceeds from this offering for general
corporate purposes, including as yet undetermined amounts
related to working capital and capital expenditures. Our
management will have considerable discretion in applying our net
proceeds, and you will not have the opportunity, as part of your
investment decision, to assess whether we are using our net
proceeds appropriately. Until the net proceeds we receive are
used, they may be placed in investments that do not produce
income or that lose value. We may use our net proceeds for
purposes that do not result in any increase in our results of
operations, which could cause the price of our common stock to
decline.
Delaware law
and our corporate charter and bylaws will contain anti-takeover
provisions that could delay or discourage takeover attempts that
stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws that
we intend to adopt before the completion of this offering may
have the effect of delaying or preventing a change of control or
changes in our management. These provisions include the
following:
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|
|
|
|
the right of the board of directors to elect a director to fill
a vacancy created by the expansion of the board of directors;
|
|
|
|
the classification of our board of directors so that only a
portion of our directors are elected each year, with each
director serving a three-year term;
|
|
|
|
the requirement for advance notice for nominations for election
to the board of directors or for proposing matters that can be
acted upon at a stockholders meeting;
|
|
|
|
the ability of the board of directors to alter our bylaws
without obtaining stockholder approval;
|
|
|
|
the ability of the board of directors to issue, without
stockholder approval, up to 10,000,000 shares of preferred
stock with rights set by the board of directors, which rights
could be senior to those of common stock;
|
|
|
|
the required approval of holders of at least two-thirds of the
shares entitled to vote at an election of directors to adopt,
amend or repeal our bylaws or amend or repeal the provisions of
|
31
|
|
|
|
|
our certificate of incorporation regarding the election and
removal of directors and the ability of stockholders to take
action by written consent; and
|
|
|
|
|
|
the elimination of the right of stockholders to call a special
meeting of stockholders and to take action by written consent.
|
In addition, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law. These
provisions may prohibit or restrict large stockholders, in
particular, those owning 15% or more of our outstanding voting
stock, from merging or combining with us. These provisions in
our certificate of incorporation and bylaws and under Delaware
law could discourage potential takeover attempts and could
reduce the price that investors might be willing to pay for
shares of our common stock in the future and result in our
market price being lower than it would without these provisions.
We do not
currently intend to pay dividends on our common stock, and
consequently, your ability to achieve a return on your
investment will depend on appreciation in the price of our
common stock.
We have never declared or paid any cash dividends on our common
stock and do not currently intend to do so for the foreseeable
future. We currently intend to invest our future earnings, if
any, to fund our growth. In addition, the provisions of our term
loan prohibit us from paying cash dividends. Therefore, you are
not likely to receive any dividends on your common stock for the
foreseeable future and the success of an investment in shares of
our common stock will depend upon any future appreciation in
their value. There is no guarantee that shares of our common
stock will appreciate in value or even maintain the price at
which our stockholders have purchased their shares.
32
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
risks and uncertainties. The forward-looking statements are
contained principally in the sections entitled Prospectus
Summary, Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Business. In some cases, you
can identify forward-looking statements by terms such as
may, might, will,
objective, intend, should,
could, can, would,
expect, believe, design,
estimate, predict,
potential, plan, or the negative of
these terms, and similar expressions intended to identify
forward-looking statements. These statements reflect our current
views with respect to future events and are based on assumptions
and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements. Forward-looking statements include,
but are not limited to, statements about:
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|
|
|
|
anticipated trends and challenges in our business and the
markets in which we operate;
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|
|
|
the capabilities, benefits and effectiveness of our services;
|
|
|
|
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 anticipated growth strategies;
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|
|
|
our ability to retain and attract customers;
|
|
|
|
our regulatory environment;
|
|
|
|
our legal proceedings;
|
|
|
|
intellectual property;
|
|
|
|
our expectations regarding competition;
|
|
|
|
use of proceeds; and
|
|
|
|
sources of new 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.
We discuss many of these risks in this prospectus in greater
detail under the heading Risk Factors. Also, these
forward-looking statements represent our estimates and
assumptions only as of the date of this prospectus. Unless
required by U.S. federal securities laws, we do not intend
to update any of these forward-looking statements to reflect
circumstances or events that occur after the statement is made.
You should read this prospectus and the documents that we
reference in this prospectus and have filed as exhibits to the
registration statement, of which this prospectus is a part,
completely and with the understanding that our actual future
results may be materially different from what we expect. We
qualify all of our forward-looking statements by these
cautionary statements.
33
USE OF
PROCEEDS
We estimate that we will receive net proceeds from this offering
of approximately $52.2 million, based on an assumed initial
public offering price of $10.00 per share, the mid-point of the
range set forth on the cover of this prospectus, after deducting
the estimated underwriting discounts and commissions and
estimated offering expenses payable by us. A $1.00 increase
(decrease) in the assumed initial public offering price of
$10.00 per share would increase (decrease) the net proceeds to
us from this offering by approximately $5.5 million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
The principal purposes for this offering are to increase our
working capital, create a public market for our common stock,
facilitate our access to the public capital markets and increase
our visibility in our markets.
We currently intend to use our proceeds from this offering for
general corporate purposes, including working capital and
capital expenditures.
As of the date of this prospectus, however, we have not
determined all of the anticipated uses for the proceeds of this
offering or the amounts that we will actually spend on the uses
set forth above. The amount and timing of actual expenditures
may vary significantly depending upon a number of factors,
including the amount of cash generated from our operations,
competitive and technological developments and the rate of
growth, if any, of our business. Accordingly, our management
will have significant flexibility in applying the net proceeds
of this offering. Pending use of the net proceeds as described
above, we intend to invest the net proceeds of this offering in
short-term, interest-bearing, investment-grade securities.
We will not receive any proceeds from the sale of shares of
common stock by the selling stockholders.
DIVIDEND
POLICY
We have never declared or paid any cash dividends on our capital
stock. We expect to retain all of our earnings to finance the
expansion and development of our business and we do not
currently intend to pay any cash dividends on our capital stock
in the foreseeable future. We expect to retain future earnings,
if any, to fund the development and growth of our business. Our
board of directors will determine future dividends, if any. Our
term loan currently prohibits us from paying dividends. See the
section entitled Managements Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources.
34
CAPITALIZATION
The following table describes our capitalization as of
December 31, 2009:
|
|
|
|
|
on a pro forma basis to give effect to the issuance of
22,441,623 shares of common stock upon the conversion of
all of our outstanding shares of preferred stock, 456,643 shares
of common stock to be issued to holders of Series E preferred
stock upon the completion of this offering and the filing of our
amended and restated certificate of incorporation upon the
completion of this offering; and
|
|
|
|
|
|
on a pro forma basis to give effect to the issuance of
22,441,623 shares of common stock issuable upon the
conversion of all of our outstanding shares of preferred stock
upon completion of this offering and 456,643 shares of
common stock to be issued to holders of Series E preferred stock
upon the completion of this offering, as adjusted to further
reflect the sale by stockholders of 91,988 shares of common
stock to be issued upon exercise of vested stock options
immediately prior to the completion of this offering with net
proceeds to us of $0.3 million and the sale by us of
5,868,100 shares of common stock in this offering at an
assumed initial public offering price of $10.00 per share,
the mid-point of the price range set forth on the cover of this
prospectus, after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
|
You should read this table together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the related notes appearing elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
(In thousands, except share data, unaudited)
|
|
|
Cash and cash equivalents
|
|
$
|
20,713
|
|
|
$
|
20,713
|
|
|
$
|
73,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank borrowings
|
|
$
|
8,055
|
|
|
$
|
$8,055
|
|
|
$
|
8,055
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value per share;
24,192,000 shares authorized, 22,441,623 shares issued
and outstanding, actual; 10,000,000 shares authorized; no
shares issued or outstanding, pro forma; no shares issued
or outstanding, pro forma as adjusted
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value per share;
47,650,000 shares authorized, 10,647,223 shares issued
and outstanding, actual; 33,545,489 shares issued and
outstanding, pro forma; 500,000,000 shares authorized,
39,505,577 shares issued and outstanding, pro forma as
adjusted
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
Additional paid-in capital
|
|
|
182,018
|
|
|
|
182,018
|
|
|
|
234,264
|
|
Deferred compensation
|
|
|
(394
|
)
|
|
|
(394
|
)
|
|
|
(394
|
)
|
Accumulated deficit
|
|
|
(157,361
|
)
|
|
|
(157,361
|
)
|
|
|
(157,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
24,266
|
|
|
|
24,266
|
|
|
|
76,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
32,321
|
|
|
$
|
32,321
|
|
|
$
|
84,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
The actual, pro forma and pro forma as adjusted information set
forth in the table above:
|
|
|
|
|
excludes 11,630,440 shares of common stock issuable upon
the exercise of options outstanding as of December 31,
2009, at a weighted average exercise price of $6.07 per share;
|
|
|
|
|
|
excludes 2,000,000 shares of common stock reserved for
future issuance under our 2009 Stock Incentive Plan following
the date of this offering, as well as shares originally reserved
for issuance under our 1998 Stock Plan, but which may become
available for awards under our 2009 Stock Incentive Plan as
described below;
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|
|
|
|
|
excludes 25,000 shares reserved for future issuance under
our Special Executive Restricted Stock Plan; and
|
|
|
|
|
|
assumes no exercise of the option to purchase additional shares
granted to the underwriters.
|
As of December 31, 2009, 1,326,788 shares remained
available for future issuance under our 1998 Stock Plan. Upon
the completion of this offering, no shares of our common stock
will remain available for future issuance under our 1998 Stock
Plan. Shares originally reserved for issuance under our 1998
Stock Plan, but which are not subject to outstanding options on
the effective date of our 2009 Stock Incentive Plan, and shares
subject to outstanding options under our 1998 Stock Plan on the
effective date of our 2009 Stock Incentive Plan that are
subsequently forfeited or terminated for any reason before being
exercised, up to a number of additional shares not to exceed
2,000,000, will also become available for awards under our 2009
Stock Incentive Plan.
If the underwriters exercise their option to purchase additional
shares of common stock in full, assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us, net proceeds to us would increase by
approximately $15.2 million.
A $1.00 increase (decrease) in the assumed initial public
offering price of $10.00 per share would increase (decrease) the
net proceeds to us from this offering by approximately
$5.5 million, or by approximately $7.0 million if the
underwriters exercise their option to purchase additional shares
of common stock in full, assuming the number of shares offered
by us, as set forth on the cover page of this prospectus,
remains the same and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses
payable by us.
36
DILUTION
Our pro forma net tangible book value as of December 31,
2009 was $11.3 million, or $0.34 per share of common stock.
Pro forma net tangible book value per share represents the
amount of our total tangible assets less total liabilities,
divided by the pro forma number of shares of common stock
outstanding, assuming the issuance of 22,441,623 shares of
common stock upon the conversion of all of our outstanding
shares of series A preferred stock, series B preferred
stock, series C preferred stock, series D preferred
stock, series E preferred stock and series F preferred
stock and the issuance of 456,643 shares of common stock to be
issued to holders of series E preferred stock upon the
completion of this offering. Net tangible book value dilution
per share represents the difference between the amount per share
paid by purchasers of shares of common stock in this offering
and the pro forma net tangible book value per share of common
stock immediately after completion of this offering on a pro
forma as adjusted basis. After giving effect to the sale by
stockholders of 91,988 shares of common stock to be issued
upon exercise of vested stock options immediately prior to the
completion of this offering and the sale of the
5,868,100 shares of common stock by us at an assumed
initial public offering price of $10.00 per share, which is the
mid-point of the price range set forth on the cover of this
prospectus, and the application of our estimated net proceeds
from the offering, and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us, our net tangible book value as of
December 31, 2009 would have been $63.5 million, or
$1.61 per share of common stock. This represents an immediate
increase in net tangible book value of $1.27 per share of common
stock to existing common stockholders and an immediate dilution
in net tangible book value of $8.39 per share to new investors
purchasing shares of common stock in this offering. The
following table illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share
|
|
|
|
|
|
$
|
10.00
|
|
Pro forma net tangible book value per share before this offering
|
|
$
|
0.34
|
|
|
|
|
|
Increase in pro forma net tangible book value per share
attributable to new investors
|
|
|
1.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share after this offering
|
|
|
|
|
|
|
1.61
|
|
|
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share to new
investors
|
|
|
|
|
|
$
|
8.39
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $10.00 per share would increase (decrease) the
net proceeds to us from this offering by approximately
$5.5 million, assuming the number of shares offered by us,
as set forth on the cover page of this prospectus, remains the
same and after deducting the estimated underwriting discounts
and commissions and estimated offering expenses payable by us.
The following table summarizes as of December 31, 2009, on
the pro forma basis described above, the number of shares of
common stock purchased from us, the total consideration paid and
the average price per share paid by existing and new investors
purchasing shares of common stock in this offering, before
deducting the estimated underwriting discounts and commissions
and estimated offering expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per Share
|
|
|
Existing stockholders
|
|
|
33,545,489
|
|
|
|
84.9
|
%
|
|
$
|
166,494,474
|
|
|
|
73.9
|
%
|
|
$
|
4.96
|
|
New investors (shares sold upon exercise of stock options)
|
|
|
91,988
|
|
|
|
0.2
|
|
|
|
273,866
|
|
|
|
0.1
|
|
|
|
2.98
|
|
New investors (shares sold by us)
|
|
|
5,868,100
|
|
|
|
14.9
|
|
|
|
58,681,000
|
|
|
|
26.0
|
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
39,505,577
|
|
|
|
100.0
|
%
|
|
$
|
225,449,340
|
|
|
|
100.0
|
%
|
|
$
|
5.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
The table above:
|
|
|
|
|
excludes 11,630,440 shares of common stock issuable upon
the exercise of options outstanding as of December 31,
2009, except 91,988 shares to be issued and sold in this
offering upon the exercise of vested stock options, at a
weighted average exercise price of $6.07 per share;
|
|
|
|
|
|
excludes 2,000,000 shares of common stock reserved for
future issuance under our 2009 Stock Incentive Plan following
the date of this offering, as well as shares originally reserved
for issuance under our 1998 Stock Plan, but which may become
available for awards under our 2009 Stock Incentive Plan as
described below;
|
|
|
|
|
|
excludes 25,000 shares reserved for future issuance under
our Special Executive Restricted Stock Plan;
|
|
|
|
|
|
includes 456,643 shares of common stock to be issued by us
upon the completion of this offering;
|
|
|
|
|
|
assumes no exercise of the option to purchase additional shares
granted to the underwriters; and
|
|
|
|
|
|
excludes amounts paid by us in connection with the repurchase,
forfeiture or cancellation of shares of our common stock.
|
To the extent that any outstanding options are exercised, there
will be further dilution to new investors.
As of December 31, 2009, 1,326,788 shares remained
available for future issuance under our 1998 Stock Plan. Upon
the completion of this offering, no shares of our common stock
will remain available for future issuance under our 1998 Stock
Plan. Shares originally reserved for issuance under our 1998
Stock Plan, but which are not subject to outstanding options on
the effective date of our 2009 Stock Incentive Plan, and shares
subject to outstanding options under our 1998 Stock Plan on the
effective date of our 2009 Stock Incentive Plan that are
subsequently forfeited or terminated for any reason before being
exercised, up to a number of additional shares not to exceed
2,000,000, will also become available for awards under our 2009
Stock Incentive Plan.
Sales by selling stockholders in this offering will reduce the
number of shares of common stock held by existing stockholders
to 28,605,577 or approximately 72.4% of the total number of
shares of common stock outstanding after this offering and will
increase the number of shares of common stock held by new
investors by 5,031,900 to approximately 27.6% of the total
number of shares of common stock outstanding after this offering.
38
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be
read together with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our audited consolidated financial statements and related
notes included elsewhere in this prospectus. The selected
consolidated balance sheet data as of December 31, 2008 and
2009, and the selected consolidated statements of operations
data for each of the years ended December 31, 2007, 2008
and 2009, have been derived from our audited consolidated
financial statements which are included elsewhere in this
prospectus. The selected consolidated balance sheet data as of
December 31, 2005, 2006 and 2007 and the selected
consolidated statements of operations data for the years ended
December 31, 2005 and 2006 have been derived from our
audited consolidated financial statements not included in this
prospectus. Historical results are not necessarily indicative of
the results to be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Management
|
|
$
|
4,302
|
|
|
$
|
14,597
|
|
|
$
|
28,226
|
|
|
$
|
38,963
|
|
|
$
|
52,579
|
|
Platform
|
|
|
26,636
|
|
|
|
28,950
|
|
|
|
31,374
|
|
|
|
29,498
|
|
|
|
30,048
|
|
Other
|
|
|
7,887
|
|
|
|
4,686
|
|
|
|
3,750
|
|
|
|
2,810
|
|
|
|
2,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
38,825
|
|
|
|
48,233
|
|
|
|
63,350
|
|
|
|
71,271
|
|
|
|
84,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of amortization of internal use
software)
|
|
|
12,990
|
|
|
|
15,691
|
|
|
|
20,602
|
|
|
|
27,588
|
|
|
|
29,573
|
|
Research and development
|
|
|
11,732
|
|
|
|
14,233
|
|
|
|
14,643
|
|
|
|
13,663
|
|
|
|
15,618
|
|
Sales and marketing
|
|
|
15,728
|
|
|
|
18,807
|
|
|
|
19,871
|
|
|
|
21,157
|
|
|
|
22,515
|
|
General and administrative
|
|
|
5,257
|
|
|
|
5,557
|
|
|
|
6,663
|
|
|
|
6,613
|
|
|
|
7,679
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
Amortization of internal use software
|
|
|
1,756
|
|
|
|
2,499
|
|
|
|
3,070
|
|
|
|
2,258
|
|
|
|
2,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
47,463
|
|
|
|
56,787
|
|
|
|
64,849
|
|
|
|
74,310
|
|
|
|
78,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(8,638
|
)
|
|
|
(8,554
|
)
|
|
|
(1,499
|
)
|
|
|
(3,039
|
)
|
|
|
6,784
|
|
Interest expense
|
|
|
(8
|
)
|
|
|
(317
|
)
|
|
|
(961
|
)
|
|
|
(799
|
)
|
|
|
(612
|
)
|
Interest and other income, net
|
|
|
490
|
|
|
|
896
|
|
|
|
687
|
|
|
|
236
|
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(8,156
|
)
|
|
|
(7,975
|
)
|
|
|
(1,773
|
)
|
|
|
(3,602
|
)
|
|
|
6,523
|
|
Income tax expense
|
|
|
12
|
|
|
|
8
|
|
|
|
31
|
|
|
|
12
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(8,168
|
)
|
|
|
(7,983
|
)
|
|
|
(1,804
|
)
|
|
|
(3,614
|
)
|
|
|
5,689
|
|
Less: Preferred stock dividend
|
|
|
697
|
|
|
|
930
|
|
|
|
|
|
|
|
2,362
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of common stock
|
|
$
|
(8,865
|
)
|
|
$
|
(8,913
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(5,976
|
)
|
|
$
|
4,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to holders of common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.06
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
(1.06
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.13
|
|
Shares used to compute net income (loss) per share attributable
to holders of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,340
|
|
|
|
8,879
|
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
10,106
|
|
Diluted
|
|
|
8,340
|
|
|
|
8,879
|
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
34,866
|
|
Pro forma net income per share (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
Diluted
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.16
|
|
Shares used to compute pro forma net income per share
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,005
|
|
Diluted
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA
(2)
|
|
$
|
(3,855
|
)
|
|
$
|
(856
|
)
|
|
$
|
8,333
|
|
|
$
|
8,409
|
|
|
$
|
19,553
|
|
Adjusted net income
(loss)
(3)
|
|
|
(7,253
|
)
|
|
|
(5,024
|
)
|
|
|
2,612
|
|
|
|
3,006
|
|
|
|
11,592
|
|
39
|
|
|
(1)
|
|
See Note 2 to our consolidated
financial statements for an explanation of the method used to
calculate basic and diluted net income per share and the
unaudited pro forma basic and diluted net income per share for
the year ended December 31, 2009. All shares to be issued
in the offering were excluded from the unaudited pro forma basic
and diluted net income per share calculation since the proceeds
will be used for general corporate purposes.
|
|
|
|
(2)
|
|
The table below sets forth a
reconciliation of net income (loss) to adjusted EBITDA based on
our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, unaudited)
|
|
|
Net income (loss)
|
|
$
|
(8,168
|
)
|
|
$
|
(7,983
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
Interest (income) expense, net
|
|
|
(477
|
)
|
|
|
(580
|
)
|
|
|
352
|
|
|
|
563
|
|
|
|
605
|
|
Income tax expense
|
|
|
12
|
|
|
|
8
|
|
|
|
31
|
|
|
|
12
|
|
|
|
834
|
|
Depreciation
|
|
|
1,219
|
|
|
|
1,388
|
|
|
|
1,284
|
|
|
|
1,641
|
|
|
|
1,729
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
Amortization of internal use software
|
|
|
1,756
|
|
|
|
2,488
|
|
|
|
3,020
|
|
|
|
2,196
|
|
|
|
2,711
|
|
Amortization of direct response advertising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Amortization of deferred sales commissions
|
|
|
888
|
|
|
|
864
|
|
|
|
1,034
|
|
|
|
991
|
|
|
|
1,153
|
|
Stock-based compensation expense
|
|
|
915
|
|
|
|
2,959
|
|
|
|
4,416
|
|
|
|
3,589
|
|
|
|
6,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
(3,855
|
)
|
|
$
|
(856
|
)
|
|
$
|
8,333
|
|
|
$
|
8,409
|
|
|
$
|
19,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
The table below sets forth a
reconciliation of net income (loss) to adjusted net income
(loss) based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, unaudited)
|
|
|
Net income (loss)
|
|
$
|
(8,168
|
)
|
|
$
|
(7,983
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
Stock-based compensation expense, net of tax
(1)
|
|
|
915
|
|
|
|
2,959
|
|
|
|
4,416
|
|
|
|
3,589
|
|
|
|
5,903
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income (loss)
|
|
$
|
(7,253
|
)
|
|
$
|
(5,024
|
)
|
|
$
|
2,612
|
|
|
$
|
3,006
|
|
|
$
|
11,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In 2009, we adjusted stock-based compensation at our effective
tax rate of 12.8%. In 2005, 2006, 2007 and 2008, we did not
adjust stock-based compensation as income taxes were minimal for
each of these periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
|
(In thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,156
|
|
|
$
|
18,196
|
|
|
$
|
15,015
|
|
|
$
|
14,857
|
|
|
$
|
20,713
|
|
Working capital
|
|
|
5,715
|
|
|
|
13,268
|
|
|
|
16,390
|
|
|
|
2,490
|
|
|
|
16,562
|
|
Total assets
|
|
|
28,697
|
|
|
|
36,755
|
|
|
|
42,108
|
|
|
|
42,302
|
|
|
|
58,352
|
|
Bank borrowings and note payable
|
|
|
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
13,500
|
|
|
|
8,055
|
|
Total liabilities
|
|
|
16,951
|
|
|
|
28,988
|
|
|
|
30,594
|
|
|
|
31,033
|
|
|
|
34,086
|
|
Total stockholders equity
|
|
|
11,746
|
|
|
|
7,767
|
|
|
|
11,514
|
|
|
|
11,269
|
|
|
|
24,266
|
|
40
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read together with
Selected Consolidated Financial Data and our
consolidated financial statements and related notes appearing
elsewhere in this prospectus. In addition to historical
information, this discussion and analysis contains
forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a
variety of factors, including but not limited to, those set
forth under Risk Factors and elsewhere in this
prospectus.
Overview
We are a leading provider of independent, technology-enabled
portfolio management, investment advice and retirement help to
participants in employer-sponsored defined contribution
retirement plans, such as 401(k) plans. We use our proprietary
advice technology platform to provide our services to millions
of retirement plan participants on a cost-efficient basis. Our
business model is based on workplace delivery of our services.
We target three key constituencies in the retirement plan
market: plan participants, plan sponsors and plan providers.
We deliver our services to plan sponsors and plan participants
primarily through existing connections with eight retirement
plan providers. We target large plan sponsors across a wide
range of industries, and, as of December 31, 2009, had
signed contracts to make our services available through 116
Fortune 500 companies and eight Fortune 20 companies.
As of December 31, 2009, we were under contract to provide
either our full suite of services, including Professional
Management, Online Advice and Retirement Evaluation, or our
Online Advice service only, through more than 760 plan sponsors
with approximately 7.4 million plan participants whose
retirement savings represented more than $500 billion in
assets. Within this group, we provide our full suite of services
to 354 plan sponsors representing approximately 3.9 million
participants and approximately $269 billion in Assets Under
Contract, or AUC. As of December 31, 2009, we had
approximately $25.7 billion in Assets Under Management, or
AUM, and managed the accounts of approximately 391,000 members
who have delegated investment decision-making authority to us.
Financial Engines was co-founded in 1996 by Professor William F.
Sharpe, a recipient of the 1990 Nobel Prize in Economic Sciences
for his pioneering work on the theory of financial economics,
including how prices of financial assets are determined and the
link between risk and return, Professor Joseph A. Grundfest, a
former SEC commissioner and a professor of law at Stanford Law
School, and the late Craig Johnson, then Chairman of the Venture
Law Group. The company was founded to address the need for
independent investment advice. Traditionally, high quality,
personalized investment advice had been available only to large
institutions and the affluent. Professor Sharpes vision
was to leverage technology to make high quality independent
advice available to millions regardless of their wealth or
investment expertise.
A pioneer in our market, we introduced our Online Advice service
in 1998. Following the introduction of Online Advice, we focused
on expanding our service offerings to provide investors with
advice on multiple tax-deferred accounts and taxable
investments. Over the next five years, we made significant
investments in technology and usability of our platform that
allowed us to expand and enhance our service offerings,
including our Retirement Evaluation, a personalized printed
retirement assessment. In 2004, we launched our Professional
Management service to provide personalized and professional
portfolio management to retirement plan participants.
As part of our growth strategy, we plan to:
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increase penetration within our current plan sponsors that
provide our Professional Management service by increasing
enrollment in managed accounts and converting plans from Active
Enrollment to Passive Enrollment;
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use our existing technology, expertise and plan provider
relationships to enhance and extend our services to include
assisting individual investors with IRA accounts and those who
are retired and draw income from their investments;
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expand the number of retirement plan sponsors through our
existing relationships with plan providers; and
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offer our Professional Management service to plan sponsors that
currently only provide our Online Advice service.
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We benefit from a number of attributes of our business model,
such as:
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Subscription-Based Revenue.
The
majority of our revenue base in a given year consists of
recurring revenue earned from contracts in place prior to the
beginning of that year. Revenue from contracts in place as of
December 31, 2008 accounted for approximately 99% of our
total revenue for the year ended December 31, 2009. Our
contracts with plan providers generally have initial terms
ranging from three to five years, and have successive automatic
renewal terms of one year unless terminated in accordance with
prior notice requirements. Some of our plan provider agreements
are in, or will soon be in, renewal periods. In addition, our
contracts with plan sponsors typically have initial terms of
three years and evergreen clauses that extend the initial term
until terminated by either party after a specified notice
period. At any time during the initial term or thereafter, a
plan sponsor can cancel a contract for fiduciary reasons or
breach of contract. A plan sponsor can generally terminate a
contract after the initial term upon 90 days notice. Since
the launch of our Professional Management service in 2004, we
have retained over 96% of our plan sponsors each year.
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Favorable Cost Structure.
We provide
our services from a proprietary advice technology platform. In
addition, once we establish a relationship with a plan provider,
our ongoing costs to manage existing member accounts are
significantly lower and we are able to add new plan sponsors and
plan participants with less than pro rata incremental expenses.
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In evaluating our results, we focus on several key operating
metrics and financial data including AUC, enrollment rate, AUM,
GAAP net income, adjusted EBITDA and adjusted net income. Given
our business model, we believe AUC and enrollment rate are
indicators of our growth potential.
Revenue
We generate revenue primarily from management fees on AUM as
well as from platform fees by providing portfolio management
services, investment advice and retirement help to plan
participants of employer-sponsored retirement plans.
Professional Management.
We derive
Professional Management revenue from management fees paid by
plan participants for our Professional Management service. Our
Professional Management service is a discretionary investment
management service, which includes a Retirement Plan analyzing
investments, contribution rate and projected retirement income,
and a Retirement Checkup designed to help plan participants to
develop a strategy for closing the gap, if any, between the
participants retirement goal and current retirement income
forecast. The services are generally made available to plan
participants in a 401(k) plan by written agreements between
Financial Engines and the plan provider, plan sponsor and the
plan participant.
The arrangement generally provides for management fees based on
the value of assets we manage for plan participants, and is
generally payable quarterly in arrears. Our Professional
Management revenue is generally the product of managed accounts
fee rates and the value of AUM at the end of each quarter.
The following section discusses the factors affecting our AUM,
and as a consequence, our Professional Management revenue.
42
Overview
Our AUM increases or decreases based on several factors,
including new asset enrollment rates, asset cancellation rates
due to members proactively terminating their membership, members
rolling their assets out of the retirement plan and sponsors
canceling the Professional Management service, as well as other
factors, such as employee and employer contributions into their
401(k) accounts and market fluctuations. If any of these factors
reduces our AUM, the amount of fees we would earn for managing
those assets would decline, which in turn could negatively
impact our revenue.
Unlike the clients of many other asset managers, our clients,
the plan participants, typically retain the ability to effect
certain transactions such as transfers out of their accounts,
directly with the plan provider, since our services sit on top
of an existing plan provider infrastructure of custodial and
record keeping services. We provide our investment advisory and
management services based on a summary or snapshot
of account balances as of a specific moment in time, which we
receive from the plan provider. The information we receive from
plan providers does not separately identify certain transactions
handled by the plan provider, such as the amounts or dates of
employer and employee contributions, plan administrative fees
other than Professional Management fees, withdrawals, loan
withdrawals or repayments, into or from member accounts, or
market movement. As a result, we do not have the ability to
quantify whether changes in the balance of a particular
members account are due to any of the foregoing factors or
are due to market movement. Accordingly, we cannot quantify the
impact of market movement or these other factors on our AUM as a
whole.
We are, however, able to estimate the impact on our AUM due to
AUM from new members, voluntary cancelled AUM and involuntary
cancelled AUM. In addition, while we cannot quantify the impact
on our AUM of any other single factor, including market
movement, we can qualitatively observe how these factors as a
whole may impact our AUM, as discussed below.
AUM from New
Members
The enrollment of new members increases our AUM. We receive
401(k) account balances for each member at least weekly,
including 401(k) account balances for any new members.
Accordingly, we are able to capture the 401(k) account balance
within a week of enrollment for any given new member.
Cancellations
Voluntary Cancelled AUM.
Members may cancel at
any time without any requirement to provide advance notice. Our
quarter-end AUM excludes the assets of any account cancelled by
a member prior to the end of the last day of the quarter. We can
quantify this amount for any period by retrieving the account
value from the last file received during the week prior to
cancellation.
Involuntary Cancelled AUM.
Plan sponsors may
cancel their contract for the provision of Professional
Management services to their plan participants upon specified
notice or without notice for fiduciary reasons or breach of
contract. If a plan sponsor has provided advance notice of
cancellation of the plan sponsor contract, however, the AUM for
members of that plan sponsor is included in our AUM until the
effective date of cancellation, after which it is no longer part
of our AUM. If a members account value falls to zero,
either upon the effective date of a sponsor cancellation or the
member transferring the entire account balance, we treat the
account as an involuntary cancellation and quantify the amount
for any period by retrieving the account value from the last
file received with a positive balance. As of December 31,
2009, the AUM attributable to members in plans for which we had
received notice of sponsor cancellation of the Professional
Management service was approximately 0.3% of our AUM as of
December 31, 2009. As of January 31, 2010, we have
received cancellation notices from two plan sponsors covering
members representing less than 1.0% of AUM as of
December 31, 2009. These cancellations are expected to be
effective on or before June 30, 2010.
43
Market Movement,
Contributions and Other Factors
As discussed above, the data files we receive from plan
providers do not separately identify certain transactions
handled by the plan provider. As a result, we do not have the
ability to quantify whether changes in the amount of a
particular holding in a members account are due to these
transactions or are due to market movement. Generally, however,
the impact of either rising or declining securities markets on
our AUM will largely depend on which asset class or classes are
rising or declining, and the relative proportion of that asset
class held in aggregate in the portfolios we manage. For
example, market gains and losses for fixed income securities and
cash have historically been more moderate than market gains and
losses for equity securities. Thus, we believe that market gains
and losses for equity securities typically have a greater impact
on our AUM. As of December 31, 2009, the percentages for
the style exposures of the portfolios we managed, in aggregate,
were approximately as follows:
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Cash
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5
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%
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Bonds
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25
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%
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Domestic Equity
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50
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%
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International Equity
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20
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%
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Total
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100
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%
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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.
Increases in our AUM due to employee contributions will depend
on the proportion of members who are actively participating in
their 401(k) plan and their respective contribution rates.
Increases in our AUM due to employer contributions will depend
on whether the plan sponsor offers an employer match, the amount
of that match and the proportion of members who are active in
their 401(k) plan. In most cases, participant contributions are
capped by plan and IRS limits.
Changes in AUM
since inception
The following table illustrates the inflows and outflows related
to changes in our AUM from period to period:
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2009
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In billions, except
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Professional Management
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January 1 -
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October 1 -
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revenue data in millions
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2004
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2005
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2006
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2007
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2008
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2009
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September 30
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December 31
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AUM, beginning of period
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$
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$
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1.0
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$
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3.3
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$
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8.0
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$
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16.3
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$
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15.6
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$
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15.6
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$
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23.5
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AUM from New Members
(1)
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1.1
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2.5
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4.4
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8.8
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7.7
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7.3
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5.3
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2.0
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Voluntary Cancelled AUM
(2)
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(0.1
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(0.4
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(0.7
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(1.6
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(2.8
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)
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(2.1
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)
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(1.6
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(0.5
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)
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Involuntary Cancelled
AUM
(3)
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(0.1
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(0.4
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(0.8
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(1.2
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(0.9
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(0.3
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Other
(4)
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0.2
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1.1
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1.5
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(4.8
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6.1
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5.1
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1.0
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AUM, end of period
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1.0
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3.3
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8.0
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16.3
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15.6
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25.7
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23.5
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25.7
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Professional Management Revenue*
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0.1
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4.3
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14.6
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28.2
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39.0
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52.6
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34.4
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18.2
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All data are shown as of December 31 of the applicable year,
except where noted.
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(1)
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The aggregate amount of all assets
under management, at the time of enrollment, of new members who
enrolled in our Professional Management service within the given
period.
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(2)
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The aggregate amount of assets, at
the time of cancellation, for voluntary cancellations occurring
when a member terminates their membership in our Professional
Management service within the given period.
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(3)
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The aggregate amount of assets, at
the time of cancellation, for involuntary cancellations
occurring when the members 401(k) plan account balance has
been reduced to zero or cancellation of a plan sponsor contract
for the Professional Management service has become effective
within the given period.
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(4)
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Other factors affecting assets
under management cannot be separately quantified. These factors
primarily consist of employer and employee contributions, plan
administrative fees and market movement, and also include
participant loans and hardship withdrawals.
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Since the inception of our Professional Management service in
2004, our year-end AUM has increased in each year other than in
2008. Increases in AUM are primarily due to new members
enrolling in the service, and to a lesser extent, employee and
employer contributions to the 401(k) plan, and may also reflect
rising securities markets. Decreases in AUM are typically due
to voluntary and involuntary cancellations, and to a lesser
extent, the deduction of plan administrative fees and
Professional Management fees and participant loans and hardship
withdrawals, and may also reflect declining securities markets.
Historically, member cancellations have had a lesser impact on
our AUM relative to the positive impact of AUM from new members,
in part due to the low historical rate of sponsor cancellations
and that our voluntary cancellation rates tend to decrease after
the first year of membership and have averaged approximately
1.0% per month during our history. Our voluntary member
cancellation rate, measured as a percentage of AUM, was
approximately 0.5% for the month of January 2010, as compared to
approximately 1.0% for the month of January 2009. The
involuntary member cancellation rate, measured as a percentage
of AUM, was approximately 0.9% for the month of January 2010, as
compared to approximately 0.8% for the month of January 2009.
For the month of January 2010, voluntary cancelled AUM was
approximately $127 million and involuntary cancelled AUM
was approximately $229 million, as compared to
approximately $158 million and approximately
$118 million for the month of January 2009. Based solely on
our historical cancellation rates, we believe that there may be
a correlation between the improved condition of the financial
markets and lower member cancellation rates generally; however,
member satisfaction and other factors, as discussed above, may
impact our cancellation rates.
While we cannot quantify the impact of market movement on our
AUM, we believe the decrease in 2008 in the value of assets in
member accounts was primarily due to the decline in the equity
markets. Based on the magnitude of this decline, we also believe
this decrease in value likely constituted a significant portion
of the outflows included as other. However, outflows
could have also included decreases in employer and employee
contributions, loans and withdrawals. We cannot quantify the
impact of these other factors as the information we receive from
the plan providers does not separately identify these
transactions.
In 2009, equity markets began to recover. We believe based on
the magnitude of this recovery that an increase in the value of
assets in member accounts due to the rising equity markets
likely constituted the most significant portion of the
other inflows. However, inflows also included
contributions, and offsetting outflows such as loans and
hardship withdrawals may have decreased. We believe that
aggregate contribution rates in 2009 may reflect relatively
lower employer contributions given that some employers suspended
or reduced their matching contribution due to adverse economic
conditions.
Platform.
We derive our platform
revenue from recurring, annual
subscription-based
platform fees for access to either our full suite of services,
including Professional Management, Online Advice and Retirement
Evaluation, or our Online Advice service only. Platform fees are
paid by the plan sponsor, plan provider or the retirement plan
itself, depending on the plan structure, and vary depending on
the type of service provided. Our Online Advice service is a
nondiscretionary Internet-based investment advisory service,
which includes features such as recommendations among the
investment alternatives available in the employer sponsored
retirement plan, a summary of the current value of the plan
account, a forecast of how much the plan account investments
might be worth at retirement, whether a change is recommended to
the contribution rate, risk and diversification
and/or
unrestricted employer stock holdings and a projection of how
much the participant may be able to spend at retirement. Plan
participants may use the service as frequently as they choose to
monitor
45
progress toward their financial goals, receive forecasts and
investment recommendations and access educational content at our
website.
Other Revenue.
Other revenue includes
reimbursement for marketing and member materials from certain
subadvisory relationships, reimbursement for providing personal
statements to participants from a limited number of plan
sponsors and plan implementation fees. A small portion of other
revenue is derived from a defined benefit consulting business.
Costs and
Expenses
Employee compensation and related expenses represent our largest
expense. We allocate compensation and other related expenses,
including stock-based compensation, to our cost of revenue,
research and development, sales and marketing, general and
administrative as well as amortization of internal use software
expense categories. While we expect our headcount to increase
over time, we believe that the economies of scale in our
business model will allow us to grow our compensation and
related expenses at a lower rate than revenue.
Other costs and expenses include the costs of marketing
materials and postage, fees paid to plan providers for
facilitating the exchange of plan and plan participant data as
well as implementing our transaction instructions for member
account and amortization and depreciation for hardware and
software purchases.
The following summarizes our cost of revenue and certain
significant operating expenses:
Cost of Revenue.
Cost of revenue
excludes amortization of internal use software and includes
expenses from portfolio management, operations, advisor call
center operations, technical operations, including information
technology, customer support, installation and
set-up
costs, data connectivity fees and printed materials costs for
certain subadvisory relationships for which we are reimbursed.
These expenses are shared across the different revenue
categories and we are not able to meaningfully allocate such
costs between separate categories of revenue. Consequently, all
costs and expenses applicable to our revenue are included in the
category cost of revenue in our statements of operations. Costs
in this area are primarily related to employee compensation and
related expenses, payments to third parties and purchased
materials. Amortization of internal use software, a portion of
which relates to our cost of revenue, is reflected as a separate
line item in our statement of operations.
Research and Development.
Research and
development expense includes costs associated with defining and
specifying new features and ongoing enhancement to our Advice
Engines and other aspects of our service offerings, financial
research, quality assurance, related administration and other
costs that do not qualify for capitalization. Costs in this area
are primarily related to employee compensation for our
investment research, product development and engineering
personnel and related expenses and, to a lesser extent, related
external consulting expenses.
Sales and Marketing.
Sales and
marketing expense includes costs associated with plan provider
and plan sponsor relationship management, marketing our
services, plan provider and plan sponsor marketing, direct
sales, printing of, and postage for marketing materials for,
direct advisory relationships and amortization of direct
response advertising. Costs in this area are primarily related
to employee compensation for sales and marketing personnel and
related expenses, which include commissions, printed materials
and general marketing programs.
General and Administrative.
General and
administrative expense includes costs for finance, legal,
compliance and administration. Costs in this area include
employee compensation and related expenses and fees for
consulting and professional services. Following this offering,
we expect that we will incur additional expenses as a result of
becoming a public company for, among other things, SEC reporting
and compliance, including compliance with the Sarbanes-Oxley Act
of 2002, director fees, insurance, transfer agent fees and other
similar expenses. General and administrative expenses are
expected to continue to increase due to incremental headcount
increases, the general growth of our business and the costs
associated with being a public company.
46
Amortization of Internal Use
Software.
Amortization expense includes
engineering costs associated with developing and enhancing our:
(1) systems developed for our internal use for tracking member
data, including AUM, member cancellations and other related
member statistics and (2) enhancements to our advisory service
platform. Associated direct development costs are capitalized
and amortized using the straight-line method over the estimated
lives of the underlying technology. Costs in this area include
employee compensation and related expenses and fees for external
consulting services.
Critical
Accounting Policies and Significant Management
Estimates
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United
States, or GAAP. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue,
costs and expenses and related disclosures. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. In many instances, we could have reasonably used
different accounting estimates, and in other instances, changes
in the accounting estimates are reasonably likely to occur from
period to period. Accordingly, actual results could differ
significantly from the estimates made by our management. To the
extent that there are material differences between these
estimates and actual results, our future financial statement
presentation, financial condition, results of operations and
cash flows will be affected.
In many cases, the accounting treatment of a particular
transaction is specifically dictated by GAAP and does not
require managements judgment in its application, while in
other cases, managements judgment is required in selecting
among available alternative accounting standards that allow
different accounting treatment for similar transactions. We
believe that there are several accounting policies that are
critical to understanding our business and prospects for future
performance, as these policies affect the reported amounts of
revenue and other significant areas that involve
managements judgment and estimates.
These significant policies are:
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Revenue recognition;
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Deferred sales commissions;
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Direct response advertising;
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Valuation of long-lived assets;
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Income taxes; and
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Stock-based compensation.
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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:
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persuasive evidence of an arrangement exists;
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the product has been delivered or the service has been performed;
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the fee is fixed or determinable; and
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collectibility is reasonably assured.
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Application of the various accounting principles in GAAP related
to the measurement and recognition of revenue requires the
company to make judgments and estimates. Specifically,
arrangements with multiple elements and nonstandard terms and
conditions may require significant contract interpretation to
determine the appropriate accounting, including whether the
deliverables specified in a multiple element arrangement should
be treated as separate units of accounting. Other
47
significant judgments include determining whether we are acting
as the principal in a transaction and whether separate contracts
are considered part of one arrangement.
Revenue recognition is also impacted by our judgment used in
determining allowances for uncollectible receivables. We
consider various factors, including a review of specific
transactions, the credit-worthiness of the customers, historical
experience and market and economic conditions when calculating
these provisions and allowances. Estimates are evaluated each
quarter to assess the adequacy of the amounts recorded.
We generate revenue through three primary sources: Professional
Management revenue, platform revenue and other revenue.
We generate Professional Management revenue on the value of
assets we manage for plan participants, which fees are generally
payable quarterly in arrears. Each plan provider sends us a
weekly file with the applicable asset values, on a specific day
of the week agreed in advance with the plan provider, but which
day varies by plan provider. At quarter-end, we use the most
recently received file to derive our fees and recognize revenue.
Pursuant to the contracts with our members, we calculate our
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 fees are paid based on a performance or
other incentive arrangement. Our 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). Our
fees are determined by the value of the assets in the
members account at the specified date. Revenue derived
from management fees for our Professional Management service is
recognized as the services are performed. In certain instances,
fees payable by members are deferred for a specified period, and
are waived if the member cancels within the specified period.
Effective January 1, 2009, we commenced recognizing revenue
during certain of these fee deferral periods based on our
estimate of the expected retention and cancellation rates
determined by historical experience of similar arrangements. We
currently only recognize revenue for fee deferral periods of
approximately three months or less and where the member has
actively enrolled in our Professional Management service. If we
use different assumptions for expected retention and
cancellation rates, or if actual retention and cancellation
rates differ materially from our estimates, future revenue
recognized may differ significantly from what we have recorded
in the current period and could materially affect our operating
income, net income and earnings (loss) per share. As a result of
recognizing revenue during the fee deferral periods, our revenue
during the year ended December 31, 2009 was higher by
approximately $301,000 compared to the year ended
December 31, 2008.
Platform revenue includes annual subscription-based platform
fees for access to either our full suite of services, including
Professional Management, Online Advice and Retirement
Evaluation, or our Online Advice service only, 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 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 customer life, 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 primarily consists 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
notrepresent the total contract value of annual or multi-year,
noncancelable subscription contracts. Setup fees are recognized
ratably over the estimated customer life, which is usually three
to five years.
48
Deferred Sales
Commissions.
We
defer certain commission payments to our sales force. Deferred
sales commissions consist of incremental costs paid to our
direct sales force associated with the execution of
noncancelable customer contracts. The deferred sales commission
amounts are recoverable through future revenue streams under the
noncancelable customer contracts. We believe this is the
preferable method of accounting as the commission charges are so
closely related to the revenue from the noncancelable customer
contracts that they should be recorded as an asset and charged
to expense over the life of the related noncancelable customer
contracts, which is typically three years. Amortization of
deferred sales commissions is included in sales and marketing
expense in the accompanying consolidated statements of
operations.
Direct
Response
Advertising.
Our
advertising costs consist primarily of print materials
associated with new customer solicitations. We account for our
advertising costs in accordance with Financial Accounting
Standards Board, or FASB,
Accounting Standards Codification,
or Codification or ASC,
340-20,
Capitalized Advertising Costs
(previously American
Institute of Certified Public Accountants Statement of Position
(SOP)
93-7,
Reporting on Advertising Costs
). Advertising costs that
do not qualify as direct response advertising are expensed to
sales and marketing at the first time the advertisement takes
place. Effective July 1, 2009, we commenced capitalization
of advertising costs associated with Active Enrollment campaigns
on a prospective basis as it was then determined that we had
sufficient and verifiable historical patterns over a reasonable
period to demonstrate probable future benefits of such campaigns.
ASC
340-20
requires the capitalization of direct response advertising only
if the primary purpose of the advertising is to elicit sales to
customers who could be shown to have responded specifically to
the advertising and the direct-response advertising results in
probable future benefits. The capitalized costs are amortized
over the period over which the future benefits are expected to
be received. Because of how we earn revenue from our
Professional Management service, demonstrating that the
direct-response advertising related to our direct advisory
active choice campaigns results in probable future benefits
requires us to make several assumptions about the gross revenues
we will earn and costs we will incur as a result of each
campaign.
We have developed forecasting methodologies that have a degree
of reliability sufficient to reasonably estimate the future
gross revenue stream associated with a given campaign. The
significant estimates and judgments we use in our forecasting
methodologies include average period of probable future
benefits, market movement, AUM cancellation rates and net
contribution rates. AUM cancellation rate is defined as the rate
at which assets will cancel out of Professional Management
program due to voluntary member terminations. A voluntary member
termination is when a member contacts Financial Engines and
terminates their membership in the Professional Management
service. Involuntary cancellations (such as employee
terminations, layoffs, etc.) are captured in the net
contribution rate. Net contribution rate is defined as the net
amount assets will increase as a result of new contributions in
to the 401(k) plan less the amount assets will decrease as a
result of disbursements from the 401(k) plan. We have estimated
the average period of probable future benefits to be three years
by analyzing our historical member retention rates and have
estimated AUM cancellation rates by analyzing our historical AUM
cancellation rates. In light of recent stock market volatility,
we currently have assumed no market movement and a zero net
contribution rate.
At December 31, 2009, $1.4 million of advertising
costs associated with Active Enrollment campaigns were reported
as assets. Advertising expense was $1.8 million,
$2.6 million and $2.2 million for the years ended
December 31, 2007, 2008 and 2009, respectively, of which
direct advised Active Enrollment campaign expense was
$1.6 million, $2.5 million and $2.0 million
respectively.
The table below evaluates the sensitivity of two of our most
significant estimates, namely average period of probable future
benefits and assumed market movement, on the realizability of
net capitalized direct response advertising costs as of
December 31, 2009. This sensitivity analysis
49
considered all campaigns that were eligible for capitalization
under our current assumptions of a three-year average period of
probable future benefits and 0% market movement per year. The
sensitivity table indicates the additional impairment charges
that would have been recorded as of December 31, 2009 if we
had assumed different levels of market movement
and/or
assumed an estimated period of probable benefits other than
3 years.
Additional
Expense (Impairments) to be Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Market Movement*
|
|
|
|
(Per year)
|
|
|
|
(40)%
|
|
|
(20)%
|
|
|
(10)%
|
|
|
0%
|
|
|
8%
|
|
|
|
(In thousands)
|
|
|
Average Period of Probable Future Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 year
|
|
$
|
411
|
|
|
$
|
356
|
|
|
$
|
324
|
|
|
$
|
291
|
|
|
$
|
261
|
|
2 years
|
|
|
242
|
|
|
|
111
|
|
|
|
77
|
|
|
|
45
|
|
|
|
21
|
|
3 years
|
|
|
193
|
|
|
|
77
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
4 years
|
|
|
202
|
|
|
|
77
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
5 years
|
|
|
241
|
|
|
|
89
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Any percentage change to market movement, net contribution rate
and AUM cancellation rate would have the same relative impact on
the sensitivity analysis as they all directly impact member AUM.
|
Valuation of
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 such
as: (a) a significant adverse change in the extent or
manner in which it is being used or in its physical condition,
(b) a significant adverse change in legal factors or in the
business climate that could affect its value, and (c) a
current-period operating or cash flow loss combined with a
history of operating or cash flow losses or a projection or
forecast that demonstrates continuing losses associated with its
use.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset group to estimated
undiscounted future cash flows expected to be generated by the
asset group. An asset group is the lowest level at which cash
flows can be identified that are largely independent of the cash
flows of other asset groups. 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 has determined that the entity level is the lowest
level at which cash flows can be identified that are largely
independent of the cash flows of other assets and liabilities as
our revenue is interdependent on the revenue-producing
activities and significant shared operating activities of all
long-lived assets. In determining the undiscounted future cash
flows expected to be generated at an entity level, we make
estimates and judgments about the future cash flows and
operating trends such as average member life, market movement,
AUM cancellation rates and net contribution rates. We also
consider other available information such as our total
enterprise value determined for the purpose of estimating the
fair value of our common stock, as further discussed below, in
assessing the fair value of the entity level asset group.
Management evaluates the remaining 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, 2007,
2008 and 2009.
50
Income
Taxes.
We
are subject to income taxes in the U.S. Significant
judgments are required in determining the consolidated provision
for income taxes.
We use the asset and liability method to account for income
taxes. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and net operating
loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. We record
a valuation allowance to reduce deferred tax assets to an amount
whose realization is more likely than not. 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.
Management periodically evaluates if it is more likely than not
that some or all of the deferred tax assets will be realized. In
making such determination, we consider all available positive
and negative evidence, including scheduled reversals of deferred
tax liabilities, projected future taxable income, tax planning
strategies and recent financial performance. In order to support
a conclusion that a valuation allowance is not needed, positive
evidence of sufficient quantity and quality (objective compared
to subjective) is necessary to overcome negative evidence.
During the years ended December 31, 2007, 2008 and 2009,
management determined there was significant negative evidence to
conclude that it was more likely than not that the net deferred
tax assets would not be realized and accordingly established a
full valuation allowance. The lack of profitability prior to
2009 is a significant piece of negative evidence and generally
precludes managements estimate of forecasted future
taxable income as positive evidence in its assessment. As a
result, a valuation allowance is recognized for the net deferred
tax assets as of December 31, 2009. In the event we become
consistently more profitable in future periods and were to
determine that we would be able to realize our deferred income
tax assets in the future in excess of their net recorded amount,
we would make an adjustment to the valuation allowance which
would reduce the provision for income taxes in the period such
determination was made.
As of December 31, 2009, we had net operating loss
carryforwards for federal and state income tax purposes of
approximately $134 million and $60 million,
respectively, available to reduce future income subject to
income taxes. The federal net operating loss carryforwards
expire through 2029. The state net operating loss carryforwards
expire through 2019.
As of December 31, 2009, approximately $6.3 million of
the net operating losses will benefit additional paid in capital
when realized. As of December 31, 2009, we also had
research credit carryforwards for federal and California income
tax purposes of approximately $1.8 million and $853,000,
respectively, available to reduce future income taxes. The
federal research credit carryforwards expire through 2029. The
California research credit carries forward indefinitely.
We are currently under examination by the Internal Revenue
Service for our domestic federal income tax returns for the
years ended December 31, 2006 and 2007. We anticipate a
decrease to our gross unrecognized tax benefits, including those
associated with research credits, related to prior returns
resulting from such examinations in the range of $0 to
$3.8 million.
51
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,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Expected life in years
|
|
|
6.08
|
|
|
|
6.06
|
|
|
|
6.07
|
|
Risk-free interest rate
|
|
|
4.46
|
%
|
|
|
2.58
|
%
|
|
|
2.62
|
%
|
Volatility
|
|
|
35
|
|
|
|
52
|
|
|
|
53
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 2007, we use the
simplified method in developing an estimate of
expected term of stock options as we expect our employee
exercise behavior to change resulting from our announced plans
for an initial public offering. We base the risk-free interest
rate on zero-coupon yields implied from U.S. Treasury
issues with remaining terms similar to the expected term on the
options. We estimate expected volatility based on a combination
of the historical and implied volatility of comparable companies
from a representative peer group based on industry and market
capitalization data. We do not anticipate paying any cash
dividends in the foreseeable future and therefore use an
expected dividend yield of zero in the option pricing model. We
are required to estimate forfeitures at the time of grant and
revise those estimates in subsequent periods if actual
forfeitures differ from those estimates. If we use different
assumptions for estimating stock-based compensation expense in
future periods or if actual forfeitures differ materially from
our estimated forfeitures, future stock-based compensation
expense may differ significantly from what we have recorded in
the current period and could materially affect our operating
income, net income (loss) and net income (loss) per share.
Given the absence of an active market for our common stock, our
stock price at any given time is determined by our board of
directors. Our board of directors considers numerous objective
and subjective factors in determining the value of our common
stock at each option grant date, including the following factors:
|
|
|
|
|
prices for our preferred stock that we had sold to outside
investors in arms-length transactions, and the rights,
preferences and privileges of our preferred stock and our common
stock;
|
|
|
|
contemporaneous independent valuations performed at three to
four month periodic intervals;
|
|
|
|
secondary sales of shares of our common stock;
|
|
|
|
our actual financial condition and results of operations
relative to our operating plan during the relevant period;
|
|
|
|
forecasts of our financial results and overall market conditions;
|
|
|
|
the market value of the stock or other equity interests of
similarly situated companies whose value can be readily
determined through objective means;
|
|
|
|
hiring of key personnel; and
|
|
|
|
the likelihood of achieving a liquidity event for the shares of
common stock underlying the options, such as an initial public
offering or sale of the company, given prevailing market
conditions at the time of grant.
|
52
Our board of directors believe that the judgment required in
such efforts necessarily involve an element of subjectivity.
Our contemporaneous valuations were performed in accordance with
methods specified by the AICPA Practice Aid on
Valuation of Privately-Held Company Equity Securities
Issued as Compensation
. These contemporaneous
valuations of our common stock were performed as of
December 31, 2006, June 30, 2007, December 31,
2007, March 31, 2008, June 30, 2008, October 31,
2008, January 31, 2009, April 30, 2009, July 31,
2009 and October 31, 2009. Our board of directors
considered these valuations in determining the fair market value
of our common stock during those periods. The valuations use the
income approach method. The income approach involves applying
appropriate risk-adjusted discount rates to estimated debt-free
cash flows, based on forecasted revenues and costs. The discount
rate applied to our cash flows was based on a weighted average
cost of capital, which represents the blended, after-tax costs
of debt and equity. The projections used in connection with this
valuation were based on our expected operating performance over
the forecast period. The valuations also considered the public
company market multiple method to evaluate the reasonableness of
the income approach. The public company market multiple method
focuses on comparing our company to similar publicly traded
entities. The valuations also considered differences between our
preferred and common stock with respect to liquidation
preferences, conversion rights, voting rights and other
features. We also considered appropriate adjustments to
recognize lack of marketability.
For empirical evidence on adjustments for lack of marketability,
the contemporaneous evaluations relied upon studies based on
restricted stocks of companies whose unrestricted shares are
freely traded as a basis, and specifically on studies performed
since 1991 and for which detailed data were available.
Indications from studies of private transactions prior to
initial public offerings were used as reasonableness checks
against the concluded indications. The overall study discounts
in the restricted stock studies used in the analysis ranged from
21.8% to 33.8%. Average marketability discount indications from
restricted stock studies performed prior to 1991 and pre-IPO
studies ranged from 20% to 59%.
Based on this analysis, a benchmark company-specific adjustment
for lack of marketability was derived. To arrive at the
concluded company-specific adjustment from the benchmark
company-specific adjustment, additional factors not considered
in the benchmark analysis were then analyzed. These factors
included financial statement analysis, dividend policy and our
history/nature, reputation and experience of our management,
amount of control in transferred shares, transfer or sale
restrictions, holding period and redemption policy. After
analysis of each of these factors, it was concluded that these
factors would not materially impact the adjustment except for
our history/nature. Our performance is closely tied to the
performance of the financial markets. Due to the high volatility
in the financial markets and uncertainty of future financial
market performances, we are assumed to be of higher risk than
the benchmark transactions, thus this factor would increase the
adjustment.
The following table summarizes the concluded company-specific
adjustments for lack of marketability as of the valuation dates
noted:
|
|
|
|
|
|
|
|
|
|
|
Concluded Company-
|
|
|
Valuation Date
|
|
Specific Adjustment
|
|
Fair Value
|
|
As of January 30, 2009
|
|
|
20
|
%
|
|
$
|
5.79
|
|
As of April 30, 2009
|
|
|
20
|
%
|
|
$
|
6.04
|
|
As of July 31, 2009
|
|
|
15
|
%
|
|
$
|
6.95
|
|
As of October 31, 2009
|
|
|
15
|
%
|
|
$
|
7.99
|
|
No other discounts were applied to arrive at the fair value
amount, other than the lack of marketability discount discussed
above.
53
In order to determine the value of our common stock, we utilized
the total enterprise value in an option-based framework. Using
this method, the common stock value is viewed as a claim on the
enterprises liquidation or IPO proceeds after debt holders
and preferred stockholders have been paid their principal and
interest or liquidation preferences. This approach considers
that the value associated with the common shares is based on our
performance relative to the liquidation preferences of other
share classes. There is inherent uncertainty in the estimates
used in our valuations. If different discount rates, assumptions
or weightings had been used, the valuations would have been
different.
Results of
Operations
Comparison of
the Years Ended December 31, 2008 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
December 31
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2009
|
|
|
Amount
|
|
|
%
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Management
|
|
$
|
38,963
|
|
|
$
|
52,579
|
|
|
$
|
13,616
|
|
|
|
35
|
%
|
Platform
|
|
|
29,498
|
|
|
|
30,048
|
|
|
|
550
|
|
|
|
2
|
|
Other
|
|
|
2,810
|
|
|
|
2,355
|
|
|
|
(455
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
71,271
|
|
|
|
84,982
|
|
|
|
13,711
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
27,588
|
|
|
|
29,573
|
|
|
|
1,985
|
|
|
|
7
|
|
Research and development
|
|
|
13,663
|
|
|
|
15,618
|
|
|
|
1,955
|
|
|
|
14
|
|
Sales and marketing
|
|
|
21,157
|
|
|
|
22,515
|
|
|
|
1,358
|
|
|
|
6
|
|
General and administrative
|
|
|
6,613
|
|
|
|
7,679
|
|
|
|
1,066
|
|
|
|
16
|
|
Withdrawn offering expense
|
|
|
3,031
|
|
|
|
|
|
|
|
(3,031
|
)
|
|
|
n/a
|
|
Amortization of internal use software
|
|
|
2,258
|
|
|
|
2,813
|
|
|
|
555
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
74,310
|
|
|
|
78,198
|
|
|
|
3,888
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(3,039
|
)
|
|
|
6,784
|
|
|
|
9,823
|
|
|
|
n/a
|
|
Interest expense
|
|
|
(799
|
)
|
|
|
(612
|
)
|
|
|
187
|
|
|
|
(23
|
)
|
Interest and other income, net
|
|
|
236
|
|
|
|
351
|
|
|
|
115
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(3,602
|
)
|
|
|
6,523
|
|
|
|
10,125
|
|
|
|
n/a
|
|
Income tax expense
|
|
|
12
|
|
|
|
834
|
|
|
|
822
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
|
$
|
9,303
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue increased 19% from $71.3 million in 2008 to
$85.0 million in 2009. The increase was primarily due to
growth in Professional Management revenue of $13.6 million.
Professional Management revenue and platform revenue comprised
62% and 35%, respectively, of total revenue in 2009.
Professional
Management Revenue
Professional Management revenue increased 35% from
$39.0 million in 2008 to $52.6 million in 2009. This
increase was primarily due to an increase in average AUM from
$17.1 billion in 2008 to $21.2 billion in 2009. The
increase in AUM was driven primarily by market appreciation,
increased enrollment resulting from marketing campaigns and
other ongoing member acquisitions.
54
Platform
Revenue
Platform revenue increased 2% from $29.5 million in 2008 to
$30.0 million in 2009, due to an increased number of plan
participants with respect to whom platform fees are paid, which
was primarily due to an increase in the number of plan sponsors
who use one or more of our services.
Other
Revenue
Other revenue decreased 16% from $2.8 million in 2008 to
$2.4 million in 2009. This decrease was primarily due to a
reduction in revenue related to the reimbursement of personal
evaluation expenses of $0.6 million, partially offset by an
increase of $0.2 million in reimbursement for marketing
materials from certain subadvisory relationships.
Cost of
Revenue
Cost of revenue increased 7% from $27.6 million in 2008 to
$29.6 million in 2009. This increase was primarily due 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 bonus 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% in 2008 to 35% in
2009. The decrease as a percentage of revenue was primarily due
to slower increases in payroll and employee-related expenses
relative to the increase in revenue during the same period.
Research and
Development
Research and development expense increased 14% from
$13.7 million in 2008 to $15.6 million in 2009. This
increase was primarily due to higher bonus 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%
in 2008 to 18% in 2009.
Sales and
Marketing
Sales and marketing expense increased 6% from $21.2 million
in 2008 to $22.5 million in 2009. This increase was
primarily due to higher bonus 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 in 2008. As a percentage of revenue,
sales and marketing expense decreased from 30% in 2008 to 26% in
2009. The decrease as a percentage of revenue was primarily due
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 in 2008 to $7.7 million in 2009. This
increase was primarily due to increased stock-based compensation
expense of $0.8 million and bonus 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 2008 and 2009.
Amortization of
Internal Use Software
Amortization expense increased 25% from $2.3 million in the
2008 to $2.8 million in 2009. This increase was primarily
due to increased capitalized development costs in late 2008.
These costs include engineering costs associated with developing
and enhancing our internally developed software.
55
Interest
Expense
Interest expense decreased 23% from $0.8 million in 2008 to
$0.6 million in the 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
in the 2008 to $0.4 million in 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.
Taxes and Net
Loss
Taxes for 2008 were de minimis, as compared to $0.8 million
for 2009. The income tax increase for 2009 was primarily a
result of increased state taxes due to operating income in 2009
compared to a loss in 2008 and limitations on our use of net
operating loss carryforwards in 2008.
Comparison of
Years Ended December 31, 2007 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2007
|
|
|
2008
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Management
|
|
$
|
28,226
|
|
|
$
|
38,963
|
|
|
$
|
10,737
|
|
|
|
38
|
%
|
Platform
|
|
|
31,374
|
|
|
|
29,498
|
|
|
|
(1,876
|
)
|
|
|
(6
|
)
|
Other
|
|
|
3,750
|
|
|
|
2,810
|
|
|
|
(940
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
63,350
|
|
|
|
71,271
|
|
|
|
7,921
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
20,602
|
|
|
|
27,588
|
|
|
|
6,986
|
|
|
|
34
|
|
Research and development
|
|
|
14,643
|
|
|
|
13,663
|
|
|
|
(980
|
)
|
|
|
(7
|
)
|
Sales and marketing
|
|
|
19,871
|
|
|
|
21,157
|
|
|
|
1,286
|
|
|
|
6
|
|
General and administrative
|
|
|
6,663
|
|
|
|
6,613
|
|
|
|
(50
|
)
|
|
|
(1
|
)
|
Withdrawn offering expense
|
|
|
|
|
|
|
3,031
|
|
|
|
3,031
|
|
|
|
n/a
|
|
Amortization of internal use software
|
|
|
3,070
|
|
|
|
2,258
|
|
|
|
(812
|
)
|
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
64,849
|
|
|
|
74,310
|
|
|
|
9,461
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,499
|
)
|
|
|
(3,039
|
)
|
|
|
(1,540
|
)
|
|
|
103
|
|
Interest expense
|
|
|
(961
|
)
|
|
|
(799
|
)
|
|
|
162
|
|
|
|
(17
|
)
|
Interest and other income, net
|
|
|
687
|
|
|
|
236
|
|
|
|
(451
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(1,773
|
)
|
|
|
(3,602
|
)
|
|
|
(1,829
|
)
|
|
|
103
|
|
Income tax expense
|
|
|
31
|
|
|
|
12
|
|
|
|
(19
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
(1,810
|
)
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue increased 13% from $63.4 million in 2007 to
$71.3 million in 2008. The increase was primarily due to
growth in Professional Management revenue of $10.7 million.
Professional Management revenue and platform revenue comprised
55% and 41%, respectively, of total revenue in 2008.
56
Professional
Management Revenue
Professional Management revenue increased 38% from
$28.2 million in 2007 to $39.0 million in 2008. This
increase was primarily due to an increase in average AUM from
$12.6 billion in 2007 to $17.1 billion in 2008. The
increase in AUM was driven primarily by increased enrollment
arising from marketing campaigns and other ongoing member
acquisitions.
Platform
Revenue
Platform revenue decreased 6% from $31.4 million in 2007 to
$29.5 million in 2008, due to reduced setup fees of
$1.6 million primarily related to a one-time recognition of
revenue from certain non-customary multiple element contracts
including deliverables requiring the deferral of revenue
recognition prior to the completion of final deliverables in
2007. A decreased number of plan participants at plan sponsors
who use one or more of our services resulted in an additional
$0.4 million reduction in platform revenue.
Other
Revenue
Other revenue decreased 25% from $3.8 million in 2007 to
$2.8 million in 2008. This decrease was due primarily to
our decision to phase out a service directed to brokers and
other investment professionals offered in 2007 but not offered
in 2008, and which we do not currently expect to offer in
subsequent years, as well as a reduction in revenue related to
reimbursement of personal evaluation expenses of
$0.4 million.
Cost of
Revenue
Cost of revenue increased 34% from $20.6 million in 2007 to
$27.6 million in 2008. This increase was primarily due to
an increase of $3.0 million in fees paid to plan providers
to facilitate the exchange of plan and plan participant data as
well as implementing our transaction instructions for member
accounts, $2.0 million in employee-related expense
associated with an increase in the number of service delivery
employees, $1.3 million in costs associated with the
printing of, and postage for, member materials and
$0.7 million in depreciation, maintenance and hosting fees
associated with our data centers. As a percentage of revenue,
cost of revenue increased from 33% in 2007 to 39% in 2008.
Research and
Development
Research and development expense decreased 7% from
$14.6 million in 2007 to $13.7 million in 2008. This
decrease was primarily due to reduced bonus expense of
$1.3 million, partially offset by increased capitalization
of internal use software of $0.5 million. As a percentage
of revenue, research and development expense decreased from 23%
in 2007 to 19% in 2008.
Sales and
Marketing
Sales and marketing expense increased 6% from $19.9 million
in 2007 to $21.2 million in 2008. This increase was
primarily due to additional marketing material expense of
$0.9 million, selling and consulting expense of
$0.8 million associated with a marketing rebranding effort
in 2008 and $0.5 million in salary expense associated with
increased headcount. These increases were partially offset by a
reduction in bonus expense of $1.3 million. As a percentage
of revenue, sales and marketing expense decreased from 31% in
2007 to 30% in 2008.
General and
Administrative
General and administrative expense decreased 1% from
$6.7 million in 2007 to $6.6 million in 2008. This
decrease was primarily due to reduced stock-based compensation
of $0.6 million, bonus expense of $0.5 million and bad
debt expense of $0.3 million, partially offset by an
increase of
57
$0.4 million in salary expense associated with increased
headcount and compensation, as well as increased legal and audit
fees of $0.3 and $0.2 million, respectively. As a
percentage of revenue, general and administrative expense
decreased from 11% in 2007 to 9% in 2008.
Withdrawn
Offering Expense
As of November 2008, we had incurred $3.0 million of costs
directly attributable to a planned initial public offering.
These costs were being deferred until the completion of the
offering. In the quarter ended December 31, 2008, these
costs were charged to expense as a result of our decision in
November 2008 to cease efforts to pursue an initial public
offering because of the disruption in the equity capital markets
and general adverse economic conditions present at that time.
Amortization of
Internal Use Software
Amortization expense decreased 26% from $3.1 million in
2007 to $2.3 million in 2008, primarily due to an increase
in the average life of capitalized development costs subject to
amortization. The increase in the average life was primarily
driven by our newer projects having a longer expected life than
our historical projects. These costs include engineering costs
associated with developing and enhancing our internally
developed software.
Interest
Expense
Interest expense decreased from $1.0 million in 2007 to
$0.8 million in 2008. This decrease was due to lower
interest rates associated with a $10.0 million promissory
note secured in September 2006 with a variable interest rate of
three-month
LIBOR plus 5% per annum and a maturity date of
September 29, 2009.
Interest and
Other Income, Net
Interest income decreased from $0.7 million in 2007 to
$0.2 million in 2008 as a result of generally lower money
market rates and cash balances.
Taxes and Net
Loss
Taxes remained low as a result of net losses for the year in
2007 and 2008. We were subject to state minimum tax in both
years as well as federal alternative minimum tax in 2007.
58
Comparison of
Years Ended December 31, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
Year Ended December 31,
|
|
|
(Decrease)
|
|
|
|
2006
|
|
|
2007
|
|
|
Amount
|
|
|
%
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Management
|
|
$
|
14,597
|
|
|
$
|
28,226
|
|
|
$
|
13,629
|
|
|
|
93
|
%
|
Platform
|
|
|
28,950
|
|
|
|
31,374
|
|
|
|
2,424
|
|
|
|
8
|
|
Other
|
|
|
4,686
|
|
|
|
3,750
|
|
|
|
(936
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
48,233
|
|
|
|
63,350
|
|
|
|
15,117
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
15,691
|
|
|
|
20,602
|
|
|
|
4,911
|
|
|
|
31
|
|
Research and development
|
|
|
14,233
|
|
|
|
14,643
|
|
|
|
410
|
|
|
|
3
|
|
Sales and marketing
|
|
|
18,807
|
|
|
|
19,871
|
|
|
|
1,064
|
|
|
|
6
|
|
General and administrative
|
|
|
5,557
|
|
|
|
6,663
|
|
|
|
1,106
|
|
|
|
20
|
|
Amortization of internal use software
|
|
|
2,499
|
|
|
|
3,070
|
|
|
|
571
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
56,787
|
|
|
|
64,849
|
|
|
|
8,062
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(8,554
|
)
|
|
|
(1,499
|
)
|
|
|
7,055
|
|
|
|
(82
|
)
|
Interest expense
|
|
|
(317
|
)
|
|
|
(961
|
)
|
|
|
(644
|
)
|
|
|
203
|
|
Interest and other income, net
|
|
|
896
|
|
|
|
687
|
|
|
|
(209
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense
|
|
|
(7,975
|
)
|
|
|
(1,773
|
)
|
|
|
6,202
|
|
|
|
78
|
|
Income tax expense
|
|
|
8
|
|
|
|
31
|
|
|
|
23
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,983
|
)
|
|
$
|
(1,804
|
)
|
|
$
|
6,179
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue increased 31% from $48.2 million in 2006 to
$63.4 million in 2007. The increase was primarily due to
growth in Professional Management revenue of $13.6 million.
Professional Management revenue and platform revenue comprised
45% and 50%, respectively, of total revenue in 2007.
Professional
Management Revenue
Professional Management revenue increased 93% from
$14.6 million in 2006 to $28.2 million in 2007. This
increase was primarily due to an increase in average AUM from
$5.7 billion in 2006 to $12.6 billion in 2007. The
increase in AUM was driven primarily by increased enrollment
arising from marketing campaigns and other ongoing member
acquisitions.
Platform
Revenue
Platform revenue increased 8% from $29.0 million in 2006 to
$31.4 million in 2007, due primarily to an increased number
of plan participants at plan sponsors who use one or more of our
services.
Other
Revenue
Other revenue decreased 20% from $4.7 million in 2006 to
$3.8 million in 2007. This decrease was due primarily to
our decision to phase out a service offered in 2007, but which
we do not currently expect to offer in subsequent years, as well
a decrease in consulting fees of $0.3 million, partially
offset by an increase in revenue related to reimbursement for
marketing and member materials of $1.0 million from certain
subadvisory relationships.
59
Cost of
Revenue
Cost of revenue increased 31% from $15.7 million in 2006 to
$20.6 million in 2007. This increase was primarily due to
an increase of $2.0 million in costs associated with the
printing of, and postage for, subadvisory marketing and member
materials, $1.5 million in increased payroll-related
expense, including $0.3 million in stock-based compensation
associated with an increase in the number of service delivery
employees and $1.1 million in fees paid to plan providers
to facilitate the exchange of plan and plan participant data, as
well as implementing our transaction instructions for member
accounts. As a percentage of revenue, cost of revenue remained
flat at 33% for both 2006 and 2007.
Research and
Development
Research and development expense increased 3% from
$14.2 million in 2006 to $14.6 million in 2007. This
increase was primarily due to increased payroll and
employee-related expenses of $1.1 million, including
stock-based compensation expense of $0.2 million, offset by
increased capitalization of website development costs of
$0.8 million. As a percentage of revenue, research and
development expense decreased from 30% in 2006 to 23% in 2007.
Sales and
Marketing
Sales and marketing expense increased 6% from $18.8 million
in 2006 to $19.9 million in 2007. This increase was
primarily due to increased payroll and employee-related expense
of $0.9 million and increased marketing materials for
direct advisory relationships of $0.7 million. As a
percentage of revenue, sales and marketing expense decreased
from 39% in 2006 to 31% in 2007.
General and
Administrative
General and administrative expense increased 20% from
$5.6 million in 2006 to $6.7 million in 2007. This
increase was primarily due to increased payroll and
employee-related expenses of $1.4 million, including
stock-based compensation expense of $1.0 million. As a
percentage of revenue, general and administrative expense
decreased from 12% in 2006 to 11% in 2007.
Amortization of
Internal Use Software
Amortization expense increased 23% from $2.5 million in
2006 to $3.1 million in 2007. This increase was primarily
due to an increase of capitalized development costs subject to
amortization. These costs include engineering costs associated
with developing and enhancing our internally developed software.
Interest
Expense
Interest expense increased from $0.3 million in 2006 to
$1.0 million in 2007. This increase was due to a higher
effective interest rate on our $10.0 million promissory
note in 2007 as compared to 2006.
Interest and
Other Income, Net
Interest income decreased from $0.9 million in 2006 to
$0.7 million in 2007 largely as a result of generally lower
cash balances and money market rates.
Taxes and Net
Loss
Taxes remained low as a result of net losses for the year in
2006 and 2007. We were subject to state minimum tax in both
years as well as federal alternative minimum tax in 2007.
Quarterly Results
of Operations
The following table sets forth our unaudited quarterly condensed
consolidated statements of operations data for each of the eight
quarters ended December 31, 2009. The data have been
60
prepared on the same basis as the audited consolidated
financial statements and related notes included in this
prospectus and you should read the following tables together
with such financial statements. The quarterly results of
operations include all necessary adjustments, consisting only of
normal recurring adjustments that we consider necessary for a
fair presentation of this data. 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 new rollouts and annual
campaigns. Professional Management revenue decreased in the
first quarter of 2009 compared to the prior quarter, primarily
due to the fee structure with one of our plan providers under
which we recognize the difference between earned revenue and
minimum contractual revenue in the fourth quarter. Platform
revenue 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 stock-based compensation, amortization of internal
use software, costs related to marketing campaigns and costs
associated with headcount across all functions. Cost of revenue
generally increased in absolute dollars each quarter presented
as a result of higher data connectivity fees and member
materials incurred to support the increase in revenue. Cost of
revenue decreased in the fourth quarter of 2008 and the first
quarter of 2009 due to a decrease in revenue resulting from the
decline in equity markets in the fourth quarter of 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
|
Mar. 31,
|
|
|
June 30,
|
|
|
Sept. 30,
|
|
|
Dec. 31,
|
|
Condensed Consolidated Statements of Operations Data:
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands, except per share data, unaudited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Management
|
|
$
|
8,964
|
|
|
$
|
9,018
|
|
|
$
|
9,913
|
|
|
$
|
11,068
|
|
|
$
|
9,593
|
|
|
$
|
11,137
|
|
|
$
|
13,646
|
|
|
$
|
18,203
|
|
Platform
|
|
|
7,351
|
|
|
|
7,343
|
|
|
|
7,498
|
|
|
|
7,306
|
|
|
|
7,220
|
|
|
|
7,704
|
|
|
|
7,602
|
|
|
|
7,522
|
|
Other
|
|
|
519
|
|
|
|
886
|
|
|
|
772
|
|
|
|
633
|
|
|
|
595
|
|
|
|
588
|
|
|
|
762
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
16,834
|
|
|
|
17,247
|
|
|
|
18,183
|
|
|
|
19,007
|
|
|
|
17,408
|
|
|
|
19,429
|
|
|
|
22,010
|
|
|
|
26,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of amortization of internal use
software)
|
|
|
5,983
|
|
|
|
7,087
|
|
|
|
7,441
|
|
|
|
7,077
|
|
|
|
6,601
|
|
|
|
6,910
|
|
|
|
7,546
|
|
|
|
8,516
|
|
Research and development
|
|
|
3,464
|
|
|
|
3,529
|
|
|
|
3,303
|
|
|
|
3,367
|
|
|
|
3,688
|
|
|
|
3,711
|
|
|
|
3,967
|
|
|
|
4,252
|
|
Sales and marketing
|
|
|
4,370
|
|
|
|
6,245
|
|
|
|
5,444
|
|
|
|
5,098
|
|
|
|
5,360
|
|
|
|
6,001
|
|
|
|
5,328
|
|
|
|
5,826
|
|
General and administrative
|
|
|
1,855
|
|
|
|
1,530
|
|
|
|
1,542
|
|
|
|
1,686
|
|
|
|
1,842
|
|
|
|
1,773
|
|
|
|
1,744
|
|
|
|
2,320
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of internal use software
|
|
|
685
|
|
|
|
536
|
|
|
|
459
|
|
|
|
578
|
|
|
|
638
|
|
|
|
673
|
|
|
|
815
|
|
|
|
687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
16,357
|
|
|
|
18,927
|
|
|
|
18,189
|
|
|
|
20,837
|
|
|
|
18,129
|
|
|
|
19,068
|
|
|
|
19,400
|
|
|
|
21,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
477
|
|
|
|
(1,680
|
)
|
|
|
(6
|
)
|
|
|
(1,830
|
)
|
|
|
(721
|
)
|
|
|
361
|
|
|
|
2,610
|
|
|
|
4,534
|
|
Interest expense
|
|
|
(213
|
)
|
|
|
(162
|
)
|
|
|
(178
|
)
|
|
|
(246
|
)
|
|
|
(184
|
)
|
|
|
(171
|
)
|
|
|
(159
|
)
|
|
|
(98
|
)
|
Interest and other income, net
|
|
|
114
|
|
|
|
73
|
|
|
|
43
|
|
|
|
6
|
|
|
|
27
|
|
|
|
232
|
|
|
|
45
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
378
|
|
|
|
(1,769
|
)
|
|
|
(141
|
)
|
|
|
(2,070
|
)
|
|
|
(878
|
)
|
|
|
422
|
|
|
|
2,496
|
|
|
|
4,483
|
|
Income tax expense (benefit)
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
(162
|
)
|
|
|
79
|
|
|
|
442
|
|
|
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
375
|
|
|
|
(1,772
|
)
|
|
|
(144
|
)
|
|
|
(2,073
|
)
|
|
|
(716
|
)
|
|
|
343
|
|
|
|
2,054
|
|
|
|
4,008
|
|
Less: Preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of common stock
|
|
$
|
375
|
|
|
$
|
(1,772
|
)
|
|
$
|
(144
|
)
|
|
$
|
(4,435
|
)
|
|
$
|
(716
|
)
|
|
$
|
343
|
|
|
$
|
2,054
|
|
|
|
2,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.04
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.03
|
|
|
$
|
0.20
|
|
|
$
|
0.29
|
|
Diluted net income (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.18
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
|
$
|
0.06
|
|
|
$
|
0.08
|
|
61
Liquidity and
Capital Resources
Sources of
Liquidity
Over the next 12 months, and in the longer term, we expect
that our cash and liquidity needs will be met by existing
resources and cash generated by our ongoing operations. We have
a $7.0 million revolving credit facility with an interest
rate of prime plus 0.75% that will expire as of April 19,
2010, and that we do not expect to draw upon in the next
12 months. In April 2009, we entered into a three-year,
$10.0 million term loan with a maturity date of May 1,
2012. Under the term loan, we can receive prime rate loans or
LIBOR rate loans. The interest rate for a prime rate loan is
1.50% above prime rate, with a minimum prime rate of 4.00% per
annum, resulting in a minimum interest rate of 5.50% per annum.
The interest rate for a LIBOR rate loan is 4.00% above the
three-month LIBOR measured on a
360-day
basis, with a minimum LIBOR rate of 1.50% per annum, resulting
in a minimum interest rate of 5.50% per annum. As of
December 31, 2009, the amount outstanding under our term
loan was $8.1 million. The interest rate currently
applicable to this term loan is equal to 1.50% above prime rate,
with a minimum prime rate of 4.00% per annum, resulting in a
minimum interest rate of 5.50% per annum. We were in compliance
with all debt covenants as of December 31, 2009, and expect
to comply with all debt covenants in the future through the
maturity date. The term loan will become immediately due and
payable in the event of default, if not cured, for non-payment
of principal or interest as such amounts become due,
misrepresentation, breach of covenants, insolvency proceedings,
bankruptcy filing, judgments, cross-defaults, dissolution or
liquidation and cessation of the enforceability of any material
provision of the term loan. Additional information regarding our
term loan can be found under Description of Certain
Indebtedness.
Since inception, our operations have been financed through cash
flows from operations, private sales of our capital stock and
our bank borrowings. Through December 31, 2009, we had
received net cash proceeds of $166.5 million through equity
financings and from the exercise of options to purchase our
common stock. At December 31, 2009, we had total cash and
cash equivalents of $20.7 million, compared to
$14.9 million at December 31, 2008.
Cash
Flows
The following table presents information regarding our cash
flows, cash and cash equivalents for the years ended
December 31, 2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
770
|
|
|
$
|
3,188
|
|
|
$
|
17,057
|
|
Net cash used in investing activities
|
|
|
(4,986
|
)
|
|
|
(6,548
|
)
|
|
|
(5,849
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,035
|
|
|
|
3,202
|
|
|
|
(5,352
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(3,181
|
)
|
|
|
(158
|
)
|
|
|
5,856
|
|
Cash and cash equivalents, end of year
|
|
$
|
15,015
|
|
|
$
|
14,857
|
|
|
$
|
20,713
|
|
Operating
Activities
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 primarily due to a higher
anticipated bonus accrual for 2009, resulting from improved
financial results and a $1.0 million increase in accounts
payable and offset by a $5.2 million increase in accounts
receivable primarily due to growth in Professional Management
fees, a $2.5 million
62
increase in other assets primarily due to capitalization of
direct response advertising costs effective July 1, 2009
and 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.
Net cash provided by operating activities in 2008 was
$3.2 million compared to net cash provided by operating
activities of $0.8 million in 2007. Net cash provided by
operating activities was a result of a net loss of
$3.6 million in 2008, compared to a net loss of
$1.8 million in 2007, plus adjustments for non-cash
expenses. These adjustments include $3.6 million for
amortization of stock-based compensation expense, a
$2.8 million decrease in accounts receivable primarily due
to an improvement in days sales outstanding, particularly for
subadvised relationships, $2.2 million of amortization of
internal use software and $1.6 million of depreciation
expense, offset by a $4.5 million decrease in accrued
compensation due to payment of 2007 bonuses as well as lower
bonus accruals in 2008 primarily resulting from negatively
impacted market conditions and a $1.5 million increase in
other assets primarily due to an increase in capitalized
commissions.
Net cash provided by operating activities in 2007 was
$0.8 million compared to net cash used by operating
activities of $1.7 million in 2006. The difference in net
cash provided by operating activities was a result of a lower
net loss of $1.8 million in 2007, compared to a net loss of
$8.0 million in 2006, plus adjustments for non-cash
expenses. These adjustments include $4.4 million for
amortization of stock-based compensation expense,
$3.0 million of amortization of internal use software and
$1.3 million of depreciation expense, partially offset by
an $8.3 million increase in accounts receivable primarily
due to significant growth in our Professional Management
revenue, which we bill quarterly in arrears, as well as an
increase in our days sales outstanding due to increasing revenue
generated by plan providers where we act as a subadvisor and a
$0.9 million increase in other assets primarily due to an
increase in capitalized commissions.
Investing
Activities
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 in the year ended December 31, 2008. For
the year ended December 31, 2009, we used $1.2 million
for the purchase of property and equipment, compared to
$2.5 million for the year ended December 31, 2008.
Net cash used in investing activities was $6.5 million in
2008 compared to $5.0 million used in 2007. In 2008, we
capitalized $4.1 million of internal use software costs,
compared to $3.6 million in 2007. In 2008, we used
$2.5 million for the purchase of property and equipment
costs, compared to $1.4 million in 2007.
Net cash used in investing activities was $5.0 million in
2007 compared to $2.3 million used in 2006. In 2007, we
capitalized $3.6 million of internal use software costs,
compared to $2.8 million in 2006. In 2007, we used
$1.4 million for the purchase of property and equipment
costs, compared to $1.2 million in 2006.
Financing
Activities
Net cash used in financing activities was $5.4 million for
the year ended December 31, 2009. Net cash provided by
financing activities was $3.2 million and $1.0 million
during 2008 and 2007, respectively. In 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
63
loan. In 2008, we borrowed $3.5 million against our
revolving credit facility. In 2007, we generated net cash
proceeds of $0.9 million from the exercise of options to
purchase common stock.
Contractual
Obligations
The following table describes our contractual obligations as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
Years
|
|
|
Years
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3
|
|
|
4-5
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Long-term debt obligations
(1)
|
|
$
|
8,055
|
|
|
$
|
3,333
|
|
|
$
|
4,722
|
|
|
$
|
|
|
|
$
|
|
|
Estimated interest payments on debt
obligations
(2)
|
|
|
561
|
|
|
|
364
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
Operating and capital
leases
(3)
|
|
|
7,661
|
|
|
|
2,006
|
|
|
|
3,757
|
|
|
|
1,745
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,277
|
|
|
$
|
5,703
|
|
|
$
|
8,676
|
|
|
$
|
1,745
|
|
|
$
|
153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Term loan: $10.0 million term loan executed in April 2009
with a stated interest rate of prime rate plus 1.50% per annum,
with a minimum prime rate of 4.00% per annum, resulting in a
minimum rate of 5.50% per annum, and a maturity date of
May 1, 2012.
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(2)
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Estimated interest payments assume the minimum rate of
5.5% per annum based on current terms.
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(3)
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We lease facilities under noncancelable operating leases
expiring at various dates through 2015.
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Off-Balance Sheet
Arrangements
We have no off-balance sheet arrangements.
Recent Accounting
Pronouncements
In October 2009, the FASB issued Accounting Standards Update
(ASU)
2009-13
Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues
Task Force
(ASU
2009-13).
ASU
2009-13
addresses how to measure and allocate arrangement consideration
to one or more units of accounting within a multiple-deliverable
arrangement. ASU
2009-13
modifies the requirements for determining whether a deliverable
can be treated as a separate unit of accounting by removing the
criteria that objective evidence of fair value exists for the
undelivered elements in order to account for those undelivered
elements as a single unit of accounting. ASU
2009-13
is
effective for the Company prospectively for revenue arrangements
entered into or materially modified beginning January 1,
2011. Early adoption is permitted. We are currently evaluating
the impact the adoption of ASC
2009-13
will
have on our financial condition and results of operations.
64
Quantitative and
Qualitative Disclosure about Market Risk
Market
Risk.
Our
exposure to market risk is directly related to our role as an
investment advisor for the professionally managed accounts for
which we provide portfolio management services. 62% of our
revenue for the year ended December 31, 2009, was derived
from fees based on the market value of AUM. We expect this
percentage to increase over time. A decrease in the aggregate
value of AUM may cause our revenue and income to decline.
Interest Rate
Risk.
Interest
payable on the $10.0 million term loan we entered into as
of April 2009 is variable. We may borrow up to
$10.0 million under our term loan as either a prime rate
loan or a LIBOR rate loan. The interest rate with respect to a
prime rate loan is equal to 1.50% above prime rate, with a
minimum prime rate of 4.00% per annum, resulting in a minimum
interest rate of 5.50% per annum. The interest rate with respect
to a LIBOR loan is 4.00% above the three-month LIBOR measured on
a 360-day basis, with a minimum LIBOR rate of 1.50% per annum,
resulting in a minimum interest rate of 5.50% per annum.
Interest rate changes will therefore affect the amount of our
interest payments, future earnings and cash flows.
65
BUSINESS
Retirement
Industry Overview
The United States retirement savings industry is large and
growing. Although Social Security is perhaps the best-known
source of retirement assets, there are significant sources of
retirement assets beyond Social Security. According to Cerulli
Associates 2009 Retirement Markets Update, non-Social Security
retirement assets grew from approximately $11.6 trillion in 2003
to approximately $16.5 trillion in 2007 before falling to
approximately $13.0 trillion in 2008, representing a compound
annual growth rate of 2.4%, and are anticipated to be
approximately $20.4 trillion by 2014. Retirement assets fall
primarily into two categories: defined benefit plans and defined
contribution plans. In defined benefit plans, such as corporate
or government pension plans, participants receive specified
monetary distributions upon retirement. In most cases,
professional asset managers, rather than individual investors,
make investment decisions for defined benefit plans. In defined
contribution plans, such as 401(k), 403(b) and 457 plans, which
we collectively refer to as 401(k) plans, participants
contribute a specified dollar amount into the plan on a regular
basis by means of payroll deductions and, upon retirement, can
draw from the amount of money resulting from these contributions
and, in some cases, company matching contributions and the
investment return of the contributions and company match. Unlike
defined benefit plans, individual investors, rather than
professional asset managers, are generally responsible for
making investment decisions in defined contribution plans.
Individual Retirement Accounts, or IRAs, are personal savings
accounts that are typically directed by the individual and are
not sponsored by a corporate or governmental employer.
Cerulli Associates estimates that private defined contribution
assets, excluding IRAs, were approximately $2.6 trillion and
constituted more than 20% of total retirement assets in the
United States, excluding Social Security, in 2008, with
approximately 58 million active 401(k) plan participants as
of December 31, 2008. Cerulli Associates also estimates a
compound annual growth rate of 7.1% for 401(k) assets from 2009
to 2014. This compares to an estimated 6.6% compound annual
growth rate for total retirement assets over the same time
period.
Actual and
Estimated Retirement Market Assets by Segment 2003
2014E
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Source:
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Cerulli Associates 2009 Retirement Markets Update. Excludes
Social Security.
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66
Retirement
Industry Trends
Shifting
Demographics Drive a Growing Need for Retirement
Assistance.
The
ongoing growth in retirement assets, especially 401(k) assets,
is driven in part by individuals seeking to supplement
retirement funds they expect to receive from Social Security and
corporate defined benefit plans. Defined contribution assets,
including 401(k) assets, are not evenly distributed by age.
According to data contained in the Federal Reserve Boards
Survey of Consumer Finances for 2007, households headed by
individuals age 45 through 64 represented 45% of all
retirement account holders but account for 56% of the assets in
retirement accounts. Members of the Baby Boomer generation,
which refers to individuals born between 1946 and 1964, will
start to reach traditional retirement age in 2011. However,
studies suggest that many Baby Boomers are not financially
prepared to support themselves in retirement. The Employee
Benefits Research Institute, or EBRI, 2009 Retirement Confidence
Survey indicates that approximately 36% of the workers
age 45 through 54, and approximately 30% of workers age 55
or older, report total savings and investments, excluding the
value of their primary residence and any defined benefit plans,
of less than $10,000. A study published in October 2009 by EBRI
and the Investment Company Institute estimated that the median
401(k) balance was approximately $12,655 at year-end 2008.
Despite the increased reliance on defined contribution plans, we
believe many investors are not equipped to adequately formulate
an investment strategy for their retirement assets. As a result,
we believe investors face significant risk and potentially
inappropriate market exposure and asset allocations. According
to research by the Investment Company Institute and EBRI, the
average 401(k) account lost 24.3% in value over the course of
2008. As a result, we believe individuals across all age groups
need assistance with investing their 401(k) assets and making
other adjustments to their retirement plans to help them retire
with sufficient income.
Growing
Reliance on Defined Contribution
Plans.
As
employer-sponsored retirement plans continue to shift from
defined benefit plans to defined contribution plans, the
responsibility for making retirement investment decisions shifts
from professional pension fund managers to individual investors.
According to Cerulli Associates, the number of corporate defined
benefit plans has declined from 56,400 in 1998 to an estimated
48,000 in 2008, with 190 additional defined benefit plans in
Fortune 1000 companies being terminated or frozen during
2009. When a defined benefit plan is frozen to all employees or
closed to new employees, the benefit level will no longer rise
based on future service or salary increases, or new employees do
not participate in these plans at all. Of the workers surveyed
in EBRIs 2009 Retirement Confidence Survey, 42% estimate
that a major source of their retirement funds will come from
employer-sponsored
retirement savings plans. The 2009 Retirement Confidence Survey
suggests that workers between the ages of 25 and 34 are even
less likely than older workers to rely on income from Social
Security. As a result, we believe that these workers will need
to accumulate greater savings amounts outside of defined benefit
plans for retirement.
Changing Legal
and Regulatory
Framework.
As
the burden of retirement investing shifts to the individual, we
believe that there is an increasing need for assistance and
guidance on how to manage retirement wealth. However, according
to a 2009 survey by Hewitt Associates, the primary reason cited
by plan sponsors for not making investment advice available to
employees has been the fear of increased fiduciary or legal
risk. We believe the Pension Protection Act of 2006 and
subsequent Department of Labor regulations can reduce these
concerns. In addition to providing specific guidelines for plan
sponsors to automatically enroll employees into qualified plans
and accelerate contributions on an annual basis, the Pension
Protection Act of 2006 further supports the existing foundation
for professional asset management of 401(k) accounts. Adherence
to these guidelines provides specific safeguards to plan
sponsors from fiduciary and legal risk. As a result, we
anticipate that the Pension Protection Act will continue to
accelerate demand for advisory services.
The Pension Protection Act of 2006 also mandated that the
Department of Labor define what are known as Qualified Default
Investment Alternatives, or QDIAs. QDIAs are default investment
67
options to which a plan sponsor can direct participants
ongoing contributions when automatically enrolling employees
into 401(k) plans. The Department of Labor defines three
qualified default investment options as QDIAs: professionally
managed accounts, balanced funds and lifecycle funds. A plan
sponsor that elects to automatically default plan participant
contributions into a QDIA in accordance with the regulation
receives a fiduciary safe harbor protecting the plan sponsor
from potential liability that arises from adoption of automatic
enrollment. We believe that the designation of managed accounts,
such as our Professional Management service, as a QDIA will
continue to increase demand for managed accounts.
Automatic
401(k).
As
a result of the Pension Protection Act of 2006 and Department of
Labor guidelines, more plan sponsors are now actively seeking
automatic retirement savings solutions for their employees.
According to a 2009 401(k) plan survey conducted by Hewitt
Associates, the percentage of employers that automatically
enroll new participants increased from 19% in 2005 to 58% in
2009. Similarly, automatic contribution escalation, where
employees contribution rates are automatically increased
over time unless the employee affirmatively elects otherwise,
increased from 9% in 2005 to 44% in 2009. A 2006 report by the
Retirement Security Project estimates that the automatic 401(k)
could increase net national saving by about 0.34% of gross
domestic product per year, or approximately $44 billion per
year. A growing trend within the automatic 401(k) is changing
the default investment option to a target-date fund or managed
account and re-enrolling existing plan participants into the new
default investment option.
Automatic 401(k)
Enrollment
1997-2009E
Note: Percentage of employers who automatically enrolled
new employees into 401(k) plans.
Source: Hewitt Associates Survey Findings: Trends and Experience
in 401(k) Plans 2009.
68
Greater Use of
Managed Accounts Among
Near-Retirees.
A
2009 study by EBRI, based on 2007 data, reported that workers
under the age of 30, with lower incomes, less time on the job
and with few assets are significantly more likely to have assets
invested in target-date funds than are older workers. The study
found that almost 44% of participants under 30 had assets in a
target-date fund, compared with 27% of those 60 or older.
Target-date funds and managed accounts can complement each other
within 401(k) plans because they can appeal to different
participants with different needs. We believe that younger
workers are more likely to utilize target-date funds and
near-retirees, who generally hold outside assets and are looking
for more retirement planning help, are more likely to use
managed accounts.
Our
Company
We are a leading provider of independent, technology-enabled
portfolio management services, investment advice and retirement
help to participants in employer-sponsored defined contribution
plans, such as 401(k) plans. We help investors plan for
retirement by offering personalized plans for saving and
investing, as well as by providing assessments of retirement
income needs and readiness, regardless of personal wealth or
investment account size. We use our proprietary advice
technology platform to provide our services to millions of
retirement plan participants on a cost-efficient basis. We
believe that our services have significantly lowered the cost
and increased the accessibility to plan participants of
independent, personalized portfolio management services,
investment advice and retirement help.
Our business model is based on workplace delivery of our
services. We target three key constituencies in the retirement
plan market: plan participants (employees of companies offering
401(k) plans), plan sponsors (employers offering 401(k) plans to
their employees) and plan providers (companies providing
administrative services to plan sponsors). We provide the
following benefits for each of these constituencies:
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For retirement plan participants, we provide personalized,
unconflicted advice and management services unique to each
individuals specific investment needs and goals, using the
investment options available through their employer-provided
plan. We offer three principal services:
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Professional Management
is a discretionary managed
account service designed for plan participants who want
affordable, personalized and professional portfolio management
services, investment advice and retirement help from an
independent investment advisor without the conflicts of interest
that can arise when an advisor offers proprietary products. Our
investment recommendations are limited to the investment
alternatives available in a 401(k) plan as determined and
approved by a plan fiduciary other than us, although we do take
into account other identified holdings of the plan sponsor or
the plan participant when offering investment advice. With the
exception of employer stock, if any, included as an investment
alternative, we do not provide advice on or manage
single-company securities. We do not consult with, or make
recommendations to, the plan sponsor regarding which investment
alternatives to make available in a participant plan. With this
service, individuals delegate investment decision-making and
trading authority to us, which is referred to as discretionary
authority. The Professional Management service is our fastest
growing service, with Assets Under Management, or AUM, growing
at a compound annual growth rate of approximately 90% since
December 31, 2004 to approximately $25.7 billion as of
December 31, 2009. Plan sponsors choosing to make our
Professional Management service available typically also make
available our Online Advice service. In some cases, we provide
this service by acting as a subadvisor to a plan provider acting
as the investment manager to plan participants.
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Online Advice
is a nondiscretionary Internet-based
service designed for plan participants who wish to take a more
active role in personally managing their portfolios and offers
personalized advice for retirement portfolios. With this
service, plan participants may elect to follow the online advice
without delegating investment decision-making and trading
authority to us, making this a nondiscretionary service. In some
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cases, we provide this service by acting as a subadvisor to a
plan provider acting as the investment advisor to plan
participants.
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Retirement Evaluation
is a retirement readiness
assessment provided to plan participants upon rollout and
generally annually thereafter, together with a Professional
Management enrollment form. Retirement Evaluations highlight
specific risks in a plan participants retirement account
and assess the likelihood of achieving the plan
participants retirement income goals. The assessment also
provides guidance on how to reduce these highlighted risks and
introduces our services as a means of obtaining help in
addressing these issues.
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For retirement plan sponsors, our services are designed to
improve employee satisfaction and reduce fiduciary and business
risk by evaluating, disclosing and addressing poor investment
and savings decisions by plan participants.
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For retirement plan providers, our services represent a
cost-effective method of providing personalized, independent
investment advice that is an attractive and increasingly
necessary service for the largest plan sponsors. Providing these
services helps plan providers compete more effectively in the
large plan market.
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We deliver our services to plan sponsors and plan participants
primarily through connections to eight retirement plan
providers. In addition, we have connectivity with Charles Schwab
to support one full suite plan sponsor. We target large plan
sponsors across a wide range of industries. As of
December 31, 2009, we had signed contracts to make our
services available through 116 Fortune 500 companies and
eight Fortune 20 companies. As of December 31, 2009,
we were under contract to provide either our full suite of
services, including Professional Management, Online Advice and
Retirement Evaluation, or our Online Advice service only,
through more than 760 plan sponsors with approximately
7.4 million plan participants whose retirement savings
represented more than $500 billion in assets. Within this
group, we provide our full suite of services to 354 plan
sponsors representing approximately 3.9 million
participants and approximately $269 billion in AUC. As of
December 31, 2009, we had approximately $25.7 billion
in AUM, and managed the accounts of approximately 391,000
members who have delegated investment decision-making authority
to us. Our AUC does not include assets in plans where we have
signed contracts, but for which we have not yet rolled out our
Professional Management service. Assets count for AUM once plan
participants actively or passively enroll in Professional
Management. The assets underlying our Online Advice only
service are not included in AUC. Retirement evaluation services
are part of our Professional Management service. We do not
derive revenue based on AUC. We believe however that AUC is
both a useful indication of the additional plan assets available
for enrollment efforts that, if successful, result in these
assets becoming AUM, and also indicates the benefit of
increasing our enrollment rates since this will lead to
additional AUM. As of December 31, 2009, we had 25 plan
sponsors, representing approximately 540,000 plan participants,
with which we had signed contracts but for which we had not yet
rolled out our Professional Management service.
Our business model is characterized by subscription-based,
recurring revenue. Our contracts with plan sponsors typically
have initial terms of three years and evergreen clauses that
extend the initial term until terminated by either party after a
specified notice period. Our revenue is derived from both
management fees and platform fees. The management fees we earn
are based on the value of the assets that we manage for plan
participants who have delegated investment decision-making
authority to us or to a plan provider for which we act as a
subadvisor. None of our fees are paid based on a performance or
other incentive arrangement. Our fees are not based on a share
of the capital gains or appreciation in a members account.
Our fees are determined by the value of the assets in the
members account at the specified date. The platform fees
we earn are derived through annual subscriptions paid by the
plan sponsor, plan provider or the retirement plan itself,
depending on the plan structure, and are based on the number of
eligible employees in the plan. We generated Professional
Management revenue of $52.6 million for 2009, an increase
of 35% from $39.0 million for
70
2008. We generated platform revenue of $30.0 million for
2009, an increase of 2% from $29.5 million for 2008.
The key steps associated with delivering our Professional
Management service are as follows:
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Contract with Plan Sponsor.
First, we sign a
contract to provide our Professional Management service to a
plan sponsors employees.
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Plan Rollout.
Second, we obtain plan and plan
participant data, set up the plan on our systems and make
services available to plan participants. Upon completion of
rollout, our services are available to all eligible participants
of that plan. As of December 31, 2009, we had approximately
$269 billion in AUC.
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Encourage Enrollment in Our Professional Management
Service.
Once the plan has been rolled out, we
deliver to plan participants retirement evaluations and
enrollment materials, either through the plan provider or
directly to plan participants, and with the support of plan
sponsors. As of December 31, 2009, our asset enrollment
rate for plans actively rolled out at least 14 months was
approximately 10.8% and our participant enrollment rate for
plans actively rolled out at least 14 months was
approximately 11.4%.
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Manage Assets.
Once a plan participant enrolls
in our Professional Management service, the retirement assets of
that plan participant count toward our AUM. As of
December 31, 2009, we had approximately $25.7 billion
of AUM. At this point, the plan participants 401(k) assets
are allocated pursuant to the participants investment
objectives and investment options available.
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We launched our Professional Management service in September
2004. From December 31, 2004 to December 31, 2009, we
had a compound annual growth rate, or CAGR, of 90% for AUM and
92% for membership. As of December 31, 2009, we had AUM of
approximately $25.7 billion and approximately 391,000
members, compared to AUM of approximately $15.6 billion and
approximately 322,000 members at December 31, 2008. Our
total revenue in 2009 was $85.0 million, compared to
$71.3 million in 2008, an increase of 19%. Of these
amounts, Professional Management revenue represented 62% in 2009
and 55% in 2008.
The following tables illustrate the increase in our AUM and
membership, and the corresponding CAGR, from December 31,
2004 to December 31, 2009.
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Assets
Under Management
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Total
Members
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All data are shown as of December
31 of the applicable year.
71
The following table illustrates the number of plan sponsors
where Professional Management is available, and the
corresponding CAGR. The data below includes plan sponsors where
no members had yet enrolled.
Total
Plan Sponsors
All data are shown as of December
31 of the applicable year.
Company
History
Financial Engines was co-founded in 1996 by Professor William F.
Sharpe, a recipient of the 1990 Nobel Prize in Economic Sciences
for his pioneering work on the theory of financial economics,
including how prices of financial assets are determined and the
link between risk and return, Professor Joseph A. Grundfest, a
former SEC commissioner and a professor of law at Stanford Law
School, and the late Craig Johnson, then Chairman of the Venture
Law Group. The company was founded to address the need for
independent investment advice. Traditionally, high quality,
personalized investment advice had been available only to large
institutions and the affluent. Professor Sharpes vision
was to leverage technology to make high quality independent
advice available to millions regardless of their wealth or
investment expertise.
A pioneer in our market, we introduced our Online Advice service
in 1998. Following the introduction of Online Advice, we focused
on expanding our service offerings to provide investors with
advice on multiple tax-deferred accounts and taxable
investments. Over the next five years, we made significant
investments in technology and usability of our platform that
allowed us to expand and enhance our service offerings,
including our Retirement Evaluation, a personalized printed
retirement assessment. In 2004, we launched our Professional
Management service to provide personalized and professional
portfolio management to retirement plan participants.
Our Market
Opportunity
We believe shifting retirement industry trends present us with
an opportunity to help plan sponsors provide independent
portfolio management services, investment advice and retirement
help to plan participants while working within the parameters of
ERISA, the Pension Protection Act and recent Department of Labor
regulations. Furthermore, the market downturn in 2008 has
highlighted the need for providing employees with retirement
help. We have the capability to provide portfolio management
services, investment advice and retirement help to plan
participants who previously did not have access to these
services, and we believe we can leverage our advice technology
platform to cost-effectively serve the fragmented plan
participant market.
Our Competitive
Strengths
We believe that our leading market position results from the
following key competitive strengths:
Independent
and Unconflicted
Advice.
We
believe that many plan participants value an investment advisor
that is independent and free from potential conflicts of
interests. We also believe that many plan fiduciaries value
making independent and unconflicted advice available to their
plan
72
participants. We do not receive differential compensation based
on the investments we recommend. We offer no proprietary
investment products and are free from the conflicts or the
perception of conflicts of interest that can arise for
competitors who offer such products. We do not hold assets in
custody or execute trades. Our investment recommendations are
limited to the investment alternatives available in a 401(k)
plan as determined and approved by a plan fiduciary other than
us, although we do take into account other identified holdings
of the plan sponsor or the plan participant when offering
investment advice. With the exception of employer stock, if any,
included as an investment alternative, we do not provide advice
on or manage single-company securities. We do not consult with,
or make recommendations to, the plan sponsors regarding which
investment alternatives to make available in a particular plan.
We are not associated with or controlled by any broker-dealer,
registered investment company, insurance company or financial
services organization. We believe our independence ensures that
our recommendations are based only on the best interests of
individual plan participants. We base our investment advice on
quantitative criteria applied through a computerized model that
is consistently applied through plan participants, plan
sponsors, plan providers and investment choices.
Proprietary
Investment Advice
Technology.
Our
technology-based investment process is based on a number of
methodologies pioneered by our co-founder and Nobel Laureate,
Professor William F. Sharpe, that are used by large
institutional investors, including pension funds and endowments.
We have applied and extended this core methodology to service
the needs of a wide range of individual investors while
achieving economies of scale.
Our technology-based investment approach incorporates the
following:
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Our Optimization Engine allows us to make personalized
investment recommendations chosen from the investment options
available within each plan, with consideration of the plan
participants individual circumstances including investment
horizon, existing investment allocations and characteristics of
his or her 401(k) plan, as well as any anticipated benefits from
other employer plans, such as cash balance or defined benefit
plans. Our Optimization Engine also considers other assets in a
plan participants household portfolio, allowing the advice
provided to adjust for the risks and correlations of other
financial assets, as well as the participants risk
tolerance. In addition, we provide personalized savings
recommendations to help participants reach their retirement
objectives.
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Our Simulation Engine allows us to model the characteristics of
more than 30,000 securities, including retail mutual funds,
stocks, employee stock options, institutional funds, guaranteed
investment contracts and stable value funds, exchange-traded
funds and fixed-income securities, taking into consideration
factors such as asset class exposures, expenses, turnover,
manager performance, active management risk, stock specific risk
and the securitys tax-efficiency. This allows our Advice
Engines to generate high quality recommendations over almost any
investment universe.
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Our Advice Engines ability to manage a plan
participants employer stock holdings is an attractive
feature to plan sponsors seeking to reduce the risk of fiduciary
liability that can arise when employer stock is included in a
401(k) plan. The advice produced by our Advice Engines also
generally reduces plan participants undiversified exposure
to the equity risk that results from holding an overly-high
concentration in employer stock. Managed accounts are the only
QDIA under the recent Department of Labor regulations that
provide a fiduciary safe harbor for plan sponsors that include
employer stock in their plans.
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Our Advice Engines are able to provide advice that takes into
consideration the impact of personal tax rates, unrealized gains
and losses, asset placement across taxable and tax-deferred
accounts and the tax efficiency of specific investments.
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Scalable
Technology
Platform.
Historically,
providing high quality investment advice to low balance
investors had been cost-prohibitive. We believe that our advice
technology platform allows us to cost-
73
effectively service the needs of individual investors with low
asset balances and provide sophisticated, personalized
investment advice that addresses the needs of millions of
individual investors, many of whom are underserved by the
financial services industry. Traditional advisors and asset
managers have typically focused on investors with financial
assets of several hundred thousand dollars or more. As of
December 31, 2009, approximately 45% of our Professional
Management members had less than $20,000 of retirement assets in
their accounts. The ability to serve these low balance plan
participants
cost-effectively
is a key advantage of our business model.
Significant Invested Capital.
Our
services are based on our proprietary technology, which we
developed over a number of years and in which we have invested
significant financial and personnel resources. We believe that
any potential competitor will face significant challenges in
terms of the human capital, time, money and technology required
to develop a competitive offering. Furthermore, the technology
interfaces that we have established with our retirement plan
providers and plan sponsors are complex and would be
time-consuming and costly for our plan providers and plan
sponsors to replicate.
Established Relationships and Data Connections with
Retirement Plan Providers.
Effectively
managing plan participant accounts requires relationships and a
data connection with the recordkeeping systems of those
retirement plans. We have built data transfer and retrieval,
transaction processing and fee deduction interfaces with a
number of retirement plan providers, including these eight
primarily: ACS, Fidelity, Hewitt, ING, JPMorgan, Mercer, T. Rowe
Price and Vanguard. Based on information from Pensions and
Investments, as of March 31, 2009, and from one of the plan
providers, we estimate that these eight plan providers
collectively service plan sponsors representing more than $1.5
trillion in plan assets, or more than 80% of the assets
contained in plans with more than 10,000 participants. In
addition, we have connectivity with Charles Schwab to support
one full suite plan sponsor. Building these connections are
major technical projects that we believe provide us with a
significant advantage over companies wishing to provide
retirement plan managed accounts. In addition, our connections
and arrangements with plan providers allow for direct deduction
of our fees from plan participant accounts, with the approval of
the plan sponsor.
Large, Industry-Leading Retirement Plan Sponsor
Clients.
As of December 31, 2009, we
were under contract to provide either our full suite of
services, including Professional Management, Online Advice and
Retirement Evaluation, or our Online Advice service only,
through more than 760 plan sponsors with approximately
7.4 million plan participants whose retirement savings
represented more than $500 billion in assets. Within this
group, we were under contract to make available our full suite
of services to more than 354 plan sponsors representing
approximately 3.9 million participants and approximately
$269 billion in AUC as of December 31, 2009. We
believe our brand recognition and experience serving plan
sponsors from a wide variety of industries provide us with a
competitive advantage. Our strategy of serving large plan
sponsors with complex plans has led us to develop a set of
product features, processes and organizational knowledge that is
attractive to other large plan sponsors that have similar plan
complexities. Companies with more than 5,000 employees
account for 0.4% of all 401(k) plans and 52% of all 401(k)
assets as of 2008, according to Cerulli Associates. We believe
that among discretionary managed account providers, we have the
largest installed base of plan sponsors that have more than
10,000 participants. As of December 31, 2009, we had signed
contracts to make our services available through 116 Fortune 500
and eight Fortune 20 companies. We believe the quality and
quantity of our plan sponsor customer base further enhances our
position as an acknowledged leader in our markets. Furthermore,
we believe that many plan sponsors that contemplate switching
plan providers consider the availability of our services on
alternative plan provider platforms in making their decisions.
We believe that this in turn provides incentives to plan
providers to maintain ongoing relationships with Financial
Engines.
74
Our Business
Model
Recurring and
Resilient Revenue
Base.
We
believe our business model has structural advantages that allow
us to demonstrate resiliency in difficult environments. We
currently serve investors with 401(k) accounts that, unlike
non-retirement investment accounts, generally receive consistent
automatic contributions from participants and have adverse tax
treatment on early withdrawals. We create portfolios with a
diversified mix of equity and fixed income exposure designed to
reduce volatility. Our investment methodology also avoids market
timing biases that can increase volatility for investors. In
addition, our contracts with plan sponsors typically have
initial terms of three years and evergreen clauses that extend
the initial term until terminated by either party after a
specified notice period. Our technological connectivity with
plan providers and plan sponsors results in low sponsor turnover
and high switching costs should a competitor try to win these
accounts. In a given year, our Professional Management revenue
consists of recurring revenue earned from contracts in place
prior to the beginning of that year. Revenue from contracts in
place as of December 31, 2008 accounted for approximately
99% of our total revenue for the year ended December 31,
2009.
While market declines may affect the value of our AUM, we
believe our business model may mitigate the effects of market
declines. From December 31, 2007 to December 31, 2008,
our AUM declined approximately 4%. This was a challenging time
for the equity markets, as shown by a decline in the S&P
500 of approximately 38% over the same period. We believe the
effect on our AUM during this period was mitigated as a result
of new business, ongoing participant contributions and less
volatile investment performance among other factors. From
December 31, 2008 to December 31, 2009, our AUM
increased 65%.
The table below illustrates the level of the S&P 500 and
our AUM, measured as of the last day of the quarter in each of
the past five quarters. Changes in AUM reflect ongoing
enrollment from new members and ongoing contributions into
member accounts. Factors that may cause our AUM to fluctuate
include, but are not limited to, the performance of financial
markets globally, new enrollments and participant contributions
or cancellations. This table does not reflect our prediction or
belief as to how our AUM will perform in relation to the
S&P 500 in future periods or on future dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
Change from
|
|
|
|
AUM*
|
|
|
|
Increase from
|
|
Quarter
|
|
|
S&P 500*
|
|
|
|
Prior Quarter
|
|
|
|
(in billions)
|
|
|
|
Prior Quarter
|
|
Q4 2008
|
|
|
|
903
|
|
|
|
|
(23
|
)%
|
|
|
$
|
15.6
|
|
|
|
|
|
|
Q1 2009
|
|
|
|
798
|
|
|
|
|
(12
|
)%
|
|
|
$
|
16.1
|
|
|
|
|
3
|
%
|
Q2 2009
|
|
|
|
919
|
|
|
|
|
15
|
%
|
|
|
$
|
19.5
|
|
|
|
|
21
|
%
|
Q3 2009
|
|
|
|
1057
|
|
|
|
|
15
|
%
|
|
|
$
|
23.5
|
|
|
|
|
21
|
%
|
Q4 2009
|
|
|
|
1115
|
|
|
|
|
5
|
%
|
|
|
$
|
25.7
|
|
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
*
|
|
Measured as of the last day of the applicable quarter.
|
Attractive
Economic
Model.
We
believe the scalability of our technology platform results in
attractive
per-member
economics. We incur significant up-front expenses to establish
connectivity with plan provider and plan sponsor platforms.
After establishing connectivity, we are able to add new plan
sponsors and new members with less than pro rata incremental
expenses. However, we do also incur one-time new member
acquisition costs, which include costs of the personnel
associated with marketing to prospective members and costs
related to printing and postage of enrollment materials. These
acquisition costs are significantly higher than our ongoing
servicing costs to manage existing member accounts in subsequent
years. We experience relatively high contribution margins in the
years following the acquisition of a new member. In 2009, we
averaged approximately $145 in revenue per member and
approximately $42 in ongoing variable servicing costs per
member. Ongoing variable servicing costs include data
connectivity fees to plan providers, retirement updates and
other member materials, as well as the expense associated with
our advisor center, operations and portfolio
75
management teams. Our fixed costs and other variable costs, such
as any other portions of our service delivery and investment
management teams, as well as technology, sales and marketing,
and general and administrative teams which may also be involved
with member servicing, are not included as these teams are
primarily dedicated to activities other than member servicing
and any incremental costs which may be associated with member
servicing have generally been insignificant. Accordingly, it is
difficult to estimate the actual total ongoing variable
servicing costs per member and these costs are likely to vary in
the future.
Sole Access
and Customer
Retention.
Our
business model enjoys a number of structural advantages that
result in sole access to plan participants and high plan sponsor
retention levels. The 354 plan sponsors representing
approximately $269 billion in AUC who make available our
Professional Management service have each made us the sole
provider of these services to their plans. We believe this
reflects the desire of plan sponsors to avoid inconsistent
methodologies, to simplify choices for plan participants and to
avoid building new data connections with multiple investment
advice vendors.
Since the launch of our Professional Management service in
September 2004, we have retained over 96% of our plan sponsor
clients each year. We believe this reflects the desire of plan
sponsors to maintain continuous and consistent provision of
investment advisory services for their employees. In addition,
we have been largely unaffected if a plan sponsor changes its
underlying recordkeeping platform or the investment alternatives
available to its employees because of the breadth of our data
connections and our independent investment methodology.
Significant
Growth Opportunity Within Our Existing Customer
Base.
We
believe our business has a significant opportunity for growth
from our existing customer base. As of December 31, 2009,
we had approximately $25.7 billion in AUM and approximately
391,000 members, while our Professional Management services were
available to employees representing approximately
$269 billion in AUC and approximately 3.9 million
potential members. This implies a participant enrollment rate,
or the percentage of plan participants who use our Professional
Management service, across all plans where Professional
Management is available, including plans where enrollment
campaigns are not concluded or have not yet been commenced, of
approximately 10.0%. The growth from ongoing contributions,
market returns and AUM penetration of existing sponsors will
provide us with the ability to increase our revenue and net
income. With our scalable technology, we will be able to use our
existing infrastructure to serve additional members without
significantly increasing servicing costs. We believe we can
increase our revenue and net income by increasing our
participant enrollment rate within our existing client base.
Our Growth
Strategy
Increase
Penetration Within Our Existing Professional Management Plan
Sponsors.
We
believe we have a significant opportunity for growth within our
existing plan sponsor base that offers our Professional
Management service to plan participants by increasing enrollment
rates for our Professional Management service. Our focus is to
encourage enrollment in our Professional Management service in
order to help employees reach their retirement goals and plan
sponsors execute their duties as prudent plan fiduciaries. As of
December 31, 2009, we managed approximately 10.8% of plan
assets in plans to which our Professional Management service has
been actively rolled out for at least 14 months. We plan to
increase enrollment by both continuing to promote our services
to participants in Active Enrollment campaigns and encouraging
plan sponsors to initiate Passive Enrollment campaigns. Active
Enrollment campaigns require that plan participants proactively
sign up for our services. Passive Enrollment campaigns
automatically enroll some or all of a plan sponsors plan
participants into our Professional Management service unless the
individual participant declines or opts-out of the
service.
Over time, we believe that we can increase our enrollment rate
in Active Enrollment campaign plans through annual enrollment
campaigns, direct marketing to plan participants and other
76
promotional activities. Our past experience has shown that in
cases where a plan sponsor used Passive Enrollment, the
enrollment rate of plan assets was higher and achieved at lower
acquisition cost per member than in cases where a plan sponsor
used Active Enrollment. We believe Passive Enrollment is
attractive to plan sponsors due to the lower fees payable by
plan participants who are passively enrolled, the fiduciary
protection afforded to plan sponsors by participants having to
affirmatively elect not to receive professional advice and the
relatively higher number of participants likely to be enrolled
and receiving professional management upon rollout. We believe
that the adoption of Passive Enrollment among more plan sponsors
will likely increase our AUM as a result of the higher
enrollment rates that these campaigns historically generate.
Depending on the proportion of the plans participants who
are passively enrolled, we eliminate or reduce our platform
fees, as well as reducing the fees payable by plan participants.
We measure enrollment in our Professional Management service by
members as a percentage of plan participants, and by AUM as a
percentage of AUC, in each case across all plans where
Professional Management is available, including plans where
enrollment campaigns are not yet concluded or have not been
commenced. In addition to measuring enrollment in all plans that
have been rolled out, we measure enrollment in plans that have
been actively rolled out for at least 14 months and in
plans that have been actively rolled out for at least
26 months. We consider a plan to be actively rolled out
upon mailing of initial enrollment materials. We measure
enrollment in plans that have been rolled out for at least
14 months and at least 26 months because we generally
seek to commence annual campaigns 12 months after the start
of the prior campaign, and each campaign typically lasts
45-60 days.
|
|
|
|
|
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|
|
|
|
|
|
|
|
Members as a
|
|
|
AUM as a
|
|
|
|
Percentage of
|
|
|
Percentage of
|
As of December 31, 2009
|
|
|
Eligible Participants
|
|
|
AUC
|
All plans rolled out
|
|
|
|
10.0
|
%
|
|
|
|
9.5
|
%
|
All plans actively rolled out 14 months or more
|
|
|
|
11.4
|
%
|
|
|
|
10.8
|
%
|
All plans actively rolled out 26 months or more
|
|
|
|
12.3
|
%
|
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Enhance and
Extend Our Services as Baby Boomers Enter
Retirement.
While
the financial services industry has largely focused on helping
Baby Boomers accumulate assets for retirement, we believe there
is a growing need for services to help convert their accumulated
retirement assets into stable lifetime income. According to data
contained in the Federal Reserve Boards Survey of Consumer
Finances for 2007, households headed by individuals age 45
through 64 represented 45% of all retirement account holders but
account for 56% of the assets in retirement accounts. While
accumulating enough assets for retirement is challenging for the
average investor, the calculation of how to spend retirement
assets is even more intimidating as individuals bear the risk of
outliving their assets. A McKinsey & Company report,
Redefining Defined Contribution (2007), indicated
that 85% of the consumers concerned or extremely concerned about
not having a sufficient income for retirement are interested in
seeking advice on how to guarantee sufficient income for
retirement.
We have plans to extend our services to help investors turn
those retirement assets into stable lifetime income. With many
Baby Boomers now reaching traditional retirement age, we believe
there is an opportunity for us to expand our services to offer
cost-effective, objective and convenient solutions to help
retirees safely convert their accumulated assets into stable
lifetime income. We believe our established investment
methodology, technology, communications and access to our
Investment Advisor Representatives can form the basis of an
attractive service for individuals who need payouts from their
retirement accounts. We believe our existing relationships with
retirement plan providers, plan sponsors and plan participants
provide us with an opportunity to extend our services to help
manage the complex challenge of turning retirement investments
into retirement income. Approximately 42% of our current
Professional Management members are over the age of 50 and
represent 62% of assets in our Professional Management program
as of December 31, 2009.
77
Address IRA
Rollover
Market.
We
also intend to expand our services to help members of our
Professional Management program who roll over their 401(k) into
an IRA account available through the plan provider. We believe
that our pre-existing relationships with many 401(k)
participants will provide an advantage as we expand into the IRA
rollover market. We also plan to help other individual IRA
investors manage and draw down income from their IRAs. We
believe that the existing technology, distribution relationships
and operational scale we have developed will be directly
applicable to serving millions of IRA investors
cost-effectively. According to Cerulli Associates, the IRA
market, with more than $3.6 trillion in assets as of
December 31, 2008, and a historical five-year compound
annual growth rate approaching 3.8% per year, is estimated to
grow faster than any other part of the retirement market, due
largely to retirees rolling their assets from a 401(k) plan to
an IRA.
Increase
Defined Contribution Market
Penetration.
We
also plan to expand our services to more fully serve the defined
contribution market. We currently focus our sales and marketing
efforts on large, corporate defined contribution plans, or
401(k) plans, and have little penetration into public defined
contribution plans such as 403(b) and 457 plans. We believe that
the existing technology, distribution relationships and
operational scale we have developed will be directly applicable
to serving millions of 403(b) and 457 investors
cost-effectively, as well as participants at employers with
fewer employees.
Expand Number
of Retirement Plan
Sponsors.
We
deliver our services to plan sponsors and plan participants
primarily through existing connections with eight retirement
plan providers. Based on information from Pensions and
Investments, as of March 31, 2009, and from one of the plan
providers, we estimate that these eight plan providers
collectively service plan sponsors representing more than $1.5
trillion in plan assets, or more than 80% of the assets
contained in plans with more than 10,000 participants. As of
December 31, 2009, we had approximately $269 billion
in AUC. We intend to sell our services to other plan sponsors
that are not current clients but are serviced by plan providers
with whom we have relationships. We also plan to create data
connections with additional plan providers to access defined
contribution plans of educational institutions as well as
non-profit organizations and government entities.
Offer
Professional Management Service to Online Only Plan
Sponsors.
As
of December 31, 2009, we provided our Online Advice service
to more than 380 of our plan sponsor customers, but do not offer
our Professional Management service to them. We plan to pursue
growth by seeking to convert a number of the largest of these
plan sponsors to our full suite of services, including
Professional Management, Online Advice and Retirement
Evaluation. As of December 31, 2009, we were under contract
to provide our full suite of services through more than
760 plan sponsors with approximately 7.4 million plan
participants whose retirement savings represented more than
$500 billion in assets. More than one million participants
have accepted our online services agreement. We believe that
successfully converting a portion of the 401(k) assets in our
online-services-only plans into AUC, and then into AUM, will
likely increase future revenue because we would earn fees based
on AUM as well as the flat fee paid by the plan sponsor.
Products and
Services
We provide individuals with personalized portfolio management
services, investment advice and retirement help to plan
participants through plan providers. Our services address some
of the most important questions and concerns faced by plan
participants as they prepare for retirement, including:
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|
|
|
|
How much will I need when I retire?
|
|
|
|
Will I have enough money to retire?
|
|
|
|
How should I invest my money?
|
|
|
|
When can I retire and how much can I spend when I do?
|
78
Professional
Management.
Our
Professional Management service, a discretionary managed account
service launched in 2004, is designed for 401(k) participants
who want affordable, personalized and professional portfolio
management, investment advice and retirement help from an
independent investment advisor with no conflicts of interest.
With this service, plan participants delegate investment
decision-making and trading authority to us, which is referred
to as discretionary authority. We developed our Professional
Management service to reach a large number of plan participants
on a cost-effective basis and assist them on the path to a
secure retirement. When plan participants enroll in our
Professional Management service, we use our Advice Engines to
create personalized, diversified portfolios and provide ongoing
Professional Management.
Members enrolled in the Professional Management service receive
a Retirement Plan, which analyzes their investments,
contribution rate and projected retirement income. The
Retirement Plan provides advice on their annual contribution
amount, shows how we propose to allocate their investments and
forecasts their retirement income relative to a retirement goal.
Members are encouraged to provide their desired retirement age,
risk preference, employer stock holding preference and
information regarding certain other assets that they hold
outside of their 401(k) account. Any personal information
provided is used to customize a new portfolio allocation that is
reflected in a revised Retirement Plan. Each member portfolio is
reviewed every three months and transactions are executed, if
necessary, to reallocate the investments. The member also
receives a quarterly Retirement Update that shows how they are
progressing towards their retirement goals and describes any
changes that we have made to their investment allocations.
Members can, at any time, call one of our registered Investment
Advisor Representatives or log in to a website to check their
progress or further tailor their portfolio to their personal
circumstances. Our registered Investment Advisor
Representatives, and certain call center personnel of the plan
providers with whom we work, have access to the Financial
Engines Professional Advisor, our proprietary client
relationship management application, enabling the advisor to
change or add to the personal information used to manage the
members account and explain to the member the impact of
any changes on the members projected future 401(k)
balance. Registered Investment Advisor Representatives can
modify member inputs but not Advice Engine outputs and
recommendations. As members approach retirement, they are
offered a Retirement Checkup, which is a phone-based
consultation with an Investment Advisor Representative. During
the Retirement Checkup, the Investment Retirement Representative
confirms the participants retirement goal, reviews the
participants retirement income forecast and helps the
participant close the gap, if any, by exploring alternatives,
such as the impact of increasing savings or adjusting the
participants retirement age. As of December 31, 2009,
we had 17 Investment Advisor Representatives. We additionally
rely on supervisors and other trained employees and personnel
when call volumes are high. We expect to increase modestly the
number of Investment Advisor Representatives to support
Retirement Checkups and outbound calling initiatives.
Online Advice.
Our Online Advice
service, launched in 1998, is a nondiscretionary Internet-based
service designed for plan participants who wish to take a more
active role in personally managing their portfolio. With this
service, plan participants may elect to follow the online advice
without delegating investment decision-making and trading
authority to us, making this a nondiscretionary service. This
Internet-based service includes interactive access to simulation
and portfolio optimization technologies through our Advice
Engines. Plan participants see a forecast that shows how likely
they are to reach their desired retirement goals, get
recommendations on which investments to buy or sell and simulate
how their portfolios might perform under a wide variety of
economic scenarios. They can also explore different levels of
investment risk, savings amounts and retirement horizons, as
well as get tax-efficient advice on accounts other than their
401(k). The Online Advice service is integrated with single
sign-on to the plan providers 401(k) website, which
enables data pre-population and, typically, the ability to
initiate transactions directly from the Online Advice service. A
version of the service is also available to retail investors
directly through our website.
79
Retirement Evaluation.
When our full
suite of services is being offered in a plan, we send each
eligible plan participant a Retirement Evaluation or similar
retirement readiness assessment upon rollout and generally
annually thereafter, together with a Professional Management
enrollment form. Retirement Evaluations highlight specific risks
in a plan participants retirement account, provide an
assessment of the likelihood of achieving the plan
participants retirement income goal, provide guidance on
how to reduce those risks and introduce our services as a means
of obtaining help in addressing these issues. Retirement
Evaluations are based on data provided by the plan provider and
include an evaluation of how well the plan participant is
investing and saving in the retirement plan. Specifically, the
evaluation considers the individual plan participants
risk, diversification, employer stock concentration and 401(k)
contribution rate.
Investment
Process and Methodology
Our goal is to apply investment techniques traditionally
available only to large, sophisticated investors to help small,
individual investors achieve their retirement goals. Our advice
services incorporate several of the methodologies developed by
our co-founder and economics Nobel Laureate, Professor William
F. Sharpe. We use Monte Carlo simulation and proprietary
optimization techniques to provide plan participants with
cost-effective, sophisticated, personalized and unconflicted
advice. Monte Carlo simulation is widely used in investment
management and is a statistical technique in which many
simulations of an uncertain quantity are run to model the
distribution of possible outcomes.
We model more than 30,000 securities, including retail mutual
funds, stocks, employee stock options, institutional funds,
guaranteed investment contracts and stable value funds,
exchange-traded funds and fixed-income securities on an ongoing
basis. When providing simulations and investment
recommendations, our methodology evaluates a variety of factors
that impact investment returns, including: fees, portfolio
turnover, management performance, tax-efficiency, a funds
investment style where we identify the underlying asset class
exposures and active management risk associated with asset
allocation changes by a fund manager in response to market
conditions and decisions to weight specific security holdings
differently than comparable indices. By modeling the
characteristics of specific investment alternatives, we are able
to provide quantitative estimates of possible future outcomes
and make investment recommendations. We are able to model the
complexities found in large retirement plans and to provide
investment advice to plan participants that can be implemented
within the limits of a given plans available options.
Unlike traditional advisory services, we do not rely on the
subjective evaluation of each plan participants portfolio
by a human investment advisor. Instead, our services rely on
Advice Engines that accept inputs on available investment
choices along with a variety of personal information including:
risk tolerance, investment horizon, age, savings, outside
personal assets, investor preferences and tax considerations.
This approach results in a consistent, systematic and objective
investment methodology in which the advice generation is
distinct from the method of delivery, which may be online, via
printed materials or through phone conversations with our
registered Investment Advisor Representatives or the call center
representatives of certain plan providers with whom we have
relationships. The representatives who are available by phone to
speak with Professional Management members have the ability to
change or add to the personal information used to manage the
members account and explain to the member the impact of
any changes on the members projected future 401(k)
balance. Registered Investment Advisor Representatives can
modify member inputs but not Advice Engine outputs and
recommendations. This process is designed to ensure that the
advice is personalized and consistent regardless of the asset
balance of the plan participant, or the channel through which
the plan participant receives our advice. This process also
ensures that the investment recommendations are consistent
across plan providers, plan sponsors and plan participants.
Finally, this approach enables a detailed audit trail of the
recommendations provided to each plan participant over time to
assist with regulatory responsibilities.
80
To maintain the quality of our investment recommendations, our
Advice Engines incorporate a wide variety of automated checks
and validation procedures. These processes are overseen by
multiple groups within our Investment Management and Service
Delivery organizations. These processes help verify that the
data inputs into our systems are timely and accurate, and that
the resulting investment recommendations reflect the correct
application of our investment methodology. We devote substantial
ongoing product development to the maintenance and development
of these data and advice validation procedures.
Our investment recommendations are limited to the investment
alternatives available in a 401(k) plan as determined and
approved by a plan fiduciary other than us, although we do take
into account other identified holdings of the plan participant
when offering investment advice. With the exception of employer
stock, if any, included as an investment alternative, we do not
provide advice on or manage single-company securities. We do not
consult with, or make recommendations to, the plan sponsor
regarding which investment alternatives to make available in a
particular plan.
We offer no proprietary investment products. We are free of the
conflicts of interest, or the perceptions of conflicts of
interest, that can arise for competitors who offer such
products. We do not receive differential compensation based on
the investments we recommend. We do not hold assets in custody
or execute trades.
We 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 horizon, other
financial assets and risk preferences.
We maintain an ongoing research program to improve and extend
our investment methodologies and our portfolio management and
investment advisory services. We conduct research into the needs
of retirees, publishing new findings in academic and
practitioner journals. Recent research has included a behavioral
finance study of the demand for annuities, efficient methods for
addressing longevity risk and efficient methods for generating
retirement income. This research can form the basis of
extensions to our current investment methodology that can enable
services that allow our Professional Management program to help
participants generate stable retirement income from accumulated
defined contribution assets. We believe that these extensions
can expand the opportunity to manage assets for participants
both within existing sponsored plans as well as in IRA rollover
accounts.
Investment
Performance
Historical investment performance is one factor that plan
sponsors evaluate when deciding whether to offer our
Professional Management service to their employees and when
monitoring the investment manager selected. Because each of our
Professional Management portfolios is personalized to the
members specific financial circumstances, there is no one
representative portfolio from which to calculate investment
performance. Unlike a traditional investment fund, there is no
single benchmark that would be appropriate to measure the
relative performance of member portfolios. In order to provide
investment performance and benchmarking information to plan
sponsors, we have aggregated members into cohort
portfolios corresponding to specific anticipated
retirement dates. While the member allocations within these
cohort portfolios differ according to the specific financial
circumstances of each individual member, they share a common
investment horizon and often have similar risk levels. This
makes it possible to benchmark the cohort portfolios against the
investment performance of similar strategies. For instance, the
performance of cohort portfolios can be compared against the
performance of target maturity funds with similar retirement
horizons.
We believe the historical investment performance of cohort
portfolios compares favorably to target-date fund benchmarks
with similar time horizons and risk-return objectives. Our
investment methodology emphasizes using market consensus
expectations (i.e., no market timing), investing in lower cost
funds and selecting managers with consistent performance over
long time periods. We
81
believe that this methodology can result in lower volatility and
more predictable results for Professional Management members
relative to the strategies employed by most target-date funds.
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Engines
|
|
|
Target-Date Fund
|
|
|
Performance
|
|
|
|
Professional Management*
|
|
|
Composite Benchmark
|
|
|
Difference
|
|
|
|
(Net of Fees)
|
|
|
(Net of Fees)
|
|
|
(Net of Fees)
|
Annualized Since Program Inception (June 30, 2005
through December 31, 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Portfolio
|
|
|
|
3.61
|
%
|
|
|
|
3.23
|
%
|
|
|
|
0.38
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%
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2020 Portfolio
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3.01
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%
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2.77
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%
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0.24
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%
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2030 Portfolio
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2.61
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%
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|
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|
2.26
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%
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|
0.34
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%
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|
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*
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Includes management on an advised and subadvised basis.
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The performance shown for the member cohort portfolios reflect
asset weighted performance, net of all Professional Management
fees, across all members in retirement plans that had the
requisite data and were retiring in a specified target year,
plus or minus one year. For example, the 2010 Portfolio includes
members retiring in years 2009, 2010 and 2011. Cohort portfolios
therefore do not include results of all program members in the
reported plans. We net out fees on the basis of the maximum fee
schedule applicable to any cohort member. The requisite
data qualification is in regard to members who are through
the transition period and who had account balances at some time
during the measured time period. In a small number of cases, we
excluded certain member accounts because they included
investments in closed or private funds for which performance
data is not available or is not able to be derived, based on
asset class, or we may not include multiple accounts. For
periods after January 1, 2010, the cohort portfolios will
reflect performance across all members in plans that had such
requisite data and were retiring in a specified target year,
plus or minus two years, subject to a retired member cohort
portfolio adjustment. A retired member cohort portfolio shall be
established and consist of all members in plans that had such
requisite data and were retiring, or retired, within one year
from the then current calendar year. For example, in 2011, the
retired member cohort portfolio shall consist of members
targeted to retire in 2012 and all other previous periods. No
cohort portfolios contain results of members who cancelled out
of the program. Because daily participant contribution and
withdrawal information is generally not available, we derive
performance by attributing the performance of each investment
held to plan accounts in the proportions held at the start of
the period.
The target-date fund composite benchmark is an equally weighted
average performance of the top five target-date funds by assets,
currently the target-date funds of Fidelity, Vanguard, T. Rowe
Price, Principal Investments and BlackRock (formerly Barclays
Global Investors). Changes are made in the composite on a
forward basis, and prior composites are available upon request.
For some target years, a fund family did not offer a specific
target horizon fund, and in those cases the return was
interpolated using the returns of the existing target-date funds.
Historical performance, particularly short-term performance, is
not a guarantee of future returns. The target-date fund
composite is provided as a benchmark, but is not illustrative of
any particular investment. An investment cannot be made in the
benchmark as a single investment.
Investment
Technology
We believe portfolio management services in the workplace should
be offered to all eligible plan participants regardless of
wealth. Achieving that objective requires significant
scalability to achieve an affordable cost to the investment
manager. The scalability of our technology has been tested and
continues to deliver flexibility and results as our business has
grown. As of December 31, 2009, we were managing
approximately 391,000 separate portfolios with a total AUM value
of approximately $25.7 billion. As of December 31,
2009, approximately 45% of our Professional Management
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members have less than $20,000 of retirement assets in their
accounts. We believe this technology advice platform and
delivery mechanism allows us to normally operate, on average,
with a ratio of one registered Investment Advisor Representative
for approximately every 10,000 members who are served by our
advisors. We believe this is a more favorable ratio than that of
the typical traditional broker or investment advisor.
Our Advice Engines consist of two main components: a Simulation
Engine and an Optimization Engine. In the course of our
development, we have received nine U.S. patents that apply
to various parts of our Advice Engines.
Simulation Engine.
We have developed a
Monte Carlo Simulation Engine that provides plan participants
with a view of the potential range of future values of their
retirement investments. The Simulation Engine helps plan
participants reach informed decisions about the appropriate
level of risk, savings and time horizon to improve the
likelihood of achieving financial goals. Our Simulation Engine
is capable of:
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modeling more than 30,000 securities, including retail mutual
funds, stocks, employee stock options, institutional funds,
guaranteed investment contracts and stable value funds,
exchange-traded funds and fixed-income securities while
considering tax implications, expenses, redemption fees, loads
and distributions;
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considering security-specific characteristics such as investment
style, expenses, turnover, manager performance,
security-specific and industry risk;
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forecasting the total household portfolio, including
tax-deferred and taxable accounts;
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incorporating social security, pension income and other
retirement benefits; and
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presenting outcomes in terms of portfolio value or retirement
income.
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Optimization Engine.
We use our
Optimization Engine to construct personalized portfolios. We do
not rely on generic, model portfolios that are unable to
accommodate many real-world complexities. As of January 5,
2010, approximately 74% of the portfolios generated by our
Advice Engines for our members had investment allocations that
were not identical to any other members portfolio in their
plan. We believe individuals prefer personalized investment
recommendations that consider their personal preferences and
financial circumstances over model portfolios.
Our Optimization Engine takes into consideration the costs,
quality and investment styles of the specific investment
alternatives available to a plan participant. Specifically, our
investment recommendations take into consideration for each fund
the mix of asset class exposures, fund expenses, turnover,
fund-specific risk due to active management, manager performance
and consistency, user imposed constraints and tax efficiency,
where applicable, to construct a personalized portfolio
recommendation for each client. The calibration of this model is
based on more than a decade of research into the factors that
influence investment performance. Our approach does not rely on
market timing or tactical asset allocation strategies. Our
models are designed and calibrated on an ongoing basis to
reflect the consensus market expectations built into the
observed asset holdings of the market as a whole. We believe
this approach increases the probability that our recommendations
are consistent with current market conditions and are free from
subjective or market timing biases that can arise from
traditional optimization models. Our platform has been employed
to provide portfolio management services, investment advice and
retirement readiness assessments to millions of investors over
the last 11 years.
When constructing a portfolio, our Optimization Engine:
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supports real-time, specific, product-level buy and sell
recommendations for Online Advice, which can be readily
executed, and automated transactions for Professional Management;
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creates recommended portfolios from the available investment
alternatives, such as retail mutual funds, institutional funds
and employer stock, in the case of a 401(k) plan, or from
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either the entire universe of more than 15,000 retail mutual
funds, or a subset thereof, in the case of taxable or other
tax-deferred
accounts;
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creates recommendations across multiple taxable and
tax-deferred
accounts;
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takes into consideration investor risk preferences, restricted
positions, redemption fees, investor constraints and outside
account information provided to us to create personalized
investment recommendations;
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for assets held in taxable accounts, considers the impact of
personal tax rates, unrealized capital gains and losses, the tax
efficiency of specific investment options including the
propensity to distribute capital gains and income distributions
and the benefit of optimal asset placement to maximize after-tax
investment returns; and
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enables real-time interaction with plan participants allowing
them to partially override recommendations and immediately
receive updated advice reflecting these constraints.
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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 their investment performance.
Customers and Key
Relationships
We provide personalized portfolio management services,
investment advice and retirement help to plan participants and
reach them through plan sponsors whose retirement plans are
administered by plan providers.
Retirement Plan Participants.
We define
plan participants as employees participating in retirement plans
who have access to our Professional Management or Online Advice
services. As of December 31, 2009, approximately
7.4 million plan participants, whose retirement savings
represented more than $500 billion in aggregate plan
assets, had access to our services. As of December 31,
2009, we managed portfolios for approximately 391,000 members
with an average balance of $66,000 in their 401(k) accounts,
collectively representing approximately $25.7 billion in
AUM. More than one million participants have accepted our online
services agreement.
Retirement Plan Sponsors.
We define
plan sponsors as employers across a range of industries who
offer defined contribution plans to employees. As of
December 31, 2009, we were under contract to provide either
our full suite of services, including Professional Management,
Online Advice and Retirement Evaluation, or our Online Advice
service only, through more than 760 plan sponsors. No more than
5% of our revenue was associated with any one plan sponsor in
2009. Since the launch of our Professional Management service in
2004, we have retained over 96% of our sponsors each year. Our
plan sponsor agreements are typically for an initial three-year
term and continue thereafter unless terminated. At any time
during the initial term or thereafter, a plan sponsor can cancel
a contract for fiduciary reasons or breach of contract. A plan
sponsor can generally terminate a contract after the initial
term upon 90 days notice.
Retirement Plan Providers.
We define
plan providers as the administrators and recordkeepers of
defined contribution plans. In consultation with plan sponsors,
plan providers make available a range of investment alternatives
through retirement plans to individual participants. We work
with plan providers to make available portfolio management and
investment advisory services to the participants in the defined
contribution plans of plan sponsors. We deliver our services to
plan sponsors and plan participants primarily through existing
connections with eight retirement plan
84
providers. Our contracts with plan providers generally have
terms ranging from three to five years, and have successive
automatic renewal terms of one year unless terminated in
accordance with prior notice requirements. Certain of the plan
provider agreements are in or will soon be in renewal periods.
In addition, a plan provider may terminate its contract with us
at any time for specified breaches. We maintain two types of
relationships with our plan providers:
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Subadvisory Relationships.
In these
relationships, the plan provider is the primary advisor and plan
fiduciary and we act in a subadvisory capacity. Our contract is
with the plan provider and not the plan sponsor. We receive full
sales support from the plan provider and offer our co-branded
services under the plan providers brand, with the services
identified as powered by Financial Engines. Revenue
is collected by the plan provider who then pays a subadvisory
fee to us. We have subadvisory relationships with ING, JPMorgan
and Vanguard.
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Direct Advisory Relationships.
In these
relationships, we are the primary advisor and a plan fiduciary.
Data is shared between the plan providers and us via data
connections. In addition, our sales teams directly engage plan
sponsors, although, in some cases, we have formed and are
executing a joint sales and collaborative marketing strategy
with the plan provider. We have separate contracts with both the
plan sponsor and plan provider and pay fees to the plan provider
for facilitating the exchange of plan and plan participant data
as well as implementing our transaction instructions for member
accounts. Plan providers with whom we have direct advisory
relationships are ACS, Charles Schwab (for one full suite plan
sponsor), Fidelity, Hewitt, Mercer and T. Rowe Price.
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In 2009, 19%, 12% and 10% of our total revenue was attributable
to JPMorgan, ING and Vanguard, respectively. Revenue
attributable to these three plan providers includes subadvisory
fees they pay to us directly, as well as revenue from certain
plan sponsors that work with these plan providers but pay us
directly. In 2009, these plan providers worked with more than
640 plan sponsors to which we provided our services. JPMorgan,
Vanguard and ING directly accounted for approximately 18%, 10%
and 8% of our total revenue, respectively, during 2009. No other
plan provider or plan sponsor accounted for more than 10% of our
total revenue during 2009.
85
The following table describes the key constituents within the
retirement plan process, their specific role in the retirement
plan process and our relationship with each constituent.
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Role in Retirement
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Role of Financial
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Financial Engines
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Constituents
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Plan Process
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Engines
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Reaches
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Plan Participants
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Invest in personal retirement plan by
making ongoing contributions through payroll deduction.
In the absence of a managed account
provider, select investments from options available within
plan.
Seek retirement portfolio management
services, investment advice and retirement help.
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Provide plan participants with
independent portfolio management services, investment advice and
retirement help.
We refer to plan participants who enroll
in our Professional Management service as members. Members
delegate investment decision-making to us.
Participants in plans with Active
Enrollment campaigns must proactively sign up for our
Professional Management service. Participants in plans with
Passive Enrollment campaigns are automatically enrolled into our
Professional Management service unless they decline the service.
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As of December 31, 2009, we had
approximately 391,000 members, and approximately 7.4 million
plan participants, whose retirement savings represented more
than $500 billion in aggregate plan assets, had access to our
services.
As of December 31, 2009,
approximately 25% of our approximately 391,000 Professional
Management members were passively enrolled.
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Plan Sponsors
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Make 401(k) plan and payroll deductions
available to employees.
Choose investment alternatives available
to employees.
Focus on increasing retirement plan
participation, increasing plan participant contributions and
improving plan participant asset allocation.
Make services available to assist plan
participants with retirement investing.
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Provide plan sponsors with a mechanism
to facilitate fulfillment of fiduciary responsibilities.
Coordinate with plan sponsors to make
advice and management services available to their plan
participants.
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As of December 31, 2009, we
provided our services to plan participants at more than 760 plan
sponsors, including 116 Fortune 500, 33 Fortune 100 and eight
Fortune 20 companies.
As of December 31, 2009, we provide
our full suite of services, including Professional Management,
Online Advice and Retirement Evaluation, to 354 plan sponsors
representing approximately 3.9 million participants and
approximately $269 billion in AUC.
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Plan Providers
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Provide recordkeeping and administrative
services to retirement plans.
Process investment transactions and
payroll deductions for plan participants.
Collaborate with us on sales, marketing,
product integration and branding.
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Offer an independent advisory service
valued by plan sponsors to complement the plan providers
existing platform.
Subadvisory plan provider relationships
include ING, JPMorgan and Vanguard.
Direct advisory plan provider
relationships include ACS, Charles Schwab (for one full suite
plan sponsor), Fidelity, Hewitt, Mercer and
T. Rowe Price.
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As of December 31, 2009, we
delivered our services to plan sponsors and plan participants
primarily through existing connections with eight retirement
plan providers. We estimate that these eight providers
collectively service plan sponsors representing more than $1.5
trillion in plan assets, or more than 80% of the assets
contained in plans with more than 10,000 participants.
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Sales and
Marketing
Increasing the number of plan participant accounts and assets we
manage requires establishing relationships and data connections
with plan providers, obtaining contracts with plan sponsors to
make our services available to their plan participants and
conducting direct marketing and other promotional activities to
encourage plan participants to use our Online Advice service or
to enroll in our Professional Management service.
86
Establishing Relationships and Connections with Plan
Providers
. We rely on direct sales to create
contractual relationships with plan providers. Following
contract signing, technical teams from Financial Engines and the
plan provider initiate a data connection project that typically
takes between four months and one year to complete. Once we have
incurred this
one-time,
up-front
cost to establish a relationship and connection with a plan
provider, we are able to roll out our services for any plan
sponsor of that plan provider with modest time and effort.
Obtaining Contracts with Plan
Sponsors.
Either Financial Engines or, in the
case of a subadvisory relationship, the plan provider, must
obtain a contract with a plan sponsor before we can make
available our Professional Management or Online Advice services
to that plan sponsors participants. We market our services
to plan sponsors in the following manner:
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Sell through the Retirement Plan
Provider.
Where we have a subadvisory
relationship with the plan provider, we provide a combination of
primary and secondary sales and marketing support depending on
the plan sponsor opportunity. Together with the plan provider,
we develop a joint sales and rollout plan in which our
relationship managers and direct sales team support the plan
provider. This distribution model enables us to reach plan
sponsors efficiently, while providing consistent and independent
investment advice to plan participants.
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Direct to Plan Sponsor.
In the case of direct
advisory relationships, we pursue a direct sales strategy with
plan sponsors. Our direct sales teams efforts are
supported by a client services team that engages in sales
efforts with existing plan sponsors and that coordinates sales
activities directed at new plan sponsors with our plan provider
partners. The direct sales and client services teams are
supported by a channel marketing team that seeks to generate
demand for our services through public relations, industry
events, plan provider specific marketing programs and sales
support in the field.
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Direct Marketing to Plan
Participants.
Once a retirement plan has been
set up on our systems and our services have been made available
to plan participants, we conduct direct marketing and other
promotional activities to encourage use of our Online Advice
service and enrollment in our Professional Management service.
These efforts typically include printed Retirement Evaluations,
email notifications and website integration. These campaigns are
usually conducted at the time of rollout and annually
thereafter. Plan sponsors can choose an Active Enrollment
campaign, in which a plan participant must affirmatively sign up
for the Professional Management service, or a Passive Enrollment
campaign, in which a plan participant will become a member of
the Professional Management service unless they decline the
service. Passive Enrollment campaigns achieve higher enrollment
results at lower acquisition cost per member than do Active
Enrollment campaigns. We believe Passive Enrollment is
attractive to plan sponsors due to the lower fees payable by
plan participants who are passively enrolled, the fiduciary
protection afforded to plan sponsors by participants having to
affirmatively elect to not receive professional advice and the
relatively higher number of participants who will be enrolled
and receiving professional management upon rollout. Depending on
the proportion of the plans participants who are passively
enrolled, we eliminate or reduce our platform fees, as well as
reducing the fees payable by plan participants.
Service Delivery
and Systems
Our Service Delivery team is responsible for the rollout,
operation and support of our Professional Management and Online
Advice services. As of December 31, 2009, we had rolled out
our Professional Management service at 354 plan sponsors with
approximately 391,000 members enrolled in this service. In
addition, the Service Delivery team supports the availability of
the service to approximately 7.4 million plan participants
who have access to our Online Advice service.
Our Client Implementations team is responsible for project
management and the steps involved in setting up and rolling out
our services to a plan sponsor. This includes learning the
specifics of each plan sponsors plan(s), including the
fund lineup, fees, matching rules, associated defined benefit
and non-qualified and other plans, configuring the plan
specifics using our plan sponsor configuration
87
tool, verifying the implementation and approving the
commencement of enrollment efforts. The team also oversees the
preparation and production of enrollment materials for each
participant in the plan. Once a sponsor is set up and rolled
out, our Client Implementations Team is also responsible for
maintenance of each sponsors ongoing plan updates as
directed by our account managers.
The Operations team is responsible for data processing and
validation of prospect data for new sponsor rollouts and annual
campaigns, as well as the ongoing servicing of members in the
Professional Management service. These member servicing
responsibilities include member data load and verification, the
coordination and oversight of all printed materials, such as
Welcome Kits and quarterly Retirement Updates, transaction
processing and reconciliation, fee processing and reconciliation
and quarterly sponsor report generation.
Our advisor call center is staffed with registered Investment
Advisor Representatives. These advisors service participants
through phone and email channels by providing guidance to plan
participants regarding the operation of the program, enrollment
and personalization of the participants financial profile.
Our registered Investment Advisor Representatives and certain
call center personnel of the plan providers with whom we work
have access to the Financial Engines Professional Advisor, our
proprietary client relationship management application, which
enables the advisor to change or add to the personal information
used to manage the members portfolio allocation.
Registered Investment Advisor Representatives can modify member
inputs but cannot modify Advice Engine outputs and
recommendations.
Our services are deployed using a centrally hosted,
web-based
architecture built on
industry-standard
hardware and software. We have off-site
back-up
facilities for our database and network equipment, a disaster
recovery plan and on-going third-party security audits to ensure
the integrity of our systems. We evaluate and improve our
systems based on measures of availability, system response time
and processing capacity.
Competition
We operate in a competitive industry, with many investment
advice providers competing for business from individual
investors, financial advisors and institutional customers.
Direct competitors who offer independent portfolio management
and investment advisory services to plan participants in the
workplace include Morningstar, GuidedChoice and ProManage. Plan
providers that offer directly competing portfolio management and
investment advisory services to investors in the workplace
include Fidelity and Merrill Lynch. We currently have a
relationship with Fidelity that allows us to provide our
services to plan sponsors, for whom Fidelity is the plan
provider, who elect to hire us. We also face indirect
competition from products that could potentially be substitutes
for our portfolio management services, investment advice and
retirement help, most notably target-date retirement funds.
Target-date funds are offered by multiple financial
institutions, such as BlackRock (formerly Barclays Global
Investors), Fidelity and Vanguard. These funds provide generic
asset allocation based solely on the investment horizon of the
investor. Among the plan sponsors to which we offer our
Professional Management service and that offer lifecycle funds,
approximately 80% offer retail-priced target-date retirement
funds. Target-date funds, managed account and balance funds have
been granted QDIA status by the Department of Labor.
We believe the competitive factors in our industry include:
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ability to provide systemic portfolio management, investment
advice and retirement help based on widely recognized financial
economic theory without conflicts of interest;
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established investment methodology and technology;
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quality, breadth and convenience of advisory services;
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established relationships with plan providers and plan sponsors;
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88
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reputation and experience serving plan sponsors and plan
participants; and
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price.
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We believe we compete favorably with respect to these factors.
Regulation
Our investment advisory and management business is subject to
extensive complex and rapidly changing federal and state laws
and regulations. Financial Engines Advisors L.L.C., a subsidiary
of Financial Engines, Inc., is registered as an investment
advisor with the SEC and is subject to examination by the SEC.
The Investment Advisers Act and related regulations impose
numerous obligations and restrictions on registered investment
advisers including fiduciary duties, record keeping
requirements, operational requirements, marketing requirements
and disclosure obligations.
The SEC is authorized to institute proceedings and impose fines
and sanctions for violations of the Investment Advisers Act,
including the power to limit, restrict or prohibit a registered
investment adviser from carrying on its business in the event
that it fails to comply with applicable laws and regulations.
Our failure to comply with the requirements of the Investment
Advisers Act or the related SEC rules and interpretations, or
other relevant legal provisions could have a material adverse
effect on us. We believe we are in compliance in all material
respects with SEC requirements and all material laws and
regulations. We were last inspected by the SEC in 2000. At the
end of that examination the SEC staff sent 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.
In 2008, we derived nearly all of our revenue from Financial
Engines Advisors L.L.C.s investment advisory and
management services through our contracts with plan providers,
plan sponsors and plan participants. As an Investment Advisor,
Financial Engines Advisors L.L.C. is not permitted to assign any
investment advisory contract without the relevant clients
consent. The term assignment is broadly defined and
includes direct assignments as well as assignments that may be
deemed to occur, under certain circumstances, upon the transfer,
directly or indirectly, of a controlling interest in Financial
Engines Advisors L.L.C. The initial public offering of Financial
Engines, Inc.s common stock will not constitute an
assignment for these purposes. Accordingly, we do not intend to
seek approvals from our clients in connection with this offering.
Some of our executives and other employees are registered
Investment Adviser Representatives with various states through
the Investment Adviser Registration Depository and are subject
in some states to examination requirements.
Financial Engines Advisors L.L.C. is subject to ERISA and the
regulations promulgated thereunder, with respect to investment
advisory and management services provided to participants in
retirement plans covered by ERISA, and is also subject to state
laws applicable to retirement plans not covered by ERISA. ERISA
and applicable provisions of the Internal Revenue Code of 1986,
as amended, referred to as the Code, impose certain duties on
persons who are fiduciaries under ERISA and prohibit certain
transactions involving ERISA plan clients. We rely on certain
regulatory interpretations and guidance in connection with our
current business model, including regulations and guidance
allowing us to passively enroll participations into our
Professional Management service. We provide subadvisory services
to plan participants pursuant to the Department of Labors
Advisory Opinion
2001-09A.
The failure of Financial Engines Advisors L.L.C. to comply with
these requirements could have a material adverse effect on us.
We are also subject to state and federal regulations related to
privacy, data use and security. These rules require that we
develop, implement and maintain written, comprehensive
information security programs including safeguards that are
appropriate to our size and complexity, the nature and
89
scope of our activities and the sensitivity of any customer
information at issue. In recent years, there has been a
heightened legislative and regulatory focus on data security,
including requiring consumer notification in the event of a data
breach. Legislation has been introduced in Congress and there
have been several Congressional hearings addressing these
issues. Congress is considering legislation establishing
requirements for data security and response to data breaches
that, if implemented, could affect us by increasing our costs of
doing business. In addition, several states have enacted
security breach legislation requiring varying levels of consumer
notification in the event of a security breach. Several other
states are considering similar legislation. Further, the SEC has
issued a proposed rule expanding current requirements for
safeguarding and disposing of customer information. The proposed
rule also adds a requirement to notify customers in the event of
a data security breach. Adoption of this rule will also increase
our costs of doing business.
In recent years, there has been a heightened legislative and
regulatory focus on the financial services industry, including
proposals that call for creation of a self-regulatory framework
for investment advisors similar to the regulatory structure that
currently exists for broker-dealers through FINRA, elimination
of pre-dispute arbitration clauses, additional fee disclosures,
and the imposition of additional qualification requirements on
investment advisors providing services to ERISA plan clients.
Included in the financial reform legislation currently pending
in Congress are various proposals that may affect investment
advisers, including Financial Engines Advisors L.L.C. Although
the final versions of these bills have not been adopted and
signed into law, and the final scope and wording of the
legislation, or the implementing rules and regulations are not
yet known, it is expected that the compliance costs and
liability risks for investment advisers will increase.
Rigorous legal and compliance analysis of our business is
important to our culture. Our General Counsel supervises our
compliance group, which is responsible for addressing all
regulatory and compliance matters that affect our activities.
Intellectual
Property
We rely on a combination of trademark, copyright, patent and
trade secret protection laws to protect our proprietary
technology and our intellectual property. We seek to control
access to and distribution of our proprietary information. We
enter into confidentiality agreements with our employees,
consultants, vendors, plan sponsors and plan providers that
generally provide that any confidential or proprietary
information developed by us or on our behalf be kept
confidential. We have proprietary know-how in software
development, implementation and testing methodologies. We also
pursue the registration of certain of our trademarks and service
marks in the United States and other countries. We have
registered the mark Financial Engines in the United
States, Australia, Switzerland, China, the European Community,
Hong Kong, Japan, Taiwan and Tunisia and have registered a sun
and clouds design mark in these same countries. We have
registered the marks Adviceserver and
Forecaster in Japan and FinEng in
Tunisia. We have registered our corporate logo and the marks
Investor Central, Financial Engines Investment
Advisor, Retirement Help for Life, and
We Make it Personal in the United States.
Advice Light is also a trademark owned by Financial
Engines, Inc. which we use to notify an online user that we have
advice on his or her account. In addition, we have registered
our domain name, www.FinancialEngines.com. We have nine issued
U.S. patents: three have been issued on our user interface,
four relate to outcomes-based investing, including our financial
advisory system, our pricing module and load-aware optimization
and two have been issued on advice palatability. We also have
seven pending U.S. patent applications. In addition, we
also have issued patents and pending applications in foreign
jurisdictions.
We have established a system of security measures to protect our
computer systems from security breaches and computer viruses. We
have employed various technology and process-based methods, such
as clustered and multi-level firewalls, intrusion detection
mechanisms, vulnerability assessments, content filtering,
antivirus software and access control mechanisms. We also use
encryption techniques. We control and limit access to
customer-specific project areas, particularly at our data
centers based on a need to know basis.
90
Employees
At December 31, 2009, we employed 264 full-time
equivalent employees, including 105 combined in investment
research, product development and engineering, 76 in sales and
marketing, 58 in service delivery and 25 in general and
administrative management. We consider relations with our
employees to be good and have never experienced a work stoppage.
None of our employees are either represented by a labor union or
subject to a collective bargaining agreement.
Facilities
We currently lease our principal executive offices in Palo Alto,
California under a lease that expires on August 31, 2012.
We also lease office space in Phoenix, Arizona, primarily for
our operations and call center, under a lease that expires on
May 31, 2015, with an option to extend the lease until
May 31, 2020. We sublease office space in Boston,
Massachusetts, under a lease that expires on January 30,
2015. We believe that current facilities are sufficient to meet
our needs for the foreseeable future.
Legal
Proceedings
We are currently not party to any material legal proceedings. We
may from time to time become involved in litigation relating to
claims arising from our ordinary course of business. These
claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources.
91
MANAGEMENT
Executive
Officers and Directors
The following table shows information about our executive
officers and directors, and their ages as of December 31,
2009:
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|
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|
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Name
|
|
Age
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|
Position(s)
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Jeffrey N. Maggioncalda
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|
|
41
|
|
|
President, Chief Executive Officer and Director
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Raymond J. Sims
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|
|
59
|
|
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Executive Vice President and Chief Financial Officer
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Christopher L. Jones
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|
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42
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|
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Executive Vice President, Investment Management and Chief
Investment Officer
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Lawrence M. Raffone
|
|
|
46
|
|
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Executive Vice President, Sales and Client Services
|
Garry W. Hallee
|
|
|
48
|
|
|
Executive Vice President, Technology and Service Delivery
|
Kenneth M. Fine
|
|
|
41
|
|
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Executive Vice President, Marketing
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Anne S. Tuttle
|
|
|
48
|
|
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Executive Vice President, General Counsel and Secretary
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Deborah J. Behrman
|
|
|
53
|
|
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Vice President, Human Resources
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Paul G. Koontz
(2)
|
|
|
49
|
|
|
Chairman
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E. Olena Berg-Lacy
(3)
|
|
|
60
|
|
|
Director
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Heidi Fields
(1)
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|
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55
|
|
|
Director
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Joseph A. Grundfest
(1)(3)
|
|
|
58
|
|
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Director
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C. Richard Kramlich
(1)(2)(3)
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|
|
74
|
|
|
Director
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John B. Shoven
(3)
|
|
|
62
|
|
|
Director
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Mark A. Wolfson
(1)
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57
|
|
|
Director
|
|
|
|
(1)
|
|
Member of the audit committee.
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|
(2)
|
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Member of the compensation
committee.
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|
(3)
|
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Member of the nominating and
corporate governance committee.
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Jeffrey N. Maggioncalda
has served as our President and
Chief Executive Officer since August 1996 and as a director
since March 1997. From June 1991 to August 1994, he served as an
associate at Cornerstone Research, an economic and financial
consulting firm. Mr. Maggioncalda received an MBA from the
Stanford Graduate School of Business and a bachelors
degree in economics and English from Stanford University.
Raymond J. Sims
has served as our Executive Vice
President and Chief Financial Officer since August 1999. Before
joining us, Mr. Sims served at Raychem Corporation, a
technology company, as senior vice president, chief financial
officer and treasurer from 1993 to 1999, as vice president and
treasurer from 1985 to 1993 and as director, internal audit from
1982 to 1984. Mr. Sims received an MBA from the Harvard
Business School and a bachelors degree in business and
economics from Lehigh University.
Christopher L. Jones
has served as our Executive Vice
President, Investment Management and Chief Investment Officer
since January 2006, our Executive Vice President, Investment
Management from May 2001 until January 2006, and as our Vice
President, Financial Research & Strategy, from January
1998 until May 2001. Prior to joining us, Mr. Jones served
as a consultant at Cornerstone Research, an economic and
financial consulting firm. Mr. Jones received masters
degrees in business technology and engineering-economic systems
and a bachelors degree in economics from Stanford
University.
Lawrence M. Raffone
has served as our Executive Vice
President, Sales and Client Services since January 2001. Prior
to joining us, Mr. Raffone served as the executive vice
president of Fidelity
92
Investments Institutional Brokerage Group, a division of
Fidelity Investments. Mr. Raffone received an MBA from
Babson College and a bachelors degree in marketing from
Bryant University.
Garry W. Hallee
has served as our Executive Vice
President of Technology and Service Delivery since December 2009
and served as our Executive Vice President, Technology from June
1999 to December 2009. He also served as acting Executive Vice
President, Service Delivery, from December 2007 to May 2008.
Prior to joining us, Mr. Hallee served as the executive
vice president of research and development for Vantive
Corporation, a customer relationship management software
company, from October 1996 to August 1998. From May 1984 to
September 1996, Mr. Hallee co-founded and served as the
chief technology officer of Aion Corporation, a computer
software company. Mr. Hallee received a masters degree and
a bachelors degree in electrical engineering/computer
systems from Stanford University.
Kenneth M. Fine
has served as our Executive Vice
President, Marketing since January 2006 and served as our
Executive Vice President, Product and Channel Marketing from May
2005 until January 2006. Prior to joining us in 1997 as our
Director, Product Marketing, Mr. Fine served as a Naval
Officer and engineer from July 1990 to August 1995.
Mr. Fine received a masters degree in systems engineering
from Virginia Polytechnic Institute, an MBA from the Stanford
Graduate School of Business and a bachelors degree in
mechanical engineering from Rensselaer Polytechnic Institute.
Anne S. Tuttle
has served as our Executive Vice
President, General Counsel and Secretary since March 2009.
Ms. Tuttle joined us in November 2003 as Director and
Associate General Counsel and served as our Director, Acting
General Counsel and Secretary from August 2005 to March 2006 and
as our Vice President, General Counsel and Secretary from March
2006 to March 2009. Prior to joining us, she served as Vice
President and Assistant General Counsel at Loomis
Sayles & Company, L.P., a federally registered
investment advisor, overseeing a
12-person
compliance team, from April 2000 to October 2003.
Ms. Tuttle received a juris doctorate from Boston
University School of Law and a bachelors degree in
economics from Yale University.
Deborah J. Behrman
has served as our Vice President,
Human Resources since April 2007. Prior to joining us,
Ms. Behrman served as President and Principal Consultant at
Dragonfly Consultants, a human resources and services consulting
firm, from July 2001 to April 2007 and as senior director, human
resources at Neoforma, a provider of supply chain management
services for healthcare from November 2003 to March 2007.
Ms. Behrman received a bachelors degree in psychology
from the University of California at Davis.
Paul G. Koontz
has served as our Chairman since February
2003 and has been a director since March 1997. Mr. Koontz
has been a general partner at Foundation Capital, a venture
capital firm, since 1996. Mr. Koontz currently serves on
the board of directors of Envestnet, Babycare (in Beijing) and
eBates. Mr. Koontz received a masters degree in engineering
management from Stanford University and a bachelors degree
in engineering from Princeton University.
E. Olena Berg-Lacy
has served as a director since
July 1998 and as a consultant from July 1998 until December 2007
and from October 2009 through the present. Ms. Berg-Lacy
has been a partner with Fiduciary Benchmarks, Inc. since
September 2007. Ms. Berg-Lacy has been a member of the
Board of Trustees for the GM/UAW Trust for Retiree HealthCare
since March 2006 and the UAW Trust for Retiree Health Benefits
since January 2009. Prior to this, she served as Assistant
Secretary of the United States Department of Labor, a position
she held from June 1993 to June 1998. She received an MBA with
honors from Harvard Business School and a bachelors degree
in English literature from California State University at Chico.
Heidi Fields
has served as a director since November 2008
and has served as executive vice president and chief financial
officer of Blue Shield of California since September 2003. Prior
to joining Blue Shield of California, she served as executive
vice president and chief financial officer of Gap, Inc. from
1999 to January 2003. From 1995 to 1999, Ms. Fields served
as the chief financial officer of ITT Industries, Inc. She has
also held senior financial management positions at General
Motors
93
Corporation, including vice president and treasurer during her
16-year tenure from 1979 to 1995. Ms. Fields has served as
a director of Agilent Technologies Inc. since 2000.
Ms. Fields received an MBA in finance/accounting from
Columbia Business School and a bachelors degree in Russian
language from Georgetown University.
Joseph A. Grundfest
is one of our founders and has served
as a director since our inception in June 1996.
Mr. Grundfest joined the faculty of Stanford Law School in
January 1990 where he is the William A. Franke Professor of Law
and Business. He also is the
co-director
of the Arthur and Toni Rembe Rock Center for Corporate
Governance at Stanford University, and
co-director
of Directors College, a venue for the continuing
professional education of directors of publicly traded
corporations. Prior to joining Stanford Law School,
Mr. Grundfest was a commissioner of the
U.S. Securities and Exchange Commission from 1985 to 1990.
Mr. Grundfest received a juris doctorate from Stanford Law
School and a bachelors degree in economics from Yale
University.
C. Richard Kramlich
has served as a director since
January 1997 and has been a general partner at New Enterprise
Associates since co-founding the venture capital firm in 1978.
Mr. Kramlich currently serves as a director on the board of
directors of Sierra Monitor Corporation, a developer of
monitoring technology, Zhone Technologies Inc., a developer of
communications networking environmental sensing and measuring,
and SVB Financial Group, a provider of commercial banking
products and services. Mr. Kramlich received an MBA from
Harvard Business School and a bachelors degree in history
from Northwestern University.
John B. Shoven, Ph.D.,
has served as a director
since January 2010 and currently serves as the Charles R. Schwab
Professor of Economics at Stanford University, where he has
taught since 1973. Dr. Shoven is also the Wallace R. Hawley
Director of the Stanford Institute for Economic Policy Research,
a position he has held since November 1999 and earlier served in
that capacity from 1989 to 1993. He served as Chairman of the
Economics Department at Stanford University from 1986 to 1989
and as Dean of the School of Humanities and Sciences from 1993
to 1998. Dr. Shoven currently serves as a director on the
board of directors of Exponent, Inc., an engineering and
scientific consulting firm, as well as chairman of the
nominating and governance committee and a member of the audit
committee and compensation committee. He serves as chairman of
the board of directors of Cadence Design Systems, Inc., a
developer of electronic design automation hardware and software,
as well as chairman of the compensation committee and a member
of the nominating and governance committee and the audit
committee. Dr. Shoven also serves as a director on the
board of directors of American Century Funds, Mountain View
Board, as well as Chairman of the Quality of Service Committee
and a member of the Governance Committee. He is a Fellow of the
American Academy of Arts and Sciences, a recipient of the Paul
A. Samuelson Award for Outstanding Scholarly Writing on Lifelong
Financial Security, an award-winning teacher at Stanford, and
has published more than 100 professional articles and twenty
books. Dr. Shoven holds a Ph.D. in economics from Yale
University and a bachelors degree in physics from
University of California, San Diego.
Mark A. Wolfson
has served as a director since January
2000 and has served as a managing partner of Oak Hill Capital
Management, LLC, a private equity firm, since 1998, and is a
founding managing partner of Oak Hill Investment Management,
L.P. Mr. Wolfson has been on the faculty of the Stanford
University Graduate School of Business since 1977, has served as
its associate dean, and has held the title of consulting
professor since 2001. He has been a research associate of the
National Bureau of Economic Research and serves on the executive
committee of the Stanford Institute for Economic Policy
Research. Mr. Wolfson is a director of eGain Communications
Corporation, a publicly held provider of multi-channel customer
service and knowledge management software, Conversus Asset
Management, LLC, which manages the portfolio of Conversus
Capital, L.P., a publicly traded portfolio of third-party
private equity funds and Accretive Health, Inc., a leading
provider of healthcare revenue cycle management services. He is
also an advisor to the investment committee of the William and
Flora Hewlett Foundation. Mr. Wolfson holds a Ph.D. in
accounting from the University of Texas, Austin and a
bachelors and masters degree in accounting and finance
from the University of Illinois.
94
Board of
Directors
Our bylaws provide for a board of directors consisting of not
fewer than five nor more than 15 members. Our board of directors
currently consists of eight members. The authorized number of
directors may be changed by resolution of the board. Vacancies
on the board can be filled by resolution of the board of
directors. Currently, our directors are elected annually to
serve until the next annual meeting of stockholders, until their
successors are duly elected and qualified, or until their
earlier death, resignation, disqualification or removal. Upon
the completion of this offering, the board of directors will be
divided into three classes, each serving staggered, three-year
terms:
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Our Class I directors will be C. Richard Kramlich and
Jeffrey N. Maggioncalda and their terms will expire at the first
annual meeting of stockholders following the date of this
prospectus;
|
|
|
|
Our Class II directors will be E. Olena Berg-Lacy, John B.
Shoven and Mark A. Wolfson and their terms will expire at the
second annual meeting of stockholders following the date of this
prospectus; and
|
|
|
|
Our Class III directors will be Joseph A. Grundfest, Heidi
Fields and Paul G. Koontz and their terms will expire at the
third annual meeting of stockholders following the date of this
prospectus.
|
As a result, only one class of directors will be elected at each
annual meeting of stockholders, with the other classes
continuing for the remainder of their respective terms. This
classification of the board of directors may delay or prevent a
change in control of Financial Engines.
Our directors are elected by a plurality standard. However, in
an election of directors, if the majority of votes cast for a
director are marked as against or
abstain, and notwithstanding the valid election of
such director, our bylaws provide that such director will
voluntarily tender his or her resignation for consideration by
our nominating and corporate governance committee. Our board of
directors will determine whether to accept the resignation of
such director, taking into account the recommendation of the
nominating and corporate governance committee. With limited
exceptions, our board of directors is required to have a
majority of independent directors at all times.
Director
Emeritus
Professor William F. Sharpe is one of our founders and served as
a director since our inception in June 1996 until retiring from
our board of directors at age 75 in April 2009. Professor
Sharpe was also chairman of our board of directors from June
1996 to February 2003. Professor Sharpe is currently a director
emeritus. Professor Sharpe does not receive any compensation for
his service as a director emeritus and does not have any voting
rights with respect to any board matters. He is currently the
STANCO 25 professor of finance, emeritus, at the Stanford
Graduate School of Business and originally joined the Stanford
faculty in 1970. Professor Sharpe received the Nobel Prize in
Economic Sciences in 1990. He received his Ph.D., masters and
bachelors degrees in economics from the University of
California at Los Angeles. Professor Sharpe is also a recipient
of a Doctor of Humane Letters, Honoris Causa from DePaul
University, Doctor Honoris Causa from the University of Alicante
in Spain, Doctor Honoris Causa from the University of Vienna,
Austria, Doctor of Science, Economics, Honoris Causa from the
London Business School and of the UCLA Medal from the University
of California at Los Angeles, the institutions highest
honor.
Corporate
Governance
We believe our corporate governance initiatives comply with the
Sarbanes-Oxley Act of 2002 and the rules and regulations of the
SEC adopted thereunder. In addition, we believe our corporate
governance initiatives comply with the rules of The NASDAQ Stock
Market. After this offering, our board of directors will
continue to evaluate our corporate governance principles and
policies.
95
Our board of directors also adopted a code of business conduct
that applies to each of our directors, officers and employees.
The code addresses various topics, including:
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compliance with laws, rules and regulations;
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conflicts of interest;
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insider trading;
|
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corporate opportunities;
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competition and fair dealing;
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equal employment and working conditions;
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record keeping;
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confidentiality;
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protection and proper use of company assets; and
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payments to government personnel.
|
Our board of directors also adopted a code of ethics for senior
financial officers applicable to our chief executive officer,
president, chief financial officer, controller and other key
management employees addressing ethical issues. Upon completion
of this offering, the code of business conduct and the code of
ethics will each be posted on our website. The code of business
conduct and the code of ethics can be amended only by the
approval of a majority of the board of directors. Any waiver to
the code of business conduct for an executive officer or
director or any waiver of the code of ethics may be granted only
by the board of directors or the nominating and corporate
governance committee and must be timely disclosed as required by
applicable law. We also implemented whistleblower procedures
that establish formal protocols for receiving and handling
complaints from employees. Any concerns regarding accounting or
auditing matters reported under these procedures will be
communicated promptly to the audit committee.
Board
Committees
We have established an audit committee, a compensation committee
and a nominating and corporate governance committee. We believe
that the composition of these committees meet the criteria for
independence under, and the functioning of these committees
complies with the applicable requirements of, the Sarbanes-Oxley
Act of 2002, the current rules of The NASDAQ Stock Market and
SEC rules and regulations. We intend to comply with future
requirements as they become applicable to us. The board of
directors has determined that Heidi Fields, Joseph A. Grundfest,
C. Richard Kramlich and Mark A. Wolfson are each an audit
committee financial expert, as defined by the rules promulgated
by the Securities and Exchange Commission. Each committee has
the composition and responsibilities described below:
Audit Committee.
Heidi Fields, Joseph
A. Grundfest, C. Richard Kramlich and Mark A. Wolfson
serve on the audit committee. Ms. Fields is chairperson of
this committee. The audit committee assists the board of
directors in fulfilling its legal and fiduciary obligations in
matters involving our accounting, auditing, financial reporting,
internal control and legal compliance functions by approving the
services performed by our independent accountants and reviewing
their reports regarding our accounting practices and systems of
internal accounting controls. The audit committee also oversees
the audit efforts of our independent accountants and takes
actions as it deems necessary to satisfy itself that the
accountants are independent of management. The audit committee
is also responsible for monitoring the integrity of our
financial statements and our compliance with legal and
regulatory requirements as they relate to financial statements
or accounting matters.
Compensation Committee.
Paul G. Koontz
and C. Richard Kramlich serve on the compensation committee.
Mr. Koontz is chairperson of this committee. The
compensation committee
96
assists the board of directors in meeting its responsibilities
with regard to oversight and determination of executive
compensation and assesses whether our compensation structure
establishes appropriate incentives for officers and employees.
The compensation committee reviews and makes recommendations to
the board of directors with respect to our major compensation
plans, policies and programs. In addition, the compensation
committee reviews and makes recommendations for approval by the
independent members of the board of directors regarding the
compensation for our executive officers, establishes and
modifies the terms and conditions of employment of our executive
officers, and administers our stock option plans.
Nominating and Corporate Governance
Committee.
Olena Berg-Lacy, Joseph A.
Grundfest, C. Richard Kramlich and John B. Shoven serve on the
nominating and corporate governance committee.
Mr. Grundfest is chairperson of this committee. The
nominating and corporate governance committee is responsible for
making recommendations to the board of directors regarding
candidates for directorships and the size and composition of the
board. In addition, the nominating and corporate governance
committee is responsible for overseeing our corporate governance
guidelines, and reporting and making recommendations to the
board concerning corporate governance matters.
Compensation
Committee Interlocks and Insider Participation
Paul G. Koontz and C. Richard Kramlich served as members of the
compensation committee during 2008. None of the members of our
compensation committee is or has in the past served as an
officer or employee of our company. None of our executive
officers currently serves, or in the past year has served, as a
member of the board of directors or compensation committee of
any entity that has one or more executive officers serving on
our board of directors or compensation committee.
Compensation of
Directors
Currently, our directors do not receive any fees for their
service on our board of directors, except for E. Olena
Berg-Lacy, Heidi Fields and John B. Shoven. In addition,
for a description of our compensation arrangements with Jeffrey
N. Maggioncalda, see Executive Compensation.
On January 12, 2009, we agreed to pay each of
Ms. Berg-Lacy and Ms. Fields an annual retainer of
$30,000 and Ms. Fields an additional annual retainer of
$15,000 for her services as chairperson of our audit committee.
We also agreed that at the first meeting of our board of
directors held after January 12 of each year, beginning in
2010, we will grant to each of Ms. Berg-Lacy and
Ms. Fields an option to purchase 10,000 shares of our
common stock subject to the terms and conditions of our form of
stock option agreement in place at such time, assuming
Ms. Berg-Lacy
or Ms. Fields as the case may be, has provided continuous
service on our board of directors during the prior year. On
January 8, 2009, we agreed to pay Dr. Shoven an annual
retainer of $30,000 and grant an initial option to purchase
50,000 shares. This option will vest and become exercisable
over four years, with the first
1/4th of
the shares subject to the initial option vesting on the first
anniversary of the date of grant and the remainder vesting
monthly thereafter over the subsequent three years. We also
agreed that at the first meeting of our board of directors held
after January 8 of each year, beginning in 2011, we will
grant to Dr. Shoven an option to purchase
10,000 shares of our common stock subject to the terms and
conditions of our form of stock option agreement in place at
such time, assuming Dr. Shoven has provided continuous
service on our board of directors during the prior year. Ms.
Berg-Lacy and Dr. Shoven will also each receive an additional
annual retainer of $5,000 for their services as members of our
nominating and corporate governance committee. In addition, we
reimburse each of Ms. Berg-Lacy, Ms. Fields and
Dr. Shoven for reasonable
out-of-pocket
and travel expenses in connection with attendance at the board
of directors meetings and committee meetings.
Following completion of this offering, our non-employee
directors will receive an annual retainer of $30,000, prorated
for partial service in any year. Members of our audit committee,
compensation committee and nominating and corporate governance
committee, other than the chairpersons of those committees, will
receive an additional annual retainer of $5,000. The chairperson
of the audit committee will receive an additional annual
retainer of $15,000 and the chairpersons of the
97
compensation committee and nominating and corporate governance
committee will each receive an additional annual retainer of
$10,000.
In addition, non-employee directors will receive
nondiscretionary, automatic grants of nonstatutory stock options
under our 2009 Stock Incentive Plan. A non-employee director
will be automatically granted an initial option to purchase
50,000 shares upon becoming a member of our board of
directors. The initial option will vest and become exercisable
over four years, with the first
1/4th of
the shares subject to the initial option vesting on the first
anniversary of the date of grant and the remainder vesting
monthly thereafter over the subsequent three years. On the first
business day following each of our regularly scheduled annual
meetings of stockholders, each non-employee director will be
automatically granted a nonstatutory option to purchase
10,000 shares of our common stock, provided the director
has served on our board of directors for at least six months.
These options will vest and become exercisable on the first
anniversary of the date of grant or immediately prior to our
next annual meeting of stockholders, if earlier. The options
granted to non-employee directors will have a per share exercise
price equal to 100% of the fair market value of the underlying
shares on the date of grant and will become fully vested if a
change in control occurs. See Employee Benefit
Plans 2009 Stock Incentive Plan.
Joseph A. Grundfest will receive the compensation described
above effective upon the completion of this offering, with the
annual retainer of $30,000 prorated for the remainder of 2010.
In addition, he will receive an annual retainer of $10,000 and
$5,000 for his service as chairperson of the nominating and
corporate governance committee and as a member of the audit
committee, respectively, which will be prorated for the
remainder of 2010. He also will be eligible to receive the
option to purchase 10,000 shares of our common stock
following each annual meeting of stockholders after the
completion of this offering. Paul G. Koontz, C. Richard Kramlich
and Mark A. Wolfson also will receive the compensation described
above once a stockholder meeting for the election of directors
has been held after the date of this prospectus, which will be
prorated for partial service during the year. However,
Messrs. Grundfest, Koontz, Kramlich and Wolfson will not
receive the initial option to purchase 50,000 shares of our
common stock referenced above.
2009 Director
Compensation
The following table sets forth the compensation paid or accrued
by us to our
non-employee
directors during fiscal year 2009. The table excludes Jeffrey N.
Maggioncalda, who did not receive any additional compensation
from us for his role as a director because he is our chief
executive officer.
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Fees Earned or
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Option
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Name
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Paid in Cash
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|
Awards
(1)(2)
|
|
Total
|
|
E. Olena Berg-Lacy
|
|
$
|
|
|
|
$
|
87,614
|
|
|
$
|
87,614
|
|
Heidi Fields
|
|
$
|
|
|
|
$
|
87,614
|
|
|
$
|
87,614
|
|
|
|
|
|
(1)
|
Amounts listed in this column represent the stock-based
compensation expense of awards recognized by us for fiscal year
2009, rather than amounts paid to or realized by the named
individual. Our assumptions with respect to the calculation of
stock-based compensation expense are set forth above in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Significant Management
Estimates Stock-Based Compensation. There can
be no assurance that options will be exercised (in which case no
value will be realized by the individual) or that the value on
exercise will approximate the compensation expense recognized by
us.
|
|
|
(2)
|
See the outstanding equity awards table below for the details of
the option awards.
|
98
The following table lists all outstanding equity awards held by
non-employee directors as of the end of fiscal year 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
|
Option
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Expiration
|
|
Name
|
|
Grant Date
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
|
E. Olena Berg-Lacy
|
|
|
05/01/2002
|
|
|
|
25,000
|
|
|
|
|
|
|
$
|
2.00
|
|
|
|
05/01/2012
|
|
|
|
|
05/01/2002
|
|
|
|
25,000
|
|
|
|
|
|
|
|
2.00
|
|
|
|
05/01/2012
|
|
|
|
|
04/26/2005
|
|
|
|
10,000
|
|
|
|
|
|
|
|
4.25
|
|
|
|
04/26/2010
|
|
|
|
|
01/27/2006
|
|
|
|
50,000
|
|
|
|
|
|
|
|
6.00
|
|
|
|
01/27/2011
|
|
|
|
|
12/17/2008
|
|
|
|
50,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
12/17/2018
|
|
Heidi Fields
|
|
|
12/17/2008
|
|
|
|
50,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
12/17/2018
|
|
99
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Executive
Summary
The following discussion provides information regarding our 2009
compensation program for our named executive officers, including
Jeffrey N. Maggioncalda, our Chief Executive Officer, Raymond J.
Sims, our Chief Financial Officer, Lawrence R. Raffone, our
Executive Vice President, Sales and Client Services, Christopher
L. Jones, our Executive Vice President, Investment Management
and Chief Investment Officer and Garry W. Hallee, our Executive
Vice President, Technology and Service Delivery. Recommendations
for executive compensation are made by our compensation
committee and approved by the board of directors, except that
compensation recommendations for our Chief Executive Officer are
approved by the non-employee members of the board of directors.
The primary components of compensation for the named executive
officers were base salary, cash incentive plan and equity
awards. In 2009, target level bonuses under our cash incentive
plan were payable at year-end upon achievement of specified
Company performance metrics for the fiscal year. Compensation
decisions in 2009 also reflected the extremely difficult
economic environment, the impact of this environment on our
financial performance and the ability of our named executive
officers to address the challenges of the economic environment.
Compensation
Philosophy and Objectives
The primary objectives of our compensation and benefits programs
for executives are to attract and retain senior, skilled
executive management, to motivate their performance toward
achieving clearly defined corporate goals, and to align their
long term interests with those of our stockholders.
We have established a set of guiding principles that have
provided the foundation for all compensation programs for
executives and all employees. These principles include, but are
not limited to, taking a total rewards approach (which includes
all aspects of our compensation package, including cash
compensation, equity, Company-provided benefits and intangibles
such as Company culture and environment), paying consistently
within the markets in which we compete for talent, making
individual compensation decisions based on overall performance
and offering pay programs that allow employees at all levels to
share in Financial Engines success in a form that is
simple to explain and administer. We use these principles to
guide us in our compensation recommendations and decisions.
Each year our board of directors approves a set of goals and
objectives for the Company, including fiscal objectives. Our
executive incentive compensation is tied directly to the
achievement of clearly defined financial objectives. The
executive incentive program is designed to align executive
incentives with the Companys success and to recognize and
reward contributions of our executive officers to the
Companys performance but without encouraging unnecessary
risk-taking.
Role of the
Compensation Committee
The compensation committee is currently comprised of two
independent non-employee members of our board of directors. The
compensation committee determines and recommends to the
non-employee members of our board of directors for approval, the
Chief Executive Officers base salary, merit increases,
incentive compensation targets and equity award grants, without
the participation of the Chief Executive Officer. The
compensation committee is also responsible for reviewing the
performance of our Chief Executive Officer. With respect to our
other named executive officers, our Chief Executive Officer
meets with the compensation committee as needed, and provides
evaluations of our executives and other relevant information to
the committee and makes recommendations regarding appropriate
compensation for each executive, including merit increases,
changes to incentive compensation and grant of equity awards.
The compensation committee also approves our incentive
compensation plan for all employees and approves sales
compensation programs in principle.
100
Our Chief Financial Officer and Vice President, Human Resources,
from time to time, provide market data and other information to
assist the compensation committee in determining appropriate
compensation levels for executives. In 2009, the compensation
committee did not retain a compensation consultant with respect
to the review, recommendation or determination of executive
compensation. However, we have retained a human resources
consultant to assist with various human resources activities,
including survey entry and data analysis. In this capacity, the
consultant may from time to time provide us with general
background and information regarding executive compensation
practices but does not review or make specific recommendations
with respect to our executive compensation. The human resources
consultant analyzes compensation practices and provides
information on industry trends for use by us in determining
appropriate compensation levels.
Competitive
Market Review for Fiscal 2009
For our cash compensation programs, generally, we target to be
within a range of the
25
th
and
50
th
percentiles for companies of a similar size. Each of our named
executive officers falls within this range with the exception of
our Chief Investment Officer, who falls below the
25
th
percentile. To determine our competitive position, we benchmark
our executive positions in marketing, technology and other
non-financial services positions, including our Chief Executive
Officer, Chief Financial Officer and Executive Vice President,
Technology and Service Delivery, to similar positions in
companies who are in the software industry segment, with
revenues of $200 million or less. We use the Radford High
Technology Total Compensation Executive Survey, or the Radford
Survey, which includes over 1,000 companies, of which
approximately 50 are included within our target market segment
and size. Most of these target companies are headquartered in
Northern California with locations globally. We do not know the
specific companies who fall within our segment and size.
We benchmark our executive positions in the investment services
industry, including our Chief Investment Officer and Executive
Vice President, Sales and Client Services, to similar positions
in investment management companies with similar AUM. We use the
McLagan Management and Administration, Investment Management and
Sales and Marketing Surveys, or the McLagan Surveys, which
includes 126 investment management companies, of which 63 have
AUM of $15 billion to $30 billion. Because the nature
of our business and our approach to asset management differ from
many of the comparative companies we use to benchmark, targeting
the 25
th
percentile for certain positions is not always appropriate or
competitively necessary. We do not know the specific companies
who fall within our segment and size.
In 2009, we used both the Radford Survey and the McLagan Surveys
as input in establishing compensation and equity levels for our
executive officers. However, from time to time, we may utilize
other surveys as well, for additional market information. For
positions that can be filled by candidates in either the
software industry or the financial services industry, we
consider both benchmarks to provide a more appropriate benchmark
for our business.
Because relevant equity data is generally not available for
positions in financial services, we utilize the data from the
Radford Survey to establish our equity guidelines for all
positions.
Principal
Elements of Executive Compensation
Our executive compensation program consists of three main
elements: base salary, cash incentive program and equity awards.
There is both a threshold of Company financial performance below
which cash incentive payments are not made and a cap on cash
incentive payments.
Base
Salaries.
Base
salaries are intended to provide our executives with a degree of
financial certainty and stability that does not depend on our
performance. In determining the base salaries for our Chief
Executive Officer and other named executive officers, the
compensation committee reviews the overall scope of each
officers responsibilities while taking into account the
base salaries being
101
paid by companies with which we compete for talent.
Historically, base salaries have not been reviewed according to
a pre-set schedule. Base salary adjustments are based on market
data, individual performance, our overall financial results and
performance, changes in job duties and responsibilities and our
overall budget for base salary increases.
Each executive officer has a set of departmental goals that are
designed to facilitate the achievement of our company goals.
These goals, which typically relate to services, quality,
customer service levels and financial management, include:
|
|
|
|
|
Achievement of department budget and spending goals;
|
|
|
|
Meeting and achieving quality and performance metrics specific
to the department;
|
|
|
|
On time,
high-quality
delivery of the services that the department provides; and
|
|
|
|
Meeting service level requirements to customers or other
departments.
|
In addition to the department goals, the following executives
have goals specific to their particular function. These include:
|
|
|
|
Position
|
|
|
Specific Goal
|
Executive Vice President and Chief Financial Officer
|
|
|
Monitor financial activities with goal
of achieving our financial plan
|
|
|
|
Lead development and execution of
financial plan and operating processes
|
|
|
|
|
Executive Vice President,
Technology and Service Delivery
|
|
|
Deliver new services and upgrade
releases within defined timeframes and specifications
|
|
|
|
Deliver customer rollouts on time and
with a high level of customer satisfaction
|
|
|
|
|
Executive Vice President, Sales and Client Services
|
|
|
Achieve the contract revenue, New
Management Fee Run Rate and enrollment goals
|
|
|
|
Increase the active prospect funnel or
pipeline
|
|
|
|
|
Performance relative to these goals and other factors, such as
leadership, teamwork and commitment to our values comprise the
overall performance rating, which is utilized by the
compensation committee, along with market data, our overall
financial results and performance, and salary increase budgets,
to determine individual increases for each executive.
The compensation committee has approved base salary increases of
$50,000 for our Chief Executive Officer, $30,000 for our Chief
Financial Officer and our Executive Vice President, Technology
and Service Delivery, along with adjustments in incentive
targets for most executive officers. In addition, an adjustment
in incentive target of $75,000 was granted to our Executive Vice
President, Sales and Client Services, and our Chief Executive
Officer received an adjustment in incentive target from 60% to
80%. These target amounts were determined by using the data from
market surveys to identify the incentive percentage for each
position that would put that position within the desired total
cash compensation range as described above. We also evaluated
each incentive target relative to other executive positions
within our company and the relative value of each position to
our company. Once we determined the target amounts, we adjusted
the incentive target to close the gap where appropriate, while
maintaining affordability within our financial plan. Minor
adjustments were made to other executive officers target
amounts as we moved from expressing target amounts in dollars to
expressing target amounts in percentages. We rounded where
necessary to keep the percentages in round numbers. We made the
change to percentages to be consistent with common practice in
the industry. The adjustments to incentive targets are effective
January 1, 2010 to be consistent with our fiscal year. The
base salary increases are effective April 1, 2010 and are
based on three factors. The first factor was the desire to bring
executive pay more in line with the middle quartile of executive
pay at comparable companies, as determined by market data
provided by the compensation surveys described above. The second
factor was to ensure that we are competitive as
102
we fill key positions and as we go forward as a public company.
Third, the compensation committee observed that executive
performance warranted an increase in salaries based upon
achievement of department and our goals, including our financial
metrics, as documented in annual performance evaluations.
Effective January 1, 2010, an additional increase of
$25,000 was granted to our Executive Vice President, Technology
and Service Delivery as the result of a significant increase in
the scope of his responsibilities, which resulted in a doubling
of the size of his organization.
In addition, the compensation committee approved a base increase
of $50,000 for our Chief Investment Officer, effective
January 1, 2010, and an additional increase of $25,000
effective July 1, 2010. As noted above, the cash
compensation for our Chief Investment Officer falls below the
25th percentile; the compensation committee believes these
phased increases are necessary to bring our Chief Investment
Officers base compensation more in line with market
compensation for this position. We plan to continue to use
phased increases to move our Chief Investment Officers
cash compensation closer to the 25th percentile over time.
Cash Incentive
Plan.
Our
annual cash incentive program for our named executive officers
is designed principally to reward performance that furthers key
corporate goals, and has to date focused exclusively on annual
financial objectives, except in the case of our Executive Vice
President, Sales and Client Services, for whom a significant
portion of his incentive compensation is based on the
achievement of specified quarterly and annual sales objectives.
For fiscal year 2009, each of our named executive officers will
receive an annual cash incentive payment based solely upon
Company performance, with no addition or decrement based on
individual performance. For 2010, annual cash incentive payments
will continue to be awarded based upon Company financial
performance. In addition, the compensation committee may award
certain one-time incentive payments to our executive
officers in consideration of taking on significant additional
responsibility for an indefinite period of time, or
extraordinary performance significantly above and beyond the
norm. While rare, we expect to continue this practice going
forward as we believe having a flexible approach to our
incentive compensation program is essential to allow us to
consider and recognize performance against changing market or
industry dynamics.
At the beginning of each fiscal year, our compensation committee
sets threshold and target levels for certain Company financial
metrics for that fiscal year based upon the performance goals
established through the annual planning process of our full
board of directors. If the threshold is not met, no incentive
payments are made under the cash incentive plan. If the
threshold is met, each participating executive officer is
eligible to receive the cash incentive amount payable at the
level of Company financial performance achieved. If the target
level is exceeded, the actual cash incentive payments are
adjusted upward based upon the level of Company financial
performance achieved. We believe this structure is consistent
with our principle of ensuring that our employees share in our
success.
For fiscal year 2009, the target level cash incentive payment
will be payable at year-end if we achieve certain levels of
New Management Fee Run Rate and Cash Net
Income as of December 31, 2009. New Management Fee
Run Rate represents estimated annualized fees generated from
certain new enrollees into our Professional Management program
during the relevant period. Cash Net Income is defined as net
earnings prior to the deduction for taxes, depreciation,
amortization and stock-based compensation expense. The Cash Net
Income target level will be adjusted for any accounting changes,
as well as for any unanticipated unusual items approved by our
board of directors, that cause the calculation of actual Cash
Net Income to differ from that used in the development of the
goal. We set cash incentive targets based in part on New
Management Fee Run Rates as we believe this metric minimizes the
impact of market performance on the actual payments to our
executive officers and awards our executive officers for
performance elements that are in their control and for which
they are responsible. We used Cash Net Income as an incentive
metric because we believe that it reasonably reflects the
elements of profitability that can be most directly impacted by
103
employees, and because it excludes certain expenses which arise
as a result of financing decisions and actions by our board of
directors. Both metrics are weighted equally and together
determine our Company Performance Factor.
Executive payments are determined by multiplying the Company
Performance Factor by the respective executives target
cash incentive amount. At the threshold plan achievement level,
payments are 50% of target payment amounts and scale linearly to
100% of target payment amounts at 100% plan achievement. If
Company performance exceeds the goals, payments scale linearly
from 100% payment at 100% plan achievement to 200% payment at
200% plan achievement, and are capped for each of our executive
officers, except Mr. Raffone, at 200% of target cash incentive
amounts. For Mr. Raffone, his maximum payment amount is capped
at 200% with respect to 40% of his target payment amount and the
remaining 60% of his target payment amount is capped at the
lesser of 250% or $750,000. Target incentive levels are
determined using market data provided by the surveys discussed
above.
|
|
|
|
|
|
|
|
|
|
|
2009 Incentive
|
Name
|
|
Current Position(s)
|
|
Target
|
|
Jeffrey N. Maggioncalda
|
|
President, Chief Executive Officer and Director
|
|
$
|
150,000
|
|
Raymond J. Sims
|
|
Executive Vice President and Chief Financial Officer
|
|
$
|
75,000
|
|
Christopher L. Jones
|
|
Executive Vice President, Investment Management and Chief
Investment Officer
|
|
$
|
195,000
|
|
Lawrence M. Raffone
|
|
Executive Vice President, Sales and Customer Services
|
|
$
|
525,000
|
|
Garry W. Hallee
|
|
Executive Vice President, Technology and Service Delivery
|
|
$
|
75,000
|
|
The target for New Management Fee Run Rate for fiscal year 2009
was $16.0 million for the full year. The target for Cash
Net Income for fiscal year 2009 was $12.0 million for the
full year. At these achievement levels, the cash payment would
be 100% of the 2009 incentive target. The threshold achievement
level is $12.0 million for New Management Fee Run Rate and
$9.0 million for Cash Net Income. If the threshold
achievement level is achieved, the cash payment would be 50% of
the 2009 incentive target. The incentive payment will be
calculated by assessing actual Company performance in comparison
to the target levels for New Management Fee Run Rate and Cash
Net Income for the entire year. Our performance in 2009 exceeded
the threshold performance levels required for our named
executive officers to be eligible to receive a cash incentive
payment for 2009. Our actual achievement in 2009 was $14.7
million in New Management Fee Run Rate, which resulted in cash
payments of 83% of the 2009 incentive target, and $17.1 million
in Cash Net Income, which resulted in cash payments of 166% of
the 2009 incentive target. This level of achievement for both
metrics combined results in a Company performance factor
multiplier of 124.4% (the average of the 83% and 166%
achievement levels discussed above). In 2009, the compensation
committee recommended, and the board of directors approved, an
advance payment of 20% of target cash incentive payments for
those employees who participate in the cash incentive plan and
were hired prior to June 1, 2009. The advance payouts were
recommended in consideration of the Companys financial
performance, lack of a merit increase in 2009, suspension of the
401(k) Company match, and the potential 18 month gap in any
cash incentive payments. The compensation committee established
20% as an appropriate level as it believed 20% was significant
enough to have a positive impact on employee morale and there
was little risk of us missing our target levels. In addition,
our performance to date indicated that the risk of not achieving
full year results at a level which would generate a payout for
the year was low.
The advance payouts were made in July 2009. The advance payouts
were a one-time occurrence and we do not currently anticipate
continuing this practice going forward. Cash incentive payments
for 2009 were calculated in 2010 based on our performance and,
for non-executive employees, individual performance, in
accordance with the cash incentive plan and the amount
previously advanced was deducted. We expect to pay up to
$6.5 million in cash incentive payments in February 2010.
104
We currently expect the cash incentive plan to remain
substantially the same going forward. The metrics used to
determine the threshold and target levels may vary slightly from
year-to-year
as our strategy and plans change. For fiscal year 2010, the two
financial performance metrics used for determining bonus
payments will be Adjusted EBITDA and New Management Fee Run
Rate. Adjusted EBITDA is defined as net income before interest,
taxes, depreciation, amortization of internal use software,
direct response advertising and commissions, and stock-based
compensation expense. Target levels will be adjusted for any
accounting changes that cause the calculation of actual Adjusted
EBITDA to differ from that used in the development of the goal.
We changed to Adjusted EBITDA as an incentive metric because
EBITDA is a generally accepted measure of financial performance
that we believe reasonably reflects the elements of
profitability that can be most directly impacted by employees,
and because it excludes certain expenses which arise as a result
of financing decisions and actions by our board of directors.
Equity
Awards.
We
grant stock options to our current and newly hired executive
officers to enable them to share in our success and to reinforce
a corporate culture that aligns employee interests with
shareholder interests. It has been our practice to periodically
grant stock options to employees, including executives, in
recognition of performance and as an incentive for retention
under the 1998 Stock Option Plan. The size of these grants are
based on a number of factors, including an executives
overall unvested share ownership, individual performance, as
described above under Base Salaries, and changes in
the scope of the individuals position.
The size and terms of any initial option grants to new
employees, including executive officers, are based largely on
competitive conditions and our own internal guidelines
applicable to the specific position.
Since 2005, our practice has been to provide equity incentives
principally in the form of stock option grants that vest over
time, with 1/4th of the shares vesting on the one-year
anniversary of the vesting commencement date and 1/48th of the
shares subsequently vesting on each monthly anniversary
thereafter. Our compensation committee may consider alternative
forms of equity in the future, such as performance shares,
restricted stock units or restricted stock awards with
alternative vesting strategies based on the achievement of
performance milestones or financial metrics.
The following stock option awards were granted to our executive
officers in 2009:
|
|
|
|
|
|
|
|
|
|
|
2009 Options
|
Name
|
|
Current Position(s)
|
|
Granted
|
|
Jeffrey N. Maggioncalda
|
|
President, Chief Executive Officer and Director
|
|
|
350,000
|
|
Raymond J. Sims
|
|
Executive Vice President and Chief Financial Officer
|
|
|
100,000
|
|
Christopher L. Jones
|
|
Executive Vice President, Investment Management and Chief
Investment Officer
|
|
|
100,000
|
|
Lawrence M. Raffone
|
|
Executive Vice President, Sales and Customer Services
|
|
|
100,000
|
|
Garry W. Hallee
|
|
Executive Vice President, Technology and Service Delivery
|
|
|
125,000
|
|
Stock option awards were based on a number of factors, including
market data, individual performance, internal equity and
retention potential. We use market data in establishing a
general range of value that we would like our executive officers
to hold in our common stock. The size of option awards varies
considerably from company to company, and therefore it is
difficult to establish a specific grant range based on market
value. Because we view equity as a significant retention device,
internal equity and the value of unvested options are primary
considerations when determining the size of stock option grants.
We also consider the potential equity we anticipate that we
would need to offer a candidate in the event we need to hire a
particular executive officer. We intend to continue to offer
stock options to our employees to encourage ownership in the
Company, recognize outstanding individual performance and
provide a retention tool for key executives to the extent that
stock options
105
and other equity awards are subject to vesting over extended
periods of time and provide for only a limited exercise period
following termination of employment. Prior to this offering, we
plan to adopt the 2009 Stock Incentive Plan, pursuant to which
we will grant equity compensation awards following the offering.
The 2009 Stock Incentive Plan permits the grant of stock
options, stock appreciation rights, restricted stock, restricted
stock units, performance units, performance shares and other
stock-based awards.
Assessment of
Risk
Our compensation program for our executive officers is designed
such that it will not incentivize unnecessary risk-taking. The
base salary component of our compensation program is a fixed
amount and does not depend on performance. Our cash incentive
program takes into account multiple metrics, thus diversifying
the risk associated with any single performance metric, and we
believe it does not incentivize our executive officers to focus
exclusively on short-term outcomes. Our equity awards are
limited by the terms of our equity plans to a fixed maximum
specified in the plan, and are subject to vesting to align the
long-term interests of our executive officers with those of our
stockholders.
Annual Review
Process
Performance is reviewed semi-annually for named executive
officers, including performance relative to goals and objectives
for the first or second half of the year, depending on when in
the year the performance evaluation is occurring. The Chief
Executive Officer is responsible for evaluating the performance
of all executives on a regular basis.
In the first quarter of each year, our Chief Executive Officer
conducts an annual performance review of each executive officer.
This performance review includes performance for the previous
fiscal year. In addition, the Chief Executive Officer conducts a
mid-year review of performance relative to specific goals for
each executive officer. The performance reviews serve as one of
the considerations used by the compensation committee to
determine base salary increases. Performance reviews are
conducted around the time the board typically sets the incentive
bonus targets as part of finalizing the financial plan for the
next year. Our board of directors may further refine targets
early into the next fiscal year. We anticipate continuing to
review executive compensation and performance annually in the
first quarter of the year.
Supplemental
Benefits
We provide the following benefits to our executives on the same
basis as provided to all of our employees:
|
|
|
|
|
health, dental and vision insurance;
|
|
|
|
life insurance;
|
|
|
|
medical and dependant care flexible spending account;
|
|
|
|
short-and long-term disability, accidental death and
dismemberment;
|
|
|
|
a 401(k) plan, with Company match and Professional Management
services; and
|
|
|
|
employee assistance plan.
|
We believe these benefits are consistent with companies with
which we compete for employees. In 2009, in light of the
uncertain economic environment, we suspended our 401(k) matching
contributions. We expect to reinstate the matching contributions
in 2010.
106
Stock
Ownership Guidelines
There are currently no equity ownership requirements or
guidelines that any of our directors, named executive officers
or other employees must meet or maintain.
Policy
Regarding the Timing of Equity Awards
As a privately owned company, there has been no market for our
common stock. Accordingly, in 2008, we had no program, plan or
practice pertaining to the timing of stock option grants to
executive officers coinciding with the release of material
non-public information.
Policy
Regarding Restatements
We do not currently have a formal policy requiring a fixed
course of action with respect to compensation adjustments
following later restatements of financial results. Under those
circumstances, the board of directors or compensation committee
thereof would evaluate whether compensation adjustments were
appropriate based upon the facts and circumstances surrounding
the restatement.
Tax and
Accounting Treatment of Compensation
Under section 162(m) of the Code, we may be unable to
deduct as compensation amounts in excess of $1 million paid
in any one year to any named executive officer. Certain
performance-based compensation approved by stockholders may not
be subject to this limitation. As we are not currently publicly
traded, our board of directors has not previously taken the
deductibility limitation imposed by Section 162(m) into
consideration in making compensation decisions. We expect that
following this offering, we will generally consider whether a
form of compensation will be deductible under
section 162(m) in determining executive compensation,
though other factors will also be considered. However, we may
authorize compensation payments that do not comply with the
exemptions to section 162(m) when we believe that such
payments are appropriate to attract and retain executive talent.
We expect that equity awards under our 1998 Stock Option Plan
and 2009 Stock Incentive Plan will qualify as performance-based
compensation under section 162(m).
2009 Summary
Compensation Table
The following tables set forth compensation for services
rendered in all capacities to us for the fiscal years ended
December 31, 2009 and 2008 for our President and Chief
Executive Officer, Chief Financial Officer and our three other
most highly compensated executive officers as of
December 31, 2009, whom we refer to in this Registration
Statement as the named executive officers, and one additional
executive officer who would have been included as a named
executive officer but for the fact that her employment
terminated prior to December 31, 2009.
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
|
Name & Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Awards
(1)
|
|
Awards
(1)
|
|
Compensation
|
|
Compensation
(2)
|
|
Total
|
|
Jeffrey N. Maggioncalda
|
|
|
2009
|
|
|
$
|
250,000
|
|
|
|
|
|
|
$
|
30,286
|
|
|
$
|
576,722
|
|
|
$
|
186,600
|
|
|
|
|
|
|
$
|
1,043,608
|
|
President and Chief Executive Officer
|
|
|
2008
|
|
|
|
237,500
|
|
|
|
|
|
|
|
63,512
|
|
|
|
351,050
|
|
|
|
87,150
|
|
|
$
|
6,900
|
|
|
|
746,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raymond J. Sims
|
|
|
2009
|
|
|
|
200,000
|
|
|
$
|
10,000
|
|
|
|
30,286
|
|
|
|
282,086
|
|
|
|
93,300
|
|
|
|
|
|
|
|
615,672
|
|
Executive Vice President and Chief Financial Officer
|
|
|
2008
|
|
|
|
193,750
|
|
|
|
|
|
|
|
63,512
|
|
|
|
106,583
|
|
|
|
43,575
|
|
|
|
5,813
|
|
|
|
413,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher L. Jones
|
|
|
2009
|
|
|
|
200,000
|
|
|
|
|
|
|
|
30,286
|
|
|
|
305,606
|
|
|
|
242,579
|
|
|
|
|
|
|
|
778,471
|
|
Executive Vice President, Investment Management and Chief
Investment Officer
|
|
|
2008
|
|
|
|
193,750
|
|
|
|
|
|
|
|
63,512
|
|
|
|
145,397
|
|
|
|
87,150
|
|
|
|
5,813
|
|
|
|
495,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence M. Raffone
Executive Vice President, Sales and Client Services
|
|
|
2009
2008
|
|
|
|
200,000
200,000
|
|
|
|
|
|
|
|
30,286
63,512
|
|
|
|
346,950
151,188
|
|
|
|
654,990
407,347
|
|
|
|
6,000
|
|
|
|
1,232,226
828,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garry W. Hallee
|
|
|
2009
|
|
|
|
200,000
|
|
|
|
|
|
|
|
30,286
|
|
|
|
311,463
|
|
|
|
93,300
|
|
|
|
|
|
|
|
635,049
|
|
Executive Vice President, Technology and Service Delivery
|
|
|
2008
|
|
|
|
193,750
|
|
|
|
25,000
|
|
|
|
63,512
|
|
|
|
145,397
|
|
|
|
43,575
|
|
|
|
5,813
|
|
|
|
477,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manjari
Lewis
(3)
Former Executive Vice
President, Service Delivery
|
|
|
2009
|
|
|
|
191,666
|
|
|
|
500
|
|
|
|
218,750
|
(4)
|
|
|
533,002
|
(5)
|
|
|
93,300
|
|
|
|
137,803
|
(6)
|
|
|
1,175,021
|
|
107
|
|
|
(1)
|
|
Amounts listed in this column
represent the stock-based compensation expense of awards
recognized by us for fiscal years 2009 and 2008, rather than
amounts paid to or realized by the named individual. Our
assumptions with respect to the calculation of stock-based
compensation expense are set forth above in
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Significant Management
Estimates Stock-Based Compensation. There can
be no assurance that awards will vest or will be exercised (in
which case no value will be realized by the individual), or that
the value upon vesting or exercise will approximate the
compensation expense recognized by us.
|
|
(2)
|
|
Represents amounts paid for 401(k)
contribution matching program.
|
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|
(3)
|
|
Ms. Lewis joined us in May 2008 and
her employment with us terminated in December 2009.
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(4)
|
|
In connection with
Ms. Lewis termination we modified the terms of our
right of repurchase, which resulted in an additional stock-based
compensation expense of $197,268.
|
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(5)
|
|
In connection with
Ms. Lewis termination we extended her right to
exercise her options that were vested as of her termination date
to December 31, 2010, which resulted in an additional
stock-based compensation expense of $120,436.
|
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|
(6)
|
|
Amount represents $10,803 in
accrued unpaid paid time off, $27,000 in housing allowance and
$100,000 in accrued severance payments.
|
2009 Grants of
Plan-Based Awards
The following table sets forth information on grants of
plan-based awards in fiscal year 2009 to our named executive
officers.
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All Other
|
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All Other
|
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|
Stock
|
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|
Option
|
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|
|
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|
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Awards:
|
|
|
Awards:
|
|
|
Exercise or
|
|
|
Grant Date
|
|
|
|
|
|
|
Estimated Future Payouts Under
|
|
|
Number of
|
|
|
Number of
|
|
|
Base Price
|
|
|
Fair Value
|
|
|
|
|
|
|
Non-Equity
Incentive Plan
|
|
|
Shares of
|
|
|
Securities
|
|
|
of Option
|
|
|
of Stock and
|
|
|
|
|
|
|
Awards
(1)
|
|
|
Stock or
|
|
|
Underlying
|
|
|
Awards
|
|
|
Option
|
|
Name
|
|
Grant Date
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Units
|
|
|
Options
|
|
|
(per share)
|
|
|
Awards
|
|
|
Jeffrey N. Maggioncalda
|
|
|
|
|
|
$
|
75,000
|
|
|
$
|
150,000
|
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/09/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
|
$
|
7.99
|
|
|
$
|
1,446,332
|
|
Raymond J. Sims
|
|
|
|
|
|
|
37,500
|
|
|
|
75,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/09/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
7.99
|
|
|
|
413,239
|
|
Christopher L. Jones
|
|
|
|
|
|
|
97,500
|
|
|
|
195,000
|
|
|
|
390,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/09/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
7.99
|
|
|
|
413,239
|
|
Lawrence M. Raffone
|
|
|
|
|
|
|
250,000
|
|
|
|
525,000
|
|
|
|
1,170,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/09/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
7.99
|
|
|
|
413,239
|
|
Garry W. Hallee
|
|
|
|
|
|
|
37,500
|
|
|
|
75,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/09/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
7.99
|
|
|
|
413,239
|
|
|
|
|
11/18/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
7.99
|
|
|
|
103,310
|
|
Manjari Lewis
|
|
|
|
|
|
|
37,500
|
|
|
|
75,000
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
01/27/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/09/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
7.99
|
|
|
|
206,620
|
|
|
|
|
(1)
|
|
The threshold illustrates the
smallest payout that can be made if all of the pre-established
performance objectives are achieved at the minimum achievement
level. Actual awards may be more or less than these amounts and
are at the discretion of the compensation committee. The target
is the payout that can be made if the pre-established
performance objectives have been achieved at the target
achievement level. The maximum is the greatest payout that can
be made if the pre-established maximum performance objectives
are achieved or exceeded at the outperform achievement levels.
|
Narrative to 2009
Summary Compensation Table and 2009 Grants Plan-Based Awards
Table
Please see Compensation Discussion and Analysis
above for a complete description of compensation plans pursuant
to which the amounts listed under the 2009 Summary Compensation
Table and 2009 Grants of Plan-Based Awards Table were paid or
awarded and the criteria for such payment, including targets for
payment of annual incentives, as well as performance criteria on
which such payments were based. The Compensation Discussion and
Analysis also describes the options grants.
Except as otherwise noted, all option awards vest over four
years with 1/4th of the total number of shares subject to
the option vesting 12 months after the vesting commencement
date and the
108
remaining shares vesting at a rate of 1/48th of the total
number of shares subject to the option each month thereafter.
2009 Outstanding
Equity Awards at Fiscal Year-End
The following table lists all outstanding equity awards held by
our named executive officers as of December 31, 2009.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
(1)
|
|
|
Stock Awards
(2)
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Units of
|
|
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
Stock That
|
|
|
Market Value of
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Have Not
|
|
|
Shares That
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
|
Vested
|
|
|
Have Not Vested
|
|
|
Jeffrey N. Maggioncalda
|
|
|
125,000
|
|
|
|
|
|
|
|
10.00
|
|
|
|
04/11/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
168,705
|
|
|
|
|
|
|
|
1.00
|
|
|
|
12/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
11,667
|
(3)
|
|
|
|
|
|
|
1.00
|
|
|
|
03/05/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
3.00
|
|
|
|
01/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
4.25
|
|
|
|
03/23/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
7.50
|
|
|
|
09/19/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
11/11/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
|
|
|
|
|
|
7.99
|
|
|
|
11/09/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Raymond J. Sims
|
|
|
50,000
|
|
|
|
|
|
|
|
3.00
|
|
|
|
01/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
4.25
|
|
|
|
07/22/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
7.50
|
|
|
|
09/19/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
11/11/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
7.99
|
|
|
|
11/09/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Christopher L. Jones
|
|
|
107,741
|
|
|
|
|
|
|
|
1.00
|
|
|
|
12/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
(3)
|
|
|
|
|
|
|
1.00
|
|
|
|
03/05/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
2.50
|
|
|
|
04/22/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
3.00
|
|
|
|
01/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
4.25
|
|
|
|
03/23/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
7.50
|
|
|
|
09/19/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
11/11/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
7.99
|
|
|
|
11/09/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Lawrence M. Raffone
|
|
|
110,001
|
|
|
|
|
|
|
|
1.00
|
|
|
|
12/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
400,000
|
|
|
|
|
|
|
|
2.50
|
|
|
|
10/28/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
3.00
|
|
|
|
01/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
4.25
|
|
|
|
03/23/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
7.50
|
|
|
|
09/19/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
11/11/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
7.99
|
|
|
|
11/09/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Garry W. Hallee
|
|
|
90,132
|
|
|
|
|
|
|
|
1.00
|
|
|
|
12/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
6,355
|
(3)
|
|
|
|
|
|
|
1.00
|
|
|
|
03/05/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
3.00
|
|
|
|
01/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
4.25
|
|
|
|
03/23/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
7.50
|
|
|
|
09/19/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
|
|
|
|
6.51
|
|
|
|
11/11/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
7.99
|
|
|
|
11/09/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
7.99
|
|
|
|
11/18/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Manjari Lewis
|
|
|
93,750
|
|
|
|
156,250
|
(4)
|
|
|
9.60
|
|
|
|
12/31/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
(4)
|
|
|
7.99
|
|
|
|
12/08/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
(1)
|
|
Except as otherwise noted, all
option awards listed in the table vest as to 1/4th of the total
number of shares subject to the option 12 months after the
vesting commencement date, and the remaining shares vest at a
rate of 1/48th of the total number of shares subject to the
options each month thereafter. All option awards are subject to
early exercise, subject to our right of repurchase during the
vesting period.
|
|
(2)
|
|
All stock awards vest on the
seventh anniversary of February 14, 2005, the vesting
commencement. The vesting accelerates upon a change of control
or following an initial public offering as to 50% of the shares
after six months, and as to the remaining 50% of the shares
after 12 months.
|
|
(3)
|
|
All option awards fully vest on
grant date.
|
|
|
|
(4)
|
|
These shares were cancelled in
connection with Ms. Lewis termination in December 2009.
|
109
2009 Option
Exercises and Stock Vested
The following table sets forth the number of shares acquired
upon exercise of options by each named executive officer during
2009.
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number of Shares
|
|
|
|
|
Acquired on
|
|
Value Realized
|
Name
|
|
Exercise
|
|
on Exercise
(1)
|
|
Jeffrey N. Maggioncalda
(2)
|
|
|
3,000
|
|
|
|
21,750
|
|
|
|
|
32,832
|
|
|
|
131,328
|
|
|
|
|
198,284
|
|
|
|
793,136
|
|
Raymond J. Sims
|
|
|
247,500
|
(3)
|
|
|
1,237,500
|
|
|
|
|
5,500
|
|
|
|
49,500
|
|
Christopher L. Jones
|
|
|
130,619
|
(4)
|
|
|
522,476
|
|
|
|
|
3,000
|
|
|
|
21,750
|
|
|
|
|
42,603
|
|
|
|
170,412
|
|
Garry W. Hallee
(5)
|
|
|
66,664
|
|
|
|
266,656
|
|
|
|
|
53,731
|
|
|
|
214,924
|
|
|
|
|
(1)
|
|
Value realized is based on the fair market value of our common
stock on the date of exercise minus the exercise price. As there
was no public market for our common stock on the dates the
options were exercised, we have assumed the fair market value on
the date of exercise was $10.00, which is the mid-point of
the proposed price range of our common stock set forth on the
cover page of this prospectus.
|
|
|
|
(2)
|
|
These options were exercised by net exercise and, as a result,
Mr. Maggioncalda forfeited 2,102 shares,
29,563 shares and 178,545 shares, respectively, to
cover the exercise price and tax withholdings.
|
|
|
|
(3)
|
|
This option was exercised by net exercise and, as a result,
Mr. Sims forfeited 226,698 shares to cover the
exercise price and tax withholdings.
|
|
|
|
(4)
|
|
This option was exercised by net exercise and, as a result,
Mr. Jones forfeited 98,086 shares to cover the
exercise price and tax withholdings.
|
|
|
|
(5)
|
|
These options were exercised by net exercise and, as a result,
Mr. Hallee forfeited 56,335 shares and
45,406 shares, respectively, to cover the exercise price
and tax withholdings.
|
Employment
Agreements and Change in Control Arrangements
We do not have any employment agreements or termination
agreements with any of our executive officers.
We generally do not have change in control agreements with our
executives except with regards to their equity agreements. The
stock option agreements state that upon a change in control, the
following will occur:
|
|
|
|
|
If the executive is terminated other than for cause at any time
within 12 months following a change of control; and
|
|
|
|
If as of the date of termination some portion of the shares are
still subject to the one-year cliff;
|
|
|
|
Then the vesting for the portion of the shares still subject to
the one-year cliff will be accelerated.
|
In addition, shares subject to the restricted stock purchase
agreements will automatically vest upon a change of control or
following an initial public offering as to 50% of the shares
after six months, and the remaining 50% of the shares after 12
months.
110
For example, an executive who was hired on April 1, 2009
and who received 10,000 options would reach the one-year cliff
on April 1, 2010 and 2,500 options would vest accordingly.
If a change of control occurred on February 1, 2010, and
the executive was terminated other than for cause, then the
vesting of those 2,500 options would accelerate as of the date
of the change of control.
Our offer letter to our Executive Vice President, Sales and
Client Services provided for certain change of control benefits
if his employment is involuntarily terminated during the
12-month period commencing 30 days prior to a change in
control. Under the terms of his offer letter, any unvested
options held by him that would otherwise have vested during the
one-year period following the date of termination will become
vested on the termination date.
Employee Benefit
Plans
1998 Stock
Plan
Our 1998 Stock Plan was adopted by our board of directors in
April 1998 and was subsequently approved by our stockholders.
The 1998 Stock Plan was originally scheduled to expire on
April 9, 2008. However, pursuant to amendments to the 1998
Stock Plan adopted by our board of directors and subsequently
approved by our stockholders, the 1998 Stock Plan will continue
in effect until April 10, 2011, unless sooner terminated
under the terms of the 1998 Stock Plan.
As of December 31, 2009, 1,326,788 shares of common
stock remained available for future issuance under our 1998
Stock Plan. As of December 31, 2009, options to purchase a
total of 11,630,440 shares of our common stock were
outstanding under the 1998 Stock Plan. The outstanding options
have exercise prices ranging from $1.00 to $10.00 per share. The
weighted average exercise price of the options outstanding under
the 1998 Stock Plan was $6.07.
Following the completion of this offering, no additional awards
will be granted and no shares of our common stock will remain
available for future issuance under the 1998 Stock Plan. Shares
originally reserved for issuance under our 1998 Stock Plan but
which are not subject to outstanding options on the effective
date of our 2009 Stock Incentive Plan, and shares subject to
outstanding options under our 1998 Stock Plan on the effective
date of the 2009 Stock Incentive Plan that are subsequently
forfeited or terminated for any reason before being exercised,
up to a number of additional shares not to exceed an aggregate
of 2,000,000 shares, will again become available for awards
under our 2009 Stock Incentive Plan.
The 1998 Stock Plan provides for the grant of incentive stock
options within the meaning of Section 422 of the Code to
employees, including officers and employee directors, and the
grant of nonstatutory stock options and restricted stock to
employees, officers, directors (including non-employee
directors) and consultants.
The 1998 Stock Plan has been administered by our board of
directors or a committee appointed by the board of directors,
and may be amended or modified by the board of directors at any
time, without stockholder approval, unless approval is required
by applicable laws, rules or regulations or stock exchange
listings standards, and provided that any amendment or
termination does not impair the rights of holders of outstanding
awards without their consent.
Stock Options.
The committee administering the
1998 Stock Plan determines the term of each option, which may
not exceed 10 years (or five years in the case of an
incentive stock option granted to a stockholder holding more
than 10% of the voting shares of our company). To the extent an
optionholder has the right in any calendar year to exercise for
the first time one or more incentive stock options for shares
having an aggregate fair market value in excess of $100,000, any
such excess options are treated as nonstatutory stock options.
No option may be transferred by the optionholder other than by
will or the laws of descent or distribution. Stock options may
not be granted with an exercise price less than 100% of the fair
market value of the shares on the grant date, or, in the case of
incentive stock options granted to a holder of
111
10% or greater of the voting shares of our company, the exercise
price may not be less than 110% of the fair market value of the
shares on the grant date. Each option may be exercised during
the optionholders lifetime solely by the optionholder.
1/4th of the total number of shares subject to the options
vest and become exercisable 12 months after the vesting
commencement date for options granted under the 1998 Stock Plan,
and the remaining options vest and become exercisable at a rate
of 1/48th of the total number of shares subject to the
options each month thereafter. After the termination of an
optionholders service as an employee, director, or
consultant for any reason other than death or disability, such
optionholder may exercise his or her vested options for the
length of time stated in the option agreement, which period may
not exceed three months or be less than 30 days. Generally,
upon the death of the optionholder, the option will remain
exercisable for six months. In the case of the
optionholders termination of service as a result of total
or permanent disability, the option will remain exercisable for
12 months. In the case of the optionholders
termination of service as a result of a disability that does not
constitute a total or permanent disability, the option will
remain exercisable for six months. Notwithstanding the
foregoing, no option may be exercised after the expiration of
its term.
Restricted Stock.
Restricted stock is a share
award that may be conditioned upon continued service, the
achievement of performance objectives or the satisfaction of any
other condition as specified in a restricted stock agreement.
Restricted stock purchase rights granted may not be granted with
a purchase price less than 85% of the fair market value of the
shares on the grant date, or, in the case of a holder of 10% or
greater of the voting shares of our company, the price may not
be less than 100% of the fair market value of the shares on the
grant date. Participants who were awarded restricted stock under
the 1998 Stock Plan generally have all the rights of a
stockholder with respect to such stock, other than the right to
transfer such stock prior to vesting. Restricted stock may
generally be subject to a repurchase right by us in the event
the recipient ceases to provide services to us.
The 1998 Stock Plan provides that in the event of any increase
or decrease in the number of outstanding shares of our common
stock resulting from a stock split, reverse stock split, stock
dividend, combination, recapitalization or reclassification of
our common stock, or any other increase or decrease effected
without receipt of consideration by the company; our board of
directors will make appropriate adjustments in order to preserve
the benefits of awards outstanding under the 1998 Stock Plan.
The 1998 Stock Plan further provides that upon consummation of a
sale of all or substantially all of our assets or a merger,
outstanding awards granted under the 1998 Stock Plan would
terminate, unless assumed or substituted by an equivalent option
or right by the acquiring or surviving company. For more
information regarding the effect of a merger, consolidation or
similar transaction on outstanding awards granted under the 1998
Stock Plan, see Employment Agreements and Change in
Control Arrangements above.
Special
Executive Restricted Stock Purchase Plan
Our Special Executive Restricted Stock Purchase Plan was adopted
by our board of directors on June 19, 2001 and was
subsequently approved by our stockholders. Our Special Executive
Restricted Stock Purchase Plan provides for grants of restricted
stock to our employees and consultants.
As of December 31, 2009, 25,000 shares of common stock
remained available for future issuance under our Special
Executive Restricted Stock Purchase Plan. As of
December 31, 2009, 350,000 shares of restricted stock
were issued but unvested under the Special Executive Restricted
Stock Purchase Plan. The weighted average purchase price of the
restricted stock awards outstanding as of December 31, 2009
was $0.01.
Following the completion of this offering, no additional awards
will be granted and no shares of our common stock will remain
available for future issuance under the Special Executive
Restricted Stock Purchase Plan.
112
The Special Executive Restricted Stock Purchase Plan provides
for the grant of restricted stock to employees and consultants
of the company.
The Special Executive Restricted Stock Purchase Plan was
administered by our board of directors or a committee appointed
by the board of directors, and may be amended or modified by the
board at any time, without stockholder approval, unless approval
is required by applicable laws, rules or regulations or stock
exchange listings standards, and provided that any amendment or
termination does not materially and adversely affect the rights
of any holder of outstanding awards without his or her consent.
Restricted stock is a share award that may be conditioned upon
continued service, the achievement of performance objectives or
the satisfaction of any other condition as specified in a
restricted stock purchase agreement. Prior to an initial public
offering and if required by applicable laws at the time of
grant, restricted stock granted under the Special Executive
Restricted Stock Purchase Plan may not be granted with a
purchase price less than 85% of the fair market value of the
shares on the grant date, or, in the case of a holder of 10% or
greater of the voting shares of our company, the price may not
be less than 100% of the fair market value of the shares on the
grant date. Participants who were granted restricted stock under
the plan generally have all the rights of a stockholder with
respect to such stock, other than the right to transfer such
stock prior to vesting. Restricted stock may generally be
subject to a repurchase right by us in the event the recipient
ceases to provide services to us.
The Special Executive Restricted Stock Purchase Plan provides
that in the event of any increase or decrease in the number of
outstanding shares of our common stock resulting from a stock
split, reverse stock split, stock dividend, combination,
recapitalization or reclassification of our common stock, or any
other increase or decrease effected without receipt of
consideration by the company, our board of directors will make
appropriate adjustments in order to preserve the benefits of
awards outstanding under the plan. The plan further provides
that upon consummation of a sale of all or substantially all of
our assets, or a merger, consolidation or other capital
reorganization of the company that includes a change of control,
outstanding stock purchase rights granted under the Special
Executive Restricted Stock Purchase Plan would terminate, unless
assumed or substituted by an equivalent right by the acquiring
or surviving company. For more information regarding the effect
of a merger, consolidation or similar transaction on outstanding
awards granted under the Special Executive Restricted Stock
Purchase Plan, see Employment Agreements and Change in
Control Arrangements above.
2009 Stock
Incentive Plan
General.
Our 2009 Stock Incentive Plan was
adopted by our board of directors in November 2009, subject to
stockholder approval, and will become effective immediately
prior to the closing of this offering.
The 2009 Stock Incentive Plan provides for the granting of
incentive stock options within the meaning of Section 422
of Code to employees and the granting of nonstatutory stock
options to employees, non-employee directors, advisors and
consultants. The 2009 Stock Incentive Plan also provides for the
grants of restricted stock, stock appreciation rights and stock
unit awards to employees, non-employee directors, advisors and
consultants.
Administration.
The compensation committee of
our board of directors will administer the 2009 Stock Incentive
Plan, including the determination of the recipient of an award,
the number of shares subject to each award, whether an option is
to be classified as an incentive stock option or nonstatutory
option, and the terms and conditions of each award, including
the exercise and purchase prices and the vesting or duration of
the award.
At the discretion of our board of directors, the compensation
committee may consist solely of two or more non-employee
directors within the meaning of
Rule 16b-3
of the Exchange Act, or solely of
113
two or more outside directors within the meaning of
Section 162(m) of the Code. Our board of directors may
appoint one or more separate committees of our board, each
consisting of one or more members of our board of directors, to
administer our 2009 Stock Incentive Plan with respect to
employees who are not subject to Section 16 of the Exchange
Act. Subject to applicable law, our board of directors may also
authorize one or more officers to designate employees, other
than employees who are subject to Section 16 of the
Exchange Act, to receive awards under our 2009 Stock Incentive
Plan
and/or
determine the number of such awards to be received by such
employees subject to limits specified by our board of directors.
Authorized Shares.
Under our 2009 Stock
Incentive Plan, 2,000,000 shares of our common stock have
been authorized for issuance. In addition, the number of shares
that have been authorized for issuance under the 2009 Stock
Incentive Plan will be increased on the first day of each fiscal
year beginning in 2010 and ending in 2019, in an amount equal to
the least of (i) 2,000,000 million shares,
(ii) 4% of the outstanding shares of our common stock on
the last day of the immediately preceding year or
(iii) another amount determined by the board of directors.
Shares subject to awards granted under the 2009 Stock Incentive
Plan that expire unexercised, are forfeited or terminated before
being exercised or settled, or are not delivered to the
participant because such award is settled in cash will again
become available for issuance under the 2009 Stock Incentive
Plan. Shares tendered or withheld to satisfy the grant, exercise
price or tax withholding obligation related to an award will
again become available for issuance under the 2009 Stock
Incentive Plan. In addition, shares originally reserved for
issuance under our 1998 Stock Plan but which are not subject to
outstanding options on the effective date of our 2009 Stock
Incentive Plan, and shares subject to outstanding options under
our 1998 Stock Plan on the effective date of the 2009 Stock
Incentive Plan that are subsequently forfeited or terminated for
any reason before being exercised, up to a number of additional
shares not to exceed an aggregate of 2,000,000 shares, will
again become available for awards under our 2009 Stock Incentive
Plan after this offering is completed and the 2009 Stock
Incentive Plan is effective.
No participant in the 2009 Stock Incentive Plan can receive
option grants, restricted shares, stock appreciation rights or
stock units totaling more than an aggregate of
500,000 shares in any calendar year, except in the
participants first year of employment in which the
participant may receive equity awards totaling up to
1,000,000 shares. No participant in the 2009 Stock
Incentive Plan may be paid more than an aggregate of $1,000,000
in cash during any calendar year with respect to equity awards
that are payable in cash.
Types of
Awards.
|
|
|
|
|
Stock Options.
A stock option is the right to
purchase a certain number of shares of stock, at a certain
exercise price, in the future. Under our 2009 Stock Incentive
Plan, incentive stock options and nonstatutory options must be
granted with an exercise price of at least 100% of the fair
market value of our common stock on the date of grant. Incentive
stock options granted to any holder of more than 10% or greater
of the voting shares of our company must have an exercise price
of at least 110% of the fair market value of our common stock on
the date of grant. No incentive stock option can be granted to
an employee if as a result of the grant, the employee would have
the right in any calendar year to exercise for the first time
one or more incentive stock options for shares having an
aggregate fair market value in excess of $100,000. The stock
option agreement specifies the date when all or any installment
of the option is to become exercisable. We expect that
1/4th of the total number of shares subject to the options
will vest and become exercisable 12 months after the
vesting commencement date for options granted, and the remaining
options will vest and become exercisable at a rate of
1/48th of
the total number of shares subject to the options each month
thereafter. Each stock option agreement sets forth the term of
the options, which is prohibited from exceeding 10 years
(five years in the case of an incentive stock option granted to
any holder of more than 10% of our voting shares), and the
extent to which the optionee will have the right to exercise the
option following termination of the optionees service with
the company. Payment of the
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114
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exercise price may be made in cash or cash equivalents or, if
provided for in the stock option agreement evidencing the award,
(i) by surrendering, or attesting to the ownership of,
shares which have already been owned by the optionee,
(ii) by delivery of an irrevocable direction to a
securities broker to sell shares and to deliver all or part of
the sale proceeds to us in payment of the aggregate exercise
price, (iii) by delivery of an irrevocable direction to a
securities broker or lender to pledge shares and to deliver all
or part of the loan proceeds to us in payment of the aggregate
exercise price, (iv) by delivering a full-recourse
promissory note or (v) by any other form that is consistent
with applicable laws, regulations and rules.
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Restricted Stock.
Restricted stock is a share
award that may be subject to vesting conditioned upon continued
service, the achievement of performance objectives or the
satisfaction of any other condition as specified in a restricted
stock agreement. Participants who are granted restricted stock
awards generally have all of the rights of a stockholder with
respect to such stock, other than the right to transfer such
stock prior to vesting. Subject to the terms of the 2009 Stock
Incentive Plan, the compensation committee will determine the
terms and conditions of any restricted stock award, including
any vesting arrangement, which will be set forth in a restricted
stock agreement to be entered into between us and each
recipient. Restricted stock may be awarded for such
consideration as the compensation committee may determine,
including without limitation cash, cash equivalents,
full-recourse promissory notes or future services or services
rendered prior to the award (without a cash payment by the
recipient).
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Stock Units.
Stock units give recipients the
right to acquire a specified number of shares of stock at a
future date upon the satisfaction of certain conditions,
including any vesting arrangement, established by the
compensation committee and as set forth in a stock unit
agreement. Unlike restricted stock, the stock underlying stock
units will not be issued until the stock units have vested and
are settled, and recipients of stock units generally will have
no voting or dividend rights prior to the time the vesting
conditions are satisfied and the award is settled. The
compensation committee may elect to settle vested stock units in
cash or in common stock or in a combination of cash and common
stock. Subject to the terms of the 2009 Stock Incentive Plan,
the compensation committee will determine the terms and
conditions of any stock unit award, which will be set forth in a
stock unit agreement to be entered into between us and each
recipient.
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Stock Appreciation Rights.
Stock appreciation
rights may be granted independently or in combination with an
award of stock options. Stock appreciation rights typically will
provide for payments to the recipient based upon increases in
the price of our common stock over the exercise price of the
award. The exercise price of a stock appreciation right will be
determined by the compensation committee, which shall not be
less than the fair market value of our common stock on the date
of grant. The compensation committee may elect to pay stock
appreciation rights in cash or in common stock or in a
combination of cash and common stock.
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Other Plan Features.
Under the 2009 Stock
Incentive Plan:
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Unless the agreement evidencing an award expressly provides
otherwise, no award granted under the plan may be transferred in
any manner (prior to the vesting and lapse of any and all
restrictions applicable to shares issued under such award),
other than by will or the laws of descent and distribution.
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Nondiscretionary, automatic grants of nonstatutory stock options
will be made to outside directors. Any outside director who
first joins the board of directors on or after the effective
date, will be automatically granted an initial nonstatutory
option to purchase 50,000 shares upon first becoming a
member of the board. The initial option will vest and become
exercisable over four years, with 1/4th of the shares
subject to the initial option vesting on the first anniversary
of the date of grant and the remainder vesting monthly after
that date. Immediately after each of our regularly scheduled
annual meetings of stockholders, each outside director
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115
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will be automatically granted an option to purchase
10,000 shares, provided that the outside director has
served on the board of directors for at least six months. Each
annual option will vest and become exercisable on the first
anniversary of the date of grant, or immediately prior to the
next regular annual meeting of the companys stockholders
following the date of grant if the meeting occurs prior to the
first anniversary date. The options granted to outside directors
will have a per share exercise price equal to 100% of the fair
market value of the underlying shares on the date of grant and
will become fully vested if we are subject to a change of
control.
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In the event of a recapitalization, stock split or similar
capital transaction, we will make appropriate and equitable
adjustments to the number of shares reserved for issuance under
the 2009 Stock Incentive Plan, including the share number in the
formula for automatic annual increases, the limitation regarding
the total number of shares underlying awards given to an
individual participant in any calendar year and the number of
nonstatutory stock options automatically granted to outside
directors and other adjustments in order to preserve the
benefits of outstanding awards under the 2009 Stock Incentive
Plan.
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Generally, if we merge with or into another corporation, we will
provide for full exercisability or vesting and accelerated
expiration of outstanding awards or settlement of the intrinsic
value of the outstanding awards in cash or cash equivalents
followed by cancellation of such awards unless the awards are
continued if we are the surviving entity, or assumed or
substituted for by any surviving entity or a parent or
subsidiary of the surviving entity.
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If we are involved in an asset acquisition, stock acquisition,
merger or similar transaction with another entity, the
compensation committee may make awards under the 2009 Stock
Incentive Plan by the assumption, substitution or replacement of
awards granted by another entity. The terms of such assumed,
substituted or replaced awards will be determined by the
compensation committee, in its discretion.
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Awards under our 2009 Stock Incentive Plan may be made subject
to the attainment of performance criteria including cash flows,
earnings per share, earnings before interest, taxes and
amortization, return on equity, total stockholder return, share
price performance, return on capital, return on assets or net
assets, revenue, income or net income, operating income or net
operating income, operating profit or net operating profit,
operating margin or profit margin, return on operating revenue,
return on invested capital, market segment, shares, costs,
expenses, regulatory body approval for commercialization of a
product or implementation or completion of critical projects.
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The 2009 Stock Incentive Plan terminates ten years after its
initial adoption, unless terminated earlier by the board of
directors. The board of directors may amend or terminate the
plan at any time, subject to stockholder approval where required
by applicable law. Any amendment or termination may not impair
the rights of holders of outstanding awards without their
consent.
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116
RELATED PARTY
TRANSACTIONS
In addition to the compensation arrangements with directors and
executive officers and the registration rights described
elsewhere in this prospectus, the following is a description of
each transaction since January 1, 2006 and each currently
proposed transaction in which:
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we have been or are to be a participant;
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the amount involved exceeds or will exceed $120,000; and
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any of our directors, executive officers or beneficial holders
of more than 5% of our capital stock, or any immediate family
member of or person sharing the household with any of these
individuals (other than tenants or employees), had or will have
a direct or indirect material interest.
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Consulting
Agreements
We have entered into a consulting agreement, as amended and
restated as of October 1, 2009, that amended and restated a
prior Consulting Agreement dated May 1, 2002, with one of
our directors, E. Olena Berg-Lacy. Under this agreement,
Ms. Berg-Lacy serves as a strategic advisor to us. We paid
Ms. Berg-Lacy $86,000, $0 and $0 for services under this
agreement during the years ended December 31, 2007, 2008
and 2009, respectively.
We have entered into a consulting agreement, dated as of
March 5, 1998, as amended on January 11, 2002, with
Professor William F. Sharpe. Professor Sharpe retired from our
board of directors at the age of 75 in April 2009 and is
currently a director emeritus. Under the consulting agreement,
Professor Sharpe provides us with investment advisory services.
We incurred consulting fees under this agreement of $300,000,
$300,000 and $285,000 during the years ended December 31,
2007, 2008 and 2009, respectively.
Other
Agreements
In September 2006, we entered into a three-year
$10.0 million term loan with Coast DL Funding L.L.C., an
account managed by Oak Hill Advisors, L.P. Oak Hill Advisors,
L.P. receives fees for managing this account but has no
ownership interest in Coast DL Funding L.L.C. Oak Hill Capital
Partners, L.P., one of our greater than 5% holders, has a
strategic relationship with Oak Hill Advisors, L.P. One of our
directors, Mark A. Wolfson, is a managing partner of Oak Hill
Capital Partners, L.P. Neither Oak Hill Capital Partners, L.P.
nor Mr. Wolfson has an ownership interest in Oak Hill
Advisors, L.P. Any optional prepayment made within two years of
the date the loan was entered into was subject to a prepayment
penalty of 1% of principal amount of the note. The interest rate
with respect to the term loan was based on
3-month
LIBOR plus a margin of 5.00%. The term loan was repaid in full
in May 2009.
Issuance of
Preferred Stock for Anti-Dilution Adjustment
In March 2005, we issued 11,843 shares of our series D
preferred stock and 134,915 shares of our series E
preferred stock to existing holders of series D preferred
stock and series E preferred stock, respectively and on a
pro rata basis, in satisfaction of anti-dilution adjustments
that were triggered by increasing the number of shares reserved
for issuance under our stock incentive plan. Similarly, in
September 2006, December 2008 and November 2009, we issued
118,480, 207,181 and 91,651 shares of our series E
preferred stock, respectively, to existing holders of
series E preferred stock, on a pro rata basis, in
satisfaction of an anti-dilution adjustment that was triggered
by increasing the number of shares reserved for issuance under
our stock incentive plan. In January 2010, our board of
directors and shareholders approved the issuance of an aggregate
of 456,643 shares of our common stock to holders of
Series E preferred stock immediately following the closing
of this offering such that each share of preferred stock,
including the Series E preferred stock, would maintain a
one-for-one conversion ratio to common stock.
117
Registration
Rights
We have entered into an investors rights agreement with
each of the purchasers of our preferred stock. Under this
agreement, our preferred stockholders are entitled to
registration rights with respect to their shares of common stock
issuable upon the automatic conversion of their convertible
preferred stock immediately prior to completion of this offering
and common stock, respectively. For additional information, see
Description of Capital Stock Registration
Rights.
Indemnification
Agreements
We intend to enter into indemnification agreements with each of
our current directors and executive officers. These agreements
will require us to indemnify these individuals to the fullest
extent permitted under Delaware law against liabilities that may
arise by reason of their service to us, and to advance expenses
incurred as a result of any proceeding against them as to which
they could be indemnified. We also intend to enter into
indemnification agreements with our future directors and
executive officers.
Procedures for
Approval of Related Party Transactions
Currently, any related party transaction is submitted to our
board of directors and are approved by a disinterested majority
of our board of directors. Our board of directors has approved a
Related Person Transactions Policy that will be effective upon
consummation of this offering. This Related Person Transactions
Policy will provide for approval by the audit committee of our
board of directors of transactions with our company valued at or
more than $120,000 in which any director, officer, 5% or greater
stockholder or certain related persons or entities has a direct
or indirect material interest.
118
PRINCIPAL AND
SELLING STOCKHOLDERS
The following table sets forth information as of
February 1, 2010 about the number of shares of common stock
beneficially owned and the percentage of common stock
beneficially owned before and after the completion of this
offering by:
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each person or group of persons known to us to be the beneficial
owner of more than 5% of our common stock;
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each of our named executive officers;
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each of our directors;
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all of our directors and executive officers as a group; and
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each of the selling stockholders.
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Unless otherwise noted below, the address of each beneficial
owner listed in the table is
c/o Financial
Engines, Inc., 1804 Embarcadero Road, Palo Alto, California
94303.
The shares to be sold by the selling stockholders were
originally issued and sold by us to such stockholders pursuant
to exemptions from registration requirements in reliance upon
Section 4(1) of the Securities Act or Regulation D
thereunder, or Rule 701 promulgated under
Section 3(b). The shares issued and sold in reliance upon
Section 4(1) or Regulation D were issued and sold in
private placement transactions of our common stock as well as
our Series A, B, C, D, E and F preferred stock at various
times from June 1996 to February 2005. The selling stockholders
in each of these transactions were accredited investors. The
shares issued and sold in reliance upon Rule 701 were
issued and sold pursuant to the exercise of options to purchase
our common stock granted under benefit plans relating to
compensation as provided under Rule 701. Each of the
selling stockholders represented their intentions at the time to
acquire the securities for investment only and not with a view
to or sale in connection with any distribution thereof and had
adequate access to information about us.
The selling stockholders listed below include Goliath, Inc. and
ML IBK Positions, Inc., each of which is a broker-dealer
affiliate. Based upon information provided to us by these
selling stockholders, each of these selling stockholders
acquired the shares to be sold in the ordinary course of such
selling stockholders business and did not have any
agreement or understanding, directly or indirectly, with any
person to distribute such selling stockholders shares at
the time of time the shares were purchased.
We have determined beneficial ownership in accordance with the
rules of the SEC. Except as indicated by the footnotes below, we
believe, based on the information furnished to us, that the
persons and entities named in the table below have sole voting
and investment power with respect to all shares of common stock
that they beneficially own, subject to applicable community
property laws.
119
Applicable percentage ownership is based on
33,166,180 shares of common stock outstanding on
February 1, 2010, which gives effect to the conversion of
each share of our preferred stock into one share of common
stock. For purposes of the table below, we have assumed that
39,582,911 shares of common stock will be outstanding upon
the completion of this offering. The percentage ownership
information assumes no exercise of the option to purchase
additional shares granted to the underwriters, unless otherwise
noted. In computing the number of shares of common stock
beneficially owned by a person and the percentage ownership of
that person, we deemed outstanding shares of common stock
subject to options held by that person that are currently
exercisable or exercisable within 60 days of
February 1, 2010, which we refer to as options that are
immediately exercisable. We did not deem these
shares outstanding, however, for the purpose of computing the
percentage ownership of any other person.
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Beneficial Ownership of Shares
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After the Offering
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Percent
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Percent
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Beneficial Ownership
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Assuming No
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Assuming
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of Shares Before
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Number
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Exercise of
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Exercise of
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Name and Address of
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the Offering
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of Shares
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Overallotment
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Overallotment
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Beneficial Owner
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Number
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Percent
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Offered
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Number
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Option
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Option
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5% Stockholders:
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Entities affiliated with Foundation Capital Leadership Fund,
L.P.
(1)
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5,737,525
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17.3
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%
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5,744,688
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14.5
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%
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13.9
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%
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Entities affiliated with New Enterprise Associates VII,
L.P.
(2)
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4,745,358
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14.3
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300,000
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(3)
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4,451,993
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11.2
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10.8
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Entities affiliated with Oak Hill Capital Partners, L.P.
(4)
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3,058,628
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9.2
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3,192,940
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8.1
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7.7
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Named Executive Officers and Directors:
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Jeffrey N. Maggioncalda
(5)
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1,637,385
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4.7
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173,197
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(6)
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1,464,188
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3.6
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3.4
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Raymond J. Sims
(7)
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537,017
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1.6
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62,655
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475,936
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1.2
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1.1
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Christopher L. Jones
(8)
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1,129,514
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3.3
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29,491
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1,100,023
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2.7
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2.6
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Lawrence M. Raffone
(9)
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1,167,704
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3.4
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1,167,704
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2.9
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2.8
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Garry Hallee
(10)
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893,953
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2.6
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95,000
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798,953
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2.0
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1.9
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Paul G. Koontz
(11)
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5,737,525
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17.3
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5,744,688
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14.5
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13.9
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E. Olena Berg-Lacy
(12)
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215,000
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*
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15,000
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200,000
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*
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*
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Heidi Fields
(13)
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60,000
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*
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60,000
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*
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*
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Joseph A. Grundfest
(14)
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713,199
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2.2
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713,199
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1.8
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1.7
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C. Richard Kramlich
(15)
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4,745,358
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14.3
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300,000
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(3)
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4,451,993
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11.2
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10.8
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John B. Shoven
(16)
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50,000
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*
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50,000
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*
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*
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Mark A. Wolfson
(17)
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34,175
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*
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34,175
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*
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*
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All executive officers and directors as a group
(15 persons)
(18)
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18,032,466
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46.7
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726,399
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17,321,439
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38.5
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37.2
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Selling Stockholders:
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1999 Maggioncalda Family
Trust
(19)
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144,739
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*
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137,597
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7,142
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*
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*
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Alfred T. Barson & Leslie Lawton Revocable
Trust Agreement 2/28/89
(20)
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3,218
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*
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480
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2,738
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*
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*
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Allen Gula
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15,000
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*
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2,250
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12,750
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*
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*
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Andre Susantin
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1,000
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*
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150
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850
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*
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*
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Andrea Buffkin
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2,333
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*
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350
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1,983
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*
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*
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120
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Beneficial Ownership of Shares
|
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After the Offering
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Percent
|
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Percent
|
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|
Beneficial Ownership
|
|
|
|
|
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|
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Assuming No
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Assuming
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|
|
|
of Shares Before
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Number
|
|
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|
|
|
Exercise of
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Exercise of
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Name and Address of
|
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the Offering
|
|
|
of Shares
|
|
|
|
|
|
Overallotment
|
|
|
Overallotment
|
|
Beneficial Owner
|
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Number
|
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Percent
|
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|
Offered
|
|
|
Number
|
|
|
Option
|
|
|
Option
|
|
|
Brian L. Johnson and Joan C. Johnson, Trustees of the Johnson
Family Trust U/D/T Dtd 11/6/89, as amended
(21)
|
|
|
12,022
|
|
|
|
*
|
|
|
|
8,074
|
|
|
|
3,948
|
|
|
|
*
|
|
|
|
*
|
|
Brian L. Johnson, Trustee of the Brian L. & Joan C. Johnson
1996 Childrens Educational Trust Dtd 12/7/96
(22)
|
|
|
15,000
|
|
|
|
*
|
|
|
|
10,000
|
|
|
|
5,000
|
|
|
|
*
|
|
|
|
*
|
|
C.V. Starr & Co., Inc.
(23)
|
|
|
88,269
|
|
|
|
*
|
|
|
|
88,269
|
|
|
|
5,372
|
|
|
|
*
|
|
|
|
*
|
|
Catherine Chen
(24)
|
|
|
21,833
|
|
|
|
*
|
|
|
|
2,291
|
|
|
|
19,542
|
|
|
|
*
|
|
|
|
*
|
|
Christine Hammer Trust U/A dtd. December 9, 1991
(25)
|
|
|
8,014
|
|
|
|
*
|
|
|
|
8,014
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Christopher Frank
|
|
|
500
|
|
|
|
*
|
|
|
|
200
|
|
|
|
300
|
|
|
|
*
|
|
|
|
*
|
|
Christopher Gross
|
|
|
26,004
|
|
|
|
*
|
|
|
|
2,910
|
|
|
|
23,094
|
|
|
|
*
|
|
|
|
*
|
|
CMC Master Fund, L.P.
(26)
|
|
|
601,335
|
|
|
|
1.8
|
%
|
|
|
150,334
|
|
|
|
451,001
|
|
|
|
1.1
|
%
|
|
|
1.1
|
%
|
Craig W. Johnson Trust dtd August 31, 2000, Brian L.
Johnson, Trustee
(27)
|
|
|
248,667
|
|
|
|
*
|
|
|
|
145,778
|
|
|
|
102,889
|
|
|
|
*
|
|
|
|
*
|
|
Curtis Foon
(28)
|
|
|
16,279
|
|
|
|
*
|
|
|
|
1,000
|
|
|
|
15,279
|
|
|
|
*
|
|
|
|
*
|
|
Cynthia Eddy
|
|
|
4,065
|
|
|
|
*
|
|
|
|
600
|
|
|
|
3,465
|
|
|
|
*
|
|
|
|
*
|
|
Daniel H. Case, III Separate Property Non-Exempt Marital
Trust u/a/d August 7, 2003
(29)
|
|
|
4,414
|
|
|
|
*
|
|
|
|
4,414
|
|
|
|
268
|
|
|
|
*
|
|
|
|
*
|
|
Daniel McMahon
|
|
|
107,522
|
|
|
|
*
|
|
|
|
12,188
|
|
|
|
95,334
|
|
|
|
*
|
|
|
|
*
|
|
David Pfister
(30)
|
|
|
60,055
|
|
|
|
*
|
|
|
|
1,555
|
|
|
|
58,500
|
|
|
|
*
|
|
|
|
*
|
|
David Smith
(31)
|
|
|
43,667
|
|
|
|
*
|
|
|
|
3,167
|
|
|
|
40,500
|
|
|
|
*
|
|
|
|
*
|
|
Desmond Chu
|
|
|
1,944
|
|
|
|
*
|
|
|
|
291
|
|
|
|
1,653
|
|
|
|
*
|
|
|
|
*
|
|
Eddy Wang
|
|
|
4,000
|
|
|
|
*
|
|
|
|
600
|
|
|
|
3,400
|
|
|
|
*
|
|
|
|
*
|
|
Ellen Tauber
|
|
|
40,068
|
|
|
|
*
|
|
|
|
11,620
|
|
|
|
28,448
|
|
|
|
*
|
|
|
|
*
|
|
Focus Ventures Co-Investment Fund, L.P.
(32)
|
|
|
49,094
|
|
|
|
*
|
|
|
|
12,274
|
|
|
|
36,979
|
|
|
|
*
|
|
|
|
*
|
|
Focus Ventures, L.P.
(33)
|
|
|
261,826
|
|
|
|
*
|
|
|
|
65,456
|
|
|
|
197,221
|
|
|
|
*
|
|
|
|
*
|
|
Frank, Richard H. and Linda G. Frank, Trustees for the Frank
Family Trust UDT dated
12/28/83
(34)
|
|
|
5,411
|
|
|
|
*
|
|
|
|
1,001
|
|
|
|
4,410
|
|
|
|
*
|
|
|
|
*
|
|
FV Investors, L.P.
(35)
|
|
|
16,368
|
|
|
|
*
|
|
|
|
4,092
|
|
|
|
12,329
|
|
|
|
*
|
|
|
|
*
|
|
George Von Gehr
|
|
|
7,120
|
|
|
|
*
|
|
|
|
7,120
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Goliath, Inc.
(36)
|
|
|
1,246,980
|
|
|
|
3.8
|
|
|
|
1,246,980
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Gregory Pallas
(37)
|
|
|
24,583
|
|
|
|
*
|
|
|
|
3,398
|
|
|
|
21,185
|
|
|
|
*
|
|
|
|
*
|
|
Henry Kravis
|
|
|
40,069
|
|
|
|
*
|
|
|
|
40,069
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Howard Palefsky
|
|
|
7,120
|
|
|
|
*
|
|
|
|
7,120
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Intel Capital Corporation
(38)
|
|
|
53,301
|
|
|
|
*
|
|
|
|
53,301
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Intel Corporation
(39)
|
|
|
441,339
|
|
|
|
1.3
|
|
|
|
441,339
|
|
|
|
26,862
|
|
|
|
*
|
|
|
|
*
|
|
Jacqueline Hipps
|
|
|
20,000
|
|
|
|
*
|
|
|
|
3,000
|
|
|
|
17,000
|
|
|
|
*
|
|
|
|
*
|
|
Jan Samuels
|
|
|
136,429
|
|
|
|
*
|
|
|
|
10,000
|
|
|
|
126,429
|
|
|
|
*
|
|
|
|
*
|
|
Jeffrey and Anne
Maggioncalda
(40)
|
|
|
5,600
|
|
|
|
*
|
|
|
|
5,600
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Jeffrey M. Fatt
(41)
|
|
|
6,000
|
|
|
|
*
|
|
|
|
750
|
|
|
|
5,250
|
|
|
|
*
|
|
|
|
*
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
After the Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Percent
|
|
|
|
Beneficial Ownership
|
|
|
|
|
|
|
|
|
Assuming No
|
|
|
Assuming
|
|
|
|
of Shares Before
|
|
|
Number
|
|
|
|
|
|
Exercise of
|
|
|
Exercise of
|
|
Name and Address of
|
|
the Offering
|
|
|
of Shares
|
|
|
|
|
|
Overallotment
|
|
|
Overallotment
|
|
Beneficial Owner
|
|
Number
|
|
|
Percent
|
|
|
Offered
|
|
|
Number
|
|
|
Option
|
|
|
Option
|
|
|
Jeffrey Maggioncalda, as custodian for Alison Nacey Maggioncalda
under California U/A to Minors Act
(42)
|
|
|
36,222
|
|
|
|
*
|
|
|
|
10,000
|
|
|
|
26,222
|
|
|
|
*
|
|
|
|
*
|
|
Jeffrey Maggioncalda, as custodian for Julia Nacey Maggioncalda
under California U/A to Minors Act
(43)
|
|
|
36,222
|
|
|
|
*
|
|
|
|
10,000
|
|
|
|
26,222
|
|
|
|
*
|
|
|
|
*
|
|
Jeffrey Maggioncalda, as custodian for Lindsay Nacey
Maggioncalda under California U/A to Minors Act
(44)
|
|
|
36,222
|
|
|
|
*
|
|
|
|
10,000
|
|
|
|
26,222
|
|
|
|
*
|
|
|
|
*
|
|
Jeffrey S. Carty, Trustee of the Jeffrey S. Carty Living Trust
dated July 26, 2006
(45)
|
|
|
70,564
|
|
|
|
*
|
|
|
|
13,168
|
|
|
|
57,396
|
|
|
|
*
|
|
|
|
*
|
|
Joanne E. Burns
(46)
|
|
|
23,157
|
|
|
|
*
|
|
|
|
490
|
|
|
|
22,667
|
|
|
|
*
|
|
|
|
*
|
|
Joseph Hardiman
|
|
|
88,137
|
|
|
|
*
|
|
|
|
52,632
|
|
|
|
35,505
|
|
|
|
*
|
|
|
|
*
|
|
Judith Berger
|
|
|
2,376
|
|
|
|
*
|
|
|
|
1,126
|
|
|
|
1,250
|
|
|
|
*
|
|
|
|
*
|
|
Julie Khaslavsky
|
|
|
15,187
|
|
|
|
*
|
|
|
|
2,278
|
|
|
|
12,909
|
|
|
|
*
|
|
|
|
*
|
|
Julie Kiani
|
|
|
1,125
|
|
|
|
*
|
|
|
|
168
|
|
|
|
957
|
|
|
|
*
|
|
|
|
*
|
|
Katchman Living Trust, Ross Katchman and Lisa Katchman, Trustees
(47)
|
|
|
12,895
|
|
|
|
*
|
|
|
|
1,934
|
|
|
|
10,961
|
|
|
|
*
|
|
|
|
*
|
|
Kathleen Watson
|
|
|
3,418
|
|
|
|
*
|
|
|
|
418
|
|
|
|
3,000
|
|
|
|
*
|
|
|
|
*
|
|
Kelly Sun
(48)
|
|
|
19,500
|
|
|
|
*
|
|
|
|
2,050
|
|
|
|
17,450
|
|
|
|
*
|
|
|
|
*
|
|
Kenneth Berger
|
|
|
2,376
|
|
|
|
*
|
|
|
|
1,126
|
|
|
|
1,250
|
|
|
|
*
|
|
|
|
*
|
|
Kenneth Fine
(49)
|
|
|
597,836
|
|
|
|
1.8
|
|
|
|
51,056
|
|
|
|
546,780
|
|
|
|
1.4
|
|
|
|
1.3
|
|
Lap Yin Chan
|
|
|
7,062
|
|
|
|
*
|
|
|
|
1,000
|
|
|
|
6,062
|
|
|
|
*
|
|
|
|
*
|
|
Leilani Jade Barrett (Harris)
|
|
|
5,585
|
|
|
|
*
|
|
|
|
837
|
|
|
|
4,748
|
|
|
|
*
|
|
|
|
*
|
|
Lisa Isaacson
(50)
|
|
|
78,455
|
|
|
|
*
|
|
|
|
5,000
|
|
|
|
73,455
|
|
|
|
*
|
|
|
|
*
|
|
Manjari Lewis
(51)
|
|
|
118,750
|
|
|
|
*
|
|
|
|
3,750
|
|
|
|
115,000
|
|
|
|
*
|
|
|
|
*
|
|
Meera Mishra
(52)
|
|
|
10,870
|
|
|
|
*
|
|
|
|
1,200
|
|
|
|
9,670
|
|
|
|
*
|
|
|
|
*
|
|
Melissa Frank
|
|
|
500
|
|
|
|
*
|
|
|
|
250
|
|
|
|
250
|
|
|
|
*
|
|
|
|
*
|
|
Michael Ault
(53)
|
|
|
64,000
|
|
|
|
*
|
|
|
|
5,000
|
|
|
|
59,000
|
|
|
|
*
|
|
|
|
*
|
|
ML IBK Positions, Inc.
(54)
|
|
|
441,337
|
|
|
|
1.3
|
|
|
|
441,337
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Nancy Sun
|
|
|
6,083
|
|
|
|
*
|
|
|
|
912
|
|
|
|
5,171
|
|
|
|
*
|
|
|
|
*
|
|
Naveed Farooqui
(55)
|
|
|
33,333
|
|
|
|
*
|
|
|
|
3,149
|
|
|
|
30,184
|
|
|
|
*
|
|
|
|
*
|
|
New Enterprise Associates VII, L.P.
(56)
|
|
|
4,068,257
|
|
|
|
12.3
|
|
|
|
300,000
|
|
|
|
3,774,892
|
|
|
|
9.5
|
|
|
|
9.2
|
|
Nick Parlante
|
|
|
15,000
|
|
|
|
*
|
|
|
|
2,250
|
|
|
|
12,750
|
|
|
|
*
|
|
|
|
*
|
|
Noah M. Rotandaro Rogers Education Trust U/A/D
August 15, 2007, Karen Fredericks, Trustee
(57)
|
|
|
13,157
|
|
|
|
*
|
|
|
|
13,157
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Pamela H. Johnson Revocable Trust
(58)
|
|
|
7,120
|
|
|
|
*
|
|
|
|
2,000
|
|
|
|
5,120
|
|
|
|
*
|
|
|
|
*
|
|
Patrick Hughes
|
|
|
39,965
|
|
|
|
*
|
|
|
|
7,376
|
|
|
|
32,589
|
|
|
|
*
|
|
|
|
*
|
|
Rebecca M. Jackson
(59)
|
|
|
6,850
|
|
|
|
*
|
|
|
|
721
|
|
|
|
6,129
|
|
|
|
*
|
|
|
|
*
|
|
Richard Berger
|
|
|
30,871
|
|
|
|
*
|
|
|
|
3,528
|
|
|
|
27,343
|
|
|
|
*
|
|
|
|
*
|
|
Robert A. DOnofrio
(60)
|
|
|
32,460
|
|
|
|
*
|
|
|
|
2,300
|
|
|
|
30,160
|
|
|
|
*
|
|
|
|
*
|
|
Robert Worsfold
(61)
|
|
|
120,400
|
|
|
|
*
|
|
|
|
10,900
|
|
|
|
109,500
|
|
|
|
*
|
|
|
|
*
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Ownership of Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
After the Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
|
|
|
Percent
|
|
|
|
Beneficial Ownership
|
|
|
|
|
|
|
|
|
Assuming No
|
|
|
Assuming
|
|
|
|
of Shares Before
|
|
|
Number
|
|
|
|
|
|
Exercise of
|
|
|
Exercise of
|
|
Name and Address of
|
|
the Offering
|
|
|
of Shares
|
|
|
|
|
|
Overallotment
|
|
|
Overallotment
|
|
Beneficial Owner
|
|
Number
|
|
|
Percent
|
|
|
Offered
|
|
|
Number
|
|
|
Option
|
|
|
Option
|
|
|
Roberts Investment Partnership, LLC
(62)
|
|
|
40,069
|
|
|
|
*
|
|
|
|
40,069
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
|
Ryan Snyder
|
|
|
32,000
|
|
|
|
*
|
|
|
|
4,800
|
|
|
|
27,200
|
|
|
|
*
|
|
|
|
*
|
|
Sara Badertscher
|
|
|
3,918
|
|
|
|
*
|
|
|
|
580
|
|
|
|
3,338
|
|
|
|
*
|
|
|
|
*
|
|
Scott Campbell
|
|
|
312,073
|
|
|
|
*
|
|
|
|
20,000
|
|
|
|
292,073
|
|
|
|
*
|
|
|
|
*
|
|
Shin Inoue
(63)
|
|
|
41,707
|
|
|
|
*
|
|
|
|
2,646
|
|
|
|
39,061
|
|
|
|
*
|
|
|
|
*
|
|
Shrikant Kathane
(64)
|
|
|
33,833
|
|
|
|
*
|
|
|
|
3,252
|
|
|
|
30,581
|
|
|
|
*
|
|
|
|
*
|
|
Sophia Mackey
(65)
|
|
|
28,476
|
|
|
|
*
|
|
|
|
1,500
|
|
|
|
26,976
|
|
|
|
*
|
|
|
|
*
|
|
Srinagesh Vitthanala
(66)
|
|
|
65,833
|
|
|
|
*
|
|
|
|
4,811
|
|
|
|
61,022
|
|
|
|
*
|
|
|
|
*
|
|
Starr International Investments Ltd.
(67)
|
|
|
88,269
|
|
|
|
*
|
|
|
|
88,269
|
|
|
|
5,372
|
|
|
|
*
|
|
|
|
*
|
|
State Street Global Advisors, Inc.
(68)
|
|
|
441,339
|
|
|
|
*
|
|
|
|
441,339
|
|
|
|
26,862
|
|
|
|
*
|
|
|
|
*
|
|
Susan Brock
|
|
|
6,333
|
|
|
|
*
|
|
|
|
949
|
|
|
|
5,384
|
|
|
|
*
|
|
|
|
*
|
|
Sylvia Kwan
|
|
|
139,755
|
|
|
|
*
|
|
|
|
47,872
|
|
|
|
91,883
|
|
|
|
*
|
|
|
|
*
|
|
Thomas Firpo
(69)
|
|
|
77,083
|
|
|
|
*
|
|
|
|
6,781
|
|
|
|
70,302
|
|
|
|
*
|
|
|
|
*
|
|
Thomas Von Karl
|
|
|
20,625
|
|
|
|
*
|
|
|
|
3,092
|
|
|
|
17,533
|
|
|
|
*
|
|
|
|
*
|
|
Trevor Frank
|
|
|
500
|
|
|
|
*
|
|
|
|
50
|
|
|
|
450
|
|
|
|
*
|
|
|
|
*
|
|
Ursula Murray
(70)
|
|
|
11,644
|
|
|
|
*
|
|
|
|
1,441
|
|
|
|
10,203
|
|
|
|
*
|
|
|
|
*
|
|
VLG Investments 1996
(71)
|
|
|
170,000
|
|
|
|
*
|
|
|
|
18,000
|
|
|
|
152,000
|
|
|
|
*
|
|
|
|
*
|
|
Walker, Karin
|
|
|
21,562
|
|
|
|
*
|
|
|
|
3,234
|
|
|
|
18,328
|
|
|
|
*
|
|
|
|
*
|
|
William Thompson
|
|
|
85,480
|
|
|
|
*
|
|
|
|
15,780
|
|
|
|
69,700
|
|
|
|
*
|
|
|
|
*
|
|
Xia Jin
(72)
|
|
|
28,000
|
|
|
|
*
|
|
|
|
3,362
|
|
|
|
24,638
|
|
|
|
*
|
|
|
|
*
|
|
Zachary MacRunnels
|
|
|
44,002
|
|
|
|
*
|
|
|
|
5,175
|
|
|
|
38,827
|
|
|
|
*
|
|
|
|
*
|
|
Other Selling Stockholder
|
|
|
|
|
|
|
|
|
|
|
662,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Represents beneficial ownership of less than 1%.
|
|
|
|
(1)
|
|
Represents 2,871,232 shares held by Foundation Capital
Leadership Fund, L.P., 2,510,756 shares held by Foundation
Capital, L.P., 278,974 shares held by Foundation Capital
Entrepreneurs Fund, LLC and 76,563 shares held by
Foundation Capital Leadership Principals Fund, LLC. The shares
listed under Beneficial Ownership of Shares After Offering also
include 716 shares of common stock and 6,447 shares of common
stock issuable, upon completion of the offering, to Foundation
Capital Entrepreneurs Fund, L.L.C. and Foundation Capital, L.P.,
respectively, as holders of Series E preferred stock Paul G.
Koontz, one of our directors, is a Managing Member of Foundation
Capital Management Co., LLC, which is the general partner of
Foundation Capital, L.P. and Foundation Capital Entrepreneurs
Fund, LLC. Mr. Koontz is a Managing Member of FC Leadership
Management Co., LLC, which is the general partner of Foundation
Capital Leadership Fund, L.P. and FC Leadership Principals Fund,
LLC. Mr. Koontz holds voting and dispositive power over the
securities held by these funds. Mr. Koontz disclaims
beneficial ownership of the reported securities except to the
extent of his pecuniary interest therein. The principal business
address of Foundation Capital Leadership Fund, L.P. is 250
Middlefield Road, Menlo Park, CA 94025.
|
|
|
|
(2)
|
|
Represents 4,068,257 shares held by New Enterprise
Associates VII, L.P., 624,000 shares held by New Enterprise
Associates 9, L.P., 49,093 shares held by NEA Presidents
Fund, L.P. and 4,008 shares held by NEA Ventures 1997, L.P.
The shares listed under Beneficial Ownership of Shares After the
Offering also includes 6,635 shares of common stock issuable,
upon completion of the offering, to New Enterprise Associates
VII, L.P. as a holder of Series E preferred stock. The shares
held by New Enterprise Associates VII are indirectly held by NEA
Partners VII, Limited Partnership, the sole general partner of
NEA Partners VII and the individual general partners of NEA
Partners VII,
|
123
|
|
|
|
|
Limited Partnership. The shares held by New Enterprise
Associates 9 are indirectly held by NEA Partners 9, Limited
Partnership, the sole general partner of New Enterprise
Associates 9 and the individual general partners of NEA Partners
9. The shares held by each of NEA Presidents Fund are indirectly
held by NEA General Partners L.P., the sole general partner of
NEA Presidents Fund and the individual general partners of NEA
General Partners. C. Richard Kramlich, one of our directors,
shares voting and dispositive power over the shares held by
these funds with Peter Barris, John M. Nehra, Charles W.
Newhall, III and Mark Perry. Messrs. Kramlich, Barris,
Nehra, Newhall and Perry disclaim beneficial ownership of these
shares except to the extent of their proportionate pecuniary
interest therein, if any. Pamela J. Clark, the general partner
of NEA Ventures 1997, holds voting and dispositive power over
the shares held by NEA Ventures 1997. Ms. Clark disclaims
beneficial ownership of these shares except to the extent of her
pecuniary interest therein. The principal business address of
the New Enterprise Associates funds is 2490 Sand Hill Road,
Menlo Park, CA 94025.
|
|
|
|
(3)
|
|
Represents 300,000 shares to be sold by New Enterprise
Associates VII, L.P.
|
|
|
|
(4)
|
|
Represents 2,982,159 shares held by Oak Hill Capital
Partners, L.P. and 76,469 shares held by Oak Hill Capital
Management Partners, L.P. The shares listed under Beneficial
Ownership of Shares After the Offering also includes 3,358
shares of common stock and 130,954 shares of common stock
issuable, upon completion of the offering, to Oak Hill Capital
Management Partners, L.P. and Oak Hill Capital Partners, L.P.,
respectively, as holders of Series E preferred stock. OHCP MGP,
LLC, a Delaware limited liability company, holds voting and
dispositive power over these shares. Mark A. Wolfson, one of our
directors, is one of eight members of OHCP MGP, LLC. The
principal business address of Oak Hill Capital Partners, L.P. is
2775 Sand Hill Road, Suite 220, Menlo Park, CA 94025.
|
|
|
|
(5)
|
|
Includes 1,355,372 shares subject to options that are
immediately exercisable, of which 540,627 shares are
subject to our right of repurchase as of February 1, 2010,
and 50,000 restricted shares are subject to our right of
repurchase as of February 1, 2010. Also includes
5,600 shares held by Jeffrey and Anne Maggioncalda and
36,222 shares held in each of three separate trusts for each of
his three children, for which Jeffrey N. Maggioncalda serves as
custodian. Mr. Maggioncalda holds sole voting and
dispositive power over the shares held by these trusts. Also
includes 144,739 shares held in trust by the 1999
Maggioncalda Family Trust. Mr. Maggioncalda holds sole
voting and dispositive power over the shares held by the trust.
|
|
|
|
(6)
|
|
Consists of 5,600 shares to be sold by Jeffrey and Anne
Maggioncalda, 137,597 shares to be sold by the 1999
Maggioncalda Family Trust and 10,000 shares to be sold by
each of the three separate trusts for each of
Mr. Maggioncaldas three children.
|
|
|
|
(7)
|
|
Includes 400,000 shares subject to options that are
immediately exercisable, of which 205,210 shares are
subject to our right of repurchase as of February 1, 2010,
and 50,000 restricted shares are subject to our right of
repurchase as of February 1, 2010. Also includes
3,542 shares held in trust for one of his children, for
which Raymond J. Sims serves as a custodian. Mr. Sims holds
sole voting and dispositive power over the shares held by the
trust. The shares listed under Beneficial Ownership of Shares
After the Offering also includes 1,574 shares of common stock
issuable, upon completion of the offering, to Mr. Sims as a
holder of Series E preferred stock.
|
|
|
|
(8)
|
|
Includes 667,741 shares subject to options that are
immediately exercisable, of which 213,543 shares are
subject to our right of repurchase as of February 1, 2010,
and 50,000 restricted shares are subject to our right of
repurchase as of February 1, 2010.
|
|
|
|
(9)
|
|
Includes 1,097,667 shares subject to options that are
immediately exercisable, of which 337,917 shares are
subject to our right of repurchase as of February 1, 2010,
and 50,000 restricted shares are subject to our right of
repurchase as of February 1, 2010.
|
|
|
|
(10)
|
|
Includes 621,487 shares subject to options that are
immediately exercisable, of which 238,543 shares are
subject to our right of repurchase as of February 1, 2010,
and 50,000 restricted shares are subject to our right of
repurchase as of February 1, 2010. Also includes 63,187
shares held in trust by the Hallee Living Trust. Mr. Hallee
holds sole voting and dispositive power over the shares held by
the trust.
|
124
|
|
|
(11)
|
|
Represents 2,871,232 shares held by Foundation Capital
Leadership Fund L.P., 2,510,756 shares held by
Foundation Capital, L.P., 278,974 shares held by Foundation
Capital Entrepreneurs Fund, LLC and 76,563 shares held by
Foundation Capital Leadership Principals Fund, LLC. The shares
listed under Beneficial Ownership of Shares After Offering also
include 716 shares of common stock and 6,447 shares of common
stock to be issued upon completion of the offering to Foundation
Capital Entrepreneurs Fund, L.L.C. and Foundation Capital, L.P.,
respectively, as holders of Series E preferred stock.
Mr. Koontz, one of our directors, is a Manager of
Foundation Capital Management Co., LLC, which is the general
partner of Foundation Capital, L.P. and the sole manager of
Foundation Capital Entrepreneurs Fund, LLC. Mr. Koontz is a
Manager of FC Leadership Management Co., LLC, which is the
general partner of Foundation Capital Leadership Fund, L.P. and
the sole manager of FC Leadership Principals Fund,
LLC. Mr. Koontz holds voting and dispositive
power over the shares held by these funds. Mr. Koontz
disclaims beneficial ownership of the reported securities except
to the extent of his pecuniary interest therein.
|
|
|
|
(12)
|
|
Includes 170,000 shares subject to options that are
immediately exercisable, of which 46,459 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(13)
|
|
Consists of 60,000 shares subject to options that are
immediately exercisable, all of which are subject to our right
of repurchase as of February 1, 2010.
|
|
|
|
(14)
|
|
Includes 713,199 shares held in trust by The Grundfest
Living Trust U/T/A DD 8/25/97. Mr. Grundfest shares
voting and dispositive power over these shares with Carol C.
Grundfest.
|
|
|
|
(15)
|
|
Represents 4,068,257 shares held by New Enterprise
Associates VII, L.P., 624,000 shares held by New Enterprise
Associates 9, L.P., 49,093 shares held by NEA Presidents
Fund, L.P. and 4,008 shares held by NEA Ventures 1997, L.P.
The shares listed under Beneficial Ownership of Shares After the
Offering also includes 6,635 shares of common stock to be issued
upon completion of the offering to New Enterprise Associates
VII, L.P. as a holder of Series E preferred stock.
Mr. Kramlich shares voting and dispositive power over the
shares held by these funds with Peter Barris, John M. Nehra,
Charles W. Newhall, III and Mark Perry.
Messrs. Kramlich, Barris, Nehra, Newhall and Perry disclaim
beneficial ownership of these shares except to the extent of
their proportionate pecuniary interest therein, if any.
|
|
|
|
(16)
|
|
Consists of 50,000 shares subject to options that are
immediately exercisable, all of which are subject to our right
of repurchase as of February 1, 2010.
|
|
|
|
(17)
|
|
Does not include 2,982,159 shares held by Oak Hill Capital
Partners, L.P. and 76,469 shares held by Oak Hill Capital
Management Partners, L.P. as to which Mr. Wolfson disclaims
beneficial ownership.
|
|
|
|
(18)
|
|
Includes 5,440,067 shares subject to options that are
immediately exercisable, of which 2,143,284 shares are
subject to our right of repurchase as of February 1, 2010,
and 325,000 restricted shares are subject to our right of
repurchase as of February 1, 2010.
|
|
|
|
(19)
|
|
Mr. Maggioncalda holds sole voting and dispositive power
over the shares held by the trust.
|
|
|
|
(20)
|
|
Alfred T. Barson and Leslie Lawton hold shared voting and
dispositive power over the shares held by the trust.
|
|
|
|
(21)
|
|
Brian L. Johnson holds voting and dispositive power over the
shares held by the trust.
|
|
|
|
(22)
|
|
Brian L. Johnson holds voting and dispositive power over the
shares held by the trust.
|
|
|
|
(23)
|
|
Excludes all securities held by Starr International Investments
Ltd. Michael Warantz holds voting and dispositive power over the
shares held by C.V. Starr & Co., Inc. The number of
shares listed under Beneficial Ownership of Shares After the
Offering also includes 5,372 shares of common stock to be
issued upon completion of the offering to C.V. Starr &
Co., Inc. as a holder of Series E preferred stock. The
principal business address of C.V. Starr & Co., Inc.
is 399 Park Avenue, 8th Floor, New York, NY 10022.
|
|
|
|
(24)
|
|
Includes 12,855 shares subject to options that are
immediately exercisable, of which 5,647 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(25)
|
|
Christine M. Hammer holds voting and dispositive power over the
shares held by the trust.
|
125
|
|
|
(26)
|
|
Elizabeth Hammack, Mark Louis, John Couch and Jenchyn Luh hold
shared voting and dispositive power over the shares held by CMC
Master Fund, L.P. The principal business address of CMC Master
Fund, L.P. is 525 University Avenue #1400, Palo Alto, CA 94301.
|
|
|
|
(27)
|
|
Brian L. Johnson holds voting and dispositive power over the
shares held by the trust.
|
|
|
|
(28)
|
|
Includes 8,250 shares subject to options that are
immediately exercisable, of which 2,803 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(29)
|
|
Stacey B. Case holds voting and dispositive power over the
shares held by the trust. The number of shares listed under
Beneficial Ownership of Shares After the Offering also includes
268 shares of common stock to be issued upon completion of
the offering to the trust.
|
|
|
|
(30)
|
|
Includes 58,500 shares subject to options that are
immediately exercisable, of which 18,376 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(31)
|
|
Includes 41,667 shares subject to options that are
immediately exercisable, of which 18,480 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(32)
|
|
Excludes all securities held by Focus Ventures, L.P. and FV
Investors, L.P. James H. Boettcher, Kevin J. McQuillan and
Steven P. Bird hold shared voting and dispositive power over the
shares held by Focus Ventures Co-Investment Fund, L.P. The
number of shares listed under Beneficial Ownership of Shares
After the Offering also includes 159 shares of common stock
to be issued upon completion of the offering to Focus Ventures
Co-Investment Fund, L.P. as a holder of Series E preferred
stock. The principal business address of Focus Ventures
Co-Investment Fund, L.P. is 525 University Avenue, #1400, Palo
Alto, CA 94301.
|
|
|
|
(33)
|
|
Excludes all securities held by Focus Ventures Co-Investment
Fund, L.P. and FV Investors, L.P. James H. Boettcher, Kevin J.
McQuillan and Steven P. Bird hold shared voting and dispositive
power over the shares held by Focus Ventures, L.P. The number of
shares listed under Beneficial Ownership of Shares After the
Offering also includes 851 shares of common stock to be
issued upon completion of the offering to Focus Ventures, L.P.
as a holder of Series E preferred stock. The principal
business address of Focus Ventures, L.P. is 525 University
Avenue, #1400, Palo Alto, CA 94301.
|
|
|
|
(34)
|
|
Richard H. Frank and Linda G. Frank share voting and dispositive
power over the shares held by the trust.
|
|
|
|
(35)
|
|
Excludes all securities held by Focus Ventures Co-Investment
Fund, L.P. and Focus Ventures, L.P. James H. Boettcher, Kevin J.
McQuillan and Steven P. Bird hold shared voting and dispositive
power over the shares held by FV Investors, L.P. The number of
shares listed under Beneficial Ownership of Shares After the
Offering also includes 53 shares of common stock to be
issued upon completion of the offering to FV Investors, L.P. as
a holder of Series E preferred stock. The principal
business address of FV Investors, L.P. is 525 University Avenue,
#1400, Palo Alto, CA 94301.
|
|
|
|
(36)
|
|
Richard D. Carpenter and Michael S. Miller hold shared voting
and dispositive power over the shares held by Goliath, Inc. The
principal business address of Goliath, Inc. is 103 Foulk
Road, Suite 238, Wilmington, DE 19803.
|
|
|
|
(37)
|
|
Consists of 24,583 shares subject to options that are
immediately exercisable, of which 1,928 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(38)
|
|
Excludes all securities held by Intel Corporation. Arvind
Sodhani, Ravi Jacob and Marty Linne hold shared voting and
dispositive power over the shares held by Intel Capital
Corporation. The principal place of business of Intel Capital
Corporation is 2200 Mission College Blvd., Santa Clara, CA
95054-1549.
|
|
|
|
(39)
|
|
Excludes all securities held by Intel Capital Corporation.
Arvind Sodhani, Ravi Jacob and Marty Linne hold shared voting
and dispositive power over the shares held by Intel Corporation
The number of shares listed under Beneficial Ownership of Shares
After the Offering also includes 26,862 shares of common
stock to be issued upon completion of the offering to Intel
Capital Corporation as a holder of Series E preferred
stock. The principal place of business of Intel Corporation is
2200 Mission College Blvd., Santa Clara, CA
95054-1549.
|
126
|
|
|
(40)
|
|
Mr. Maggioncalda and Anne Maggioncalda hold shared voting
and dispositive power over the shares held by Jeffrey and Anne
Maggioncalda.
|
|
|
|
(41)
|
|
Consists of 6,000 shares subject to options that are
immediately exercisable, of which 855 shares are subject to
our right of repurchase as of February 1, 2010.
|
|
|
|
(42)
|
|
Mr. Maggioncalda holds sole voting and dispositive power
over the shares held in trust for Alison Nacey Maggioncalda.
|
|
|
|
(43)
|
|
Mr. Maggioncalda holds sole voting and dispositive power
over the shares held in trust for Julia Nacey Maggioncalda.
|
|
|
|
(44)
|
|
Mr. Maggioncalda holds sole voting and dispositive power
over the shares held in trust for Lindsay Nacey Maggioncalda.
|
|
|
|
(45)
|
|
Jeffrey S. Carty holds voting and dispositive power over the
shares held by the trust.
|
|
|
|
(46)
|
|
Includes 22,667 shares subject to options that are
immediately exercisable, of which 7,876 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(47)
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|
Ross Katchman and Lisa Katchman hold shared voting and
dispositive power over the shares held by the trust.
|
|
|
|
(48)
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|
Includes 17,500 shares subject to options that are
immediately exercisable, of which 5,834 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(49)
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|
Includes 543,500 shares subject to options that are
immediately exercisable, of which 207,293 shares are
subject to our right of repurchase as of February 1, 2010,
and 50,000 restricted shares are subject to our right of
repurchase as of February 1, 2010.
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|
|
|
(50)
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|
Includes 77,667 shares subject to options that are
immediately exercisable, of which 19,501 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(51)
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|
Consists of 93,750 shares subject to options that are
immediately exercisable as of February 1, 2010, and 25,000
restricted shares that are subject to our right of repurchase as
of February 1, 2010, which right of repurchase will lapse
upon completion of the offering. Ms. Lewis is our former
Executive Vice President, Service Delivery.
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|
|
|
(52)
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|
Includes 10,533 shares subject to options that are
immediately exercisable, of which 2,813 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(53)
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|
Consists of 64,000 shares subject to options that are
immediately exercisable, of which 29,793 shares are subject
to our right of repurchase as of February 1, 2010.
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|
|
|
(54)
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Mary Harman holds voting and dispositive power over the shares
held by ML IBK Positions, Inc. The principal business address of
ML IBK Positions, Inc. is One Bryant Park, 17th Floor,
New York, NY 10036.
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|
|
|
(55)
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|
Includes 30,000 shares subject to options that are
immediately exercisable, of which 12,335 shares are subject
to our right of repurchase as of February 1, 2010.
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|
|
|
(56)
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|
Excludes all securities held by New Enterprise Associates 9,
L.P., NEA Presidents Fund, L.P. and NEA Ventures 1997, L.P. The
shares held by New Enterprise Associates VII are indirectly held
by NEA Partners VII, Limited Partnership, the sole general
partner of NEA Partners VII and the individual general partners
of NEA Partners VII, Limited Partnership. C. Richard Kramlich,
one of our directors, shares voting and dispositive power over
the shares held by New Enterprise Associates VII, L.P. with
Peter Barris, John M. Nehra, Charles W. Newhall, III and
Mark Perry. The number of shares listed under Beneficial
Ownership of Shares After the Offering also includes
6,635 shares of common stock to be issued upon completion
of the offering to New Enterprise Associates VII, L.P. as a
holder of Series E preferred stock. The principal business
address of New Enterprise Associates VII, L.P. is 1954
Greenspring Drive, Suite 600, Timonium, MD 21093.
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|
|
|
(57)
|
|
Karen P. Fredericks holds voting and dispositive power over the
shares held by the trust.
|
|
|
|
(58)
|
|
Pamela H. Johnson holds voting and dispositive power over the
shares held by the trust.
|
|
|
|
(59)
|
|
Consists of 6,850 shares subject to options that are
immediately exercisable, of which 2,039 shares are subject
to our right of repurchase as of February 1, 2010.
|
127
|
|
|
(60)
|
|
Consists of 32,460 shares subject to options that are
immediately exercisable, of which 12,026 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(61)
|
|
Consists of 120,400 shares subject to options that are
immediately exercisable, of which 40,045 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(62)
|
|
George R. Roberts holds voting and dispositive power over the
shares held by Roberts Investment Partnership, LLC. The
principal business address of Roberts Investment Partnership,
LLC is 2755 Campus Drive, Suite 240, San Mateo, CA
94403.
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|
|
|
(63)
|
|
Includes 35,000 shares subject to options that are
immediately exercisable, of which 24,063 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(64)
|
|
Includes 28,000 shares subject to options that are
immediately exercisable, of which 12,147 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(65)
|
|
Includes 15,633 shares subject to options that are
immediately exercisable, of which 2,093 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(66)
|
|
Includes 63,500 shares subject to options that are
immediately exercisable, of which 30,418 shares are subject
to our right of repurchase as of February 1, 2010.
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|
|
|
(67)
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|
Excludes all securities held by C.V. Starr & Co., Inc.
Stuart Osborne and Margaret Barnes hold shared voting and
dispositive power over the shares held by Starr International
Investments Ltd. The number of shares listed under Beneficial
Ownership of Shares After the Offering also includes
5,372 shares of common stock to be issued upon completion
of the offering to Starr International Investments Ltd. as a
holder of Series E preferred stock. The principal business
address of Starr International Investments Ltd. is Bermuda
Commercial Bank Building,
19 Par-la-ville
Road, Hamilton, HM 11, BM Bermuda.
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|
|
|
(68)
|
|
Thomas P. Kelly holds voting and dispositive power over the
shares held by State Street Global Advisors, Inc. The number of
shares listed under Beneficial Ownership of Shares After the
Offering also includes 26,862 shares of common stock to be
issued upon completion of the offering to State Street Global
Advisors, Inc. as a holder of Series E preferred stock. The
principal business address of State Street Global Advisors, Inc.
is One Lincoln Street, Boston, MA 02111.
|
|
|
|
(69)
|
|
Includes 52,500 shares subject to options that are
immediately exercisable, of which 31,876 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(70)
|
|
Includes 11,367 shares subject to options that are
immediately exercisable, of which 2,034 shares are subject
to our right of repurchase as of February 1, 2010.
|
|
|
|
(71)
|
|
Mark Royer holds voting and dispositive power over the shares
held by VLG Investments 1996. The principal business address of
VLG Investments 1996 is P.O. Box 372, San Mateo,
CA 94401.
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|
|
|
(72)
|
|
Includes 23,000 shares subject to options that are
immediately exercisable, of which 5,584 shares are subject
to our right of repurchase as of February 1, 2010.
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128
DESCRIPTION OF
CAPITAL STOCK
General
The following description of our capital stock and provisions of
our certificate of incorporation and bylaws is only a summary.
You should also refer to the copies of our certificate of
incorporation and bylaws that have been or will be filed with
the SEC as exhibits to our registration statement, of which this
prospectus forms a part, and to the provisions of Delaware law.
Upon completion of this offering, we expect that our authorized
capital stock will consist of 500,000,000 shares of common
stock, $0.0001 par value per share, and
10,000,000 shares of undesignated preferred stock,
$0.0001 par value per share, after giving effect to the
conversion of all outstanding preferred stock into common stock
and the restatement of our certificate of incorporation.
Common
Stock
As of December 31, 2009, there were 33,088,846 shares
of common stock outstanding held by approximately 382
stockholders of record, assuming the conversion on a
one-for-one
basis of each outstanding share of series A preferred
stock, series B preferred stock, series C preferred
stock, series D preferred stock, series E preferred
stock and series F preferred stock upon the completion of
this offering.
Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of
stockholders. Upon completion of this offering and the filing of
our amended and restated certificate of incorporation, our
common stockholders will not be entitled to cumulative voting in
the election of directors by our certificate of incorporation.
This means that the holders of a majority of the voting shares
will be able to elect all of the directors then standing for
election. Subject to preferences that may apply to shares of
preferred stock outstanding at the time, the holders of
outstanding shares of our common stock will be entitled to
receive dividends out of assets legally available at the times
and in the amounts that our board of directors may determine
from time to time. Upon our liquidation, dissolution or
winding-up,
the holders of common stock would be entitled to share ratably
in all assets remaining after payment of all liabilities and the
liquidation preferences of any outstanding preferred stock.
Holders of common stock have no preemptive or conversion rights
or other subscription rights. There will be no redemption or
sinking fund provisions applicable to the common stock. All
currently outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued in
this offering, when paid for, will also be fully paid and
nonassessable.
Preferred
Stock
Upon the completion of this offering, each outstanding share of
our series A preferred stock will convert into one share of
common stock, or an aggregate of 1,030,006 shares of common
stock; each outstanding share of our series B preferred
stock will convert into one share of common stock, or an
aggregate of approximately 3,445,858 shares of common
stock; each outstanding share of our series C preferred
stock will convert into one share of common stock, or an
aggregate of approximately 3,123,573 shares of common
stock; each outstanding share of our series D preferred
stock will convert into one share of common stock, or an
aggregate of approximately 3,655,166 shares of common
stock; each outstanding share of our series E preferred
stock will convert into one share of common stock, or an
aggregate of approximately 7,502,809 shares of common stock
and each outstanding share of our series F preferred stock
will convert into one share of common stock, or an aggregate of
approximately 3,684,211 shares of common stock.
Following the conversion, our certificate of incorporation will
be amended to delete all references to the prior series of
preferred stock and our board of directors will be authorized,
subject to limitations imposed by Delaware law, to issue from
time to time up to a total of 10,000,000 shares of
129
preferred stock in one or more series, without stockholder
approval. We expect that our board of directors will be
authorized to establish from time to time the number of shares
to be included in each series, and to fix the rights,
preferences and privileges of the shares of each wholly unissued
series and any of its qualifications, limitations or
restrictions. We expect that our board of directors will also be
able to increase or decrease the number of shares of any series,
but not below the number of shares of that series then
outstanding, without any further vote or action by the
stockholders.
The board of directors may authorize the issuance of preferred
stock with voting or conversion rights that could dilute the
voting power or alter other rights of the holders of our common
stock, or that could decrease the amount of earnings and assets
available for distribution to holders of our common stock. The
issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate
purposes, could, among other things, have the effect of
delaying, deferring or preventing a change in control of us and
might harm the market price of our common stock and the voting
and other rights of the holders of common stock. We have no
current plans to issue any shares of preferred stock after the
completion of this offering.
Registration
Rights
After this offering, the holders of 23,688,603 shares of
common stock, including shares issued upon conversion of the
preferred stock, without taking into account any shares sold in
this offering by the selling stockholders are entitled to
contractual rights by which they may require us to register
those shares under the Securities Act. All of these shares are
subject to a
lock-up
period for 163 days, subject to extension as described
under Shares Eligible For Future Sale. If we
propose to register any of our securities under the Securities
Act for our own account, holders of those shares are entitled to
include their shares in our registration, provided they accept
the terms of the underwriting as agreed upon between us and the
underwriters selected by us, and among other conditions, that
the underwriters of any such offering have the right to limit
the number of shares included in the registration. Six months
after the effective date of the registration statement of which
this prospectus is a part, and subject to limitations and
conditions specified in the registration rights agreement with
the holders, holders of at least 50% of the shares of common
stock issued upon conversion of the series A preferred
stock, series B preferred stock, series C preferred
stock, series D preferred stock, series E preferred
stock and series F preferred stock may require us to
prepare and file a registration statement under the Securities
Act at our expense covering those shares, provided that the
shares to be included in the registration have an anticipated
aggregate public offering price of at least $25,000,000. We are
not obligated to effect more than two of these demand
registrations. In addition, six months after the effective date
of the registration statement of which this prospectus is a
part, and subject to limitations and conditions specified in the
registration rights agreement with the holders, holders of at
least 50% of the shares of common stock issued upon conversion
of the series D preferred stock, series E preferred
stock and series F preferred stock may require us to
prepare and file a registration statement under the Securities
Act at our expense covering those shares, provided that the
shares to be included in the registration have an anticipated
aggregate public offering price of at least $5,000,000. We are
not obligated to effect more than two of these demand
registrations. Holders of those shares may also require us to
file additional registration statements on
Form S-3,
subject to limitations specified in the registration rights
agreement. There are no cash penalties under the registration
rights agreement or any other penalties resulting from delays in
registering the shares of our common stock.
130
Anti-Takeover
Effects of Delaware Law and Our Certificate of Incorporation and
Bylaws
The provisions of Delaware law, our restated certificate of
incorporation and our bylaws described below may have the effect
of delaying, deferring or discouraging another party from
acquiring control of us.
Delaware
Law
We will be subject to the provisions of Section 203 of the
Delaware General Corporation Law regulating corporate takeovers.
In general, those provisions prohibit a Delaware corporation
from engaging in any business combination with any interested
stockholder for a period of three years following the date that
the stockholder became an interested stockholder, unless:
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the transaction is approved by the board of directors before the
date the interested stockholder attained that status;
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upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction
commenced; or
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on or after the date the business combination is approved by the
board of directors, the business combination is authorized at a
meeting of stockholders, and not by written consent, by at least
two-thirds of the outstanding voting stock that is not owned by
the interested stockholder.
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In general, Section 203 defines business
combination to include the following:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested
stockholder;
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subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
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any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
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In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation, and any entity or
person affiliated with or controlling or controlled by any such
entity or person.
A Delaware corporation may opt out of this provision by express
provision in its original certificate of incorporation or by
amendment to its certificate of incorporation or bylaws approved
by its stockholders. However, we have not opted out of, and do
not currently intend to opt out of, this provision. The statute
could prohibit or delay mergers or other takeover or change in
control attempts and, accordingly, may discourage attempts to
acquire us.
131
Charter and
Bylaws
Following the completion of this offering, we expect that our
certificate of incorporation and bylaws will provide that:
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no action can be taken by stockholders except at an annual or
special meeting of the stockholders called in accordance with
our bylaws, and stockholders may not act by written consent;
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the classification of our board of directors so that only a
portion of our directors are elected each year, with each
director serving a three-year term;
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the approval of holders of two-thirds of the shares entitled to
vote at an election of directors will be required to adopt,
amend or repeal our bylaws or amend or repeal the provisions of
our certificate of incorporation regarding the election and
removal of directors and the ability of stockholders to take
action by written consent or call a special meeting;
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our board of directors will be expressly authorized to make,
alter or repeal our bylaws;
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stockholders may not call special meetings of the stockholders
or fill vacancies on the board;
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stockholders must provide notice of nominations of directors or
the proposal of business to be voted on at an annual meeting;
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our board of directors will be authorized to issue preferred
stock without stockholder approval, as described above;
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our board of directors will be elected annually to serve until
the next annual meeting of stockholders;
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directors may only be removed for cause; and
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we will indemnify officers and directors against losses that
they may incur in investigations and legal proceedings resulting
from their services to us, which may include services in
connection with takeover defense measures.
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Limitation of
Liability and Indemnification Matters
We will adopt provisions in our certificate of incorporation
that limit the liability of our directors for monetary damages
for breach of their fiduciary duty as directors, except for
liability that cannot be eliminated under the Delaware General
Corporation Law. Accordingly, our directors will not be
personally liable for monetary damages for breach of their
fiduciary duty as directors, except for liabilities:
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for any breach of the directors duty of loyalty to us or
our stockholders;
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for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
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for unlawful payments of dividends or unlawful stock repurchases
or redemptions, as provided under Section 174 of the
Delaware General Corporation Law; or
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for any transaction from which the director derived an improper
personal benefit.
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Any amendment or repeal of these provisions will require the
approval of the holders of shares representing at least
two-thirds of the shares entitled to vote in the election of
directors, voting as one class.
Our certificate of incorporation and bylaws will also provide
that we will indemnify our directors and officers to the fullest
extent permitted under Delaware law. Our certificate of
incorporation and bylaws will also permit us to purchase
insurance on behalf of any officer, director, employee or other
132
agent for any liability arising out of his or her actions as our
officer, director, employee or agent, regardless of whether
Delaware law would permit indemnification. We intend to enter
into separate indemnification agreements with our directors and
executive officers that could require us, among other things, to
indemnify them against certain liabilities that may arise by
reason of their status or service as directors and to advance
their expenses incurred as a result of any proceeding against
them as to which they could be indemnified. We believe that the
limitation of liability provision in our certificate of
incorporation and the indemnification agreements will facilitate
our ability to continue to attract and retain qualified
individuals to serve as directors and officers.
The Nasdaq Global
Market Listing Symbol
We have applied to list our common stock on The Nasdaq Global
Market under the symbol FNGN.
Transfer Agent
and Registrar
The transfer agent and registrar for our common stock is Wells
Fargo Bank, N.A.
133
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. We cannot predict the effect, if any, that market
sales of shares or the availability of shares for sale will have
on the market price prevailing from time to time. As described
below, only a limited number of shares will be available for
sale shortly after this offering due to contractual and legal
restrictions on resale. Nevertheless, sales of our common stock
in the public market after the restrictions lapse, or the
perception that those sales may occur, could cause the
prevailing market price to decrease or to be lower than it might
be in the absence of those sales or perceptions.
Sale of
Restricted Shares
Upon completion of this offering, we will have 39,505,577
outstanding shares of common stock, assuming that there are no
exercised outstanding options after December 31, 2009,
except for those exercised and sold in connection with this
offering. The shares of common stock being sold in this offering
will be freely tradable, other than by any of our
affiliates as defined in Rule 144(a) under the
Securities Act, without restriction or registration under the
Securities Act. All remaining shares were issued and sold by us
in private transactions and are eligible for public sale if
registered under the Securities Act or sold in accordance with
Rule 144 or Rule 701 under the Securities Act. These
remaining shares are restricted securities within
the meaning of Rule 144 under the Securities Act. Shares
purchased by our affiliates may not be resold except pursuant to
an effective registration statement or an exemption from
registration, including the exemption under Rule 144 under
the Securities Act, as described below.
As a result of the
lock-up
agreements described below, other contractual restrictions on
resale and the provisions of Rules 144 and 701 described
below, the restricted securities will be available for sale in
the public market as follows:
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no shares will be eligible for sale prior to 163 days after
the date of this prospectus;
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28,148,934 shares will be eligible for sale upon the
expiration of the
lock-up
agreements, described below, beginning 163 days after the
date of this prospectus, subject to extension as described
below, and when permitted under Rule 144 or 701; and
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7,607,055 shares will be eligible for sale upon the
exercise of vested options 163 days after the date of this
prospectus, subject to extension as described below.
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Lock-up
Agreements
Our directors, executive officers and substantially all of our
stockholders have agreed with limited exceptions that they will
not sell any shares of common stock owned by them without the
prior written consent of Goldman, Sachs & Co., on
behalf of the underwriters for a period of 163 days from
the date of this prospectus; provided, however, that if
(1) during the last 17 days of the initial
lock-up
period, we release earnings results or announce material news or
a material event or (2) prior to the expiration of the
initial
lock-up
period, we announce that we will release earnings results during
the
15-day
period following the last day of the initial
lock-up
period, then in each case the
lock-up
period will be automatically extended until the expiration of
the
17-day
period beginning on the date of release of the earnings results
or the announcement of the material news or material event, as
applicable, unless Goldman, Sachs & Co. waives, in
writing, such extension. As a result, the maximum possible
lock-up
period under these
lock-up
agreements is 180 days beginning on the date of this
prospectus. At any time and without public notice, Goldman,
Sachs & Co. may in its sole discretion release some or
all of the securities from these
lock-up
agreements. To the extent shares are released before the
expiration of the
lock-up
period and these shares are sold into the market, the market
price of our common stock could decline. The representative has
advised us that it has no present intent or arrangement to
release any of the shares subject to these
lock-up
agreements prior to the expiration of the
lock-up
period. The release of any
lock-up
agreement is considered on a case
134
by case basis. The representative has further advised us that
the factors it would consider in determining whether to release
shares subject to a
lock-up
agreement include, but are not limited to, the length of time
before the
lock-up
agreement expires, the number of shares involved, the reasons
for the requested release, market conditions, the trading price
of our shares and whether the person seeking the release is an
officer, director or other affiliate of us. Immediately
following the
163-day
lock-up
period, shares of our common stock outstanding after this
offering will become available for sale, subject to legal
restrictions on resale. See Underwriting .
Rule 144
In general, under Rule 144, beginning 90 days after
the date of this prospectus, a person who is not our affiliate
and has not been our affiliate at any time during the preceding
three months will be entitled to sell any shares of common stock
that such person has beneficially owned for at least six months,
including the holding period of any prior owner other than one
of our affiliates, without regard to volume limitations. Sales
of our common stock by any such person would be subject to the
availability of current public information about us if the
shares to be sold were beneficially owned by such person for
less than one year.
In addition, under Rule 144, a person may sell shares of
our common stock acquired from us immediately upon the closing
of this offering, without regard to volume limitations or the
availability of public information about us, if:
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the person is not our affiliate and has not been our affiliate
at any time during the preceding three months; and
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the person has beneficially owned the shares to be sold for at
least one year, including the holding period of any prior owner
other than one of our affiliates.
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Beginning 90 days after the date of this prospectus, a
person deemed to be our affiliate, who beneficially owned the
shares proposed to be sold for at least six months, including
the holding period of any prior owner other than one of our
affiliates, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
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1% of the then outstanding shares of our common stock, or
approximately 39,505,577 shares immediately after this
offering, assuming no exercise of the underwriters option
to purchase additional shares; or
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the average weekly trading volume of the common stock on The
Nasdaq Global Market during the four calendar weeks preceding
the date on which notice of the sale is filed with the
Securities and Exchange Commission.
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Sales under Rule 144 by our affiliates are subject to
requirements relating to manner of sale, notice and availability
of current public information about us.
Rule 701
Subject to various limitations on the aggregate offering price
of a transaction and other conditions, Rule 701 may be
relied upon with respect to the resale of securities originally
purchased from us by our employees, directors, officers,
consultants or advisers prior to the completion of this
offering, pursuant to written compensatory benefit plans or
written contracts relating to the compensation of such persons.
In addition, the SEC has indicated that Rule 701 will apply
to stock options granted by us before this offering, along with
the shares acquired upon exercise of those options. Securities
issued in reliance on Rule 701 are deemed to be restricted
securities and, beginning 90 days after the date of this
prospectus, unless subject to the contractual restrictions
described above, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144
and by affiliates under Rule 144 without compliance with
the minimum holding
135
period requirements. All securities issued in reliance on 701
are also subject to the
163-day
lock-up
period described above.
Stock
Plans
We intend to file a registration statement under the Securities
Act covering 3,326,788 shares of common stock reserved for
issuance under our stock plans. This registration statement is
expected to be filed soon after the date of this prospectus and
will automatically become effective upon filing. Accordingly,
shares registered under this registration statement will be
available for sale in the open market unless those shares are
subject to vesting restrictions with us or the contractual
restrictions described above.
Registration
Rights
In addition, after this offering, the holders of approximately
23,688,603 shares of common stock, without taking into
account the shares sold in this offering by the selling
stockholders, including shares of common stock issuable upon
conversion of our series A preferred stock, series B
preferred stock, series C preferred stock, series D
preferred stock, series E preferred stock and series F
preferred stock upon the completion of this offering, will be
entitled to rights to cause us to register the sale of those
shares under the Securities Act. All of these shares are subject
to the
163-day
lock-up
period. Registration of these shares under the Securities Act
would result in these shares, other than shares purchased by our
affiliates, becoming freely tradable without restriction under
the Securities Act immediately upon the effectiveness of the
registration. See Description of Capital Stock
Registration Rights.
136
DESCRIPTION OF
CERTAIN INDEBTEDNESS
General
On April 20, 2009, we, and our subsidiary, Financial
Engines Reincorporation Sub, Inc., as borrower, entered into a
second amended and restated loan and security agreement that
provides for a three-year $10.0 million term loan, which is
repayable in 36 equal installments through May 1,
2012, and a
364-day
$7.0 million revolving credit facility, with Silicon Valley
Bank. The key terms of the term loan are described below. This
description is not complete and is qualified in its entirety by
reference to the complete text of the Second Amended and
Restated Loan Security Agreement, a copy of which has been filed
as an exhibit to this registration statement, of which this
prospectus forms a part.
Loan and Terms of
Payment
Under the terms of the loan and security agreement, we may
borrow up to the lesser of (a) $7.0 million or
(b) the sum of 80% of our eligible accounts and 50% of our
eligible intra-quarter managed accounts through our revolving
credit facility. As part of our revolving credit facility, the
lender may issue letters of credit up to an aggregate amount of
$2.5 million. We are required to immediately reimburse the
lender for drawings made under the letters of credit. In
addition, we may enter into foreign exchange contracts with the
lender under which we commit to purchase from or sell to the
lender specified amounts of foreign currency on specific days up
to an aggregate amount of $2.5 million. We also may use up
to $2.5 million of the revolving credit facility for the
lenders cash management services. Any amounts paid under
the foreign exchange contracts or for the cash management
services will be treated as advances under the revolving credit
facility and accrue interest at the applicable interest rate.
We also may borrow up to $10.0 million under our term loan
as either a prime rate loan or a LIBOR rate loan. We must repay
any principal and accrued interest in 36 equal installments.
Interest and
Fees
The interest rate for the revolving credit facility will accrue
at a floating rate per annum rate equal to 0.75% above the prime
rate, which is payable monthly, and which may be increased by an
additional 5.00% in the event of default. We also must pay a
commitment fee equal to 0.25% of the revolving credit facility.
However, if our account balances with the lender drop below
$5.0 million at any time, we will immediately owe the
lender an additional commitment fee of $30,000.
The interest rate for a prime rate loan is at a rate per annum
equal to 1.50% above the prime rate, with a minimum prime rate
of 4.00% per annum, resulting in a minimum interest rate for
prime rate loans of 5.50% per annum, subject to an additional
5.00% in the event of default. The interest rate for a LIBOR
loan is 4.00% above the three-month LIBOR rate per annum,
measured on a
360-day
basis, with a minimum LIBOR rate of 1.50% per annum, resulting
in a minimum interest rate for LIBOR loans of 5.50% per annum,
which may be increased in the event of default to prime rate
plus 5.00%. We also paid a fee of $50,000, or an amount equal to
0.50% of the term loan.
Immediately upon an event of default and during the continuance
of any event of default, all outstanding amounts under the
revolving credit facility or a prime rate loan will bear an
interest rate per annum that is 5.00% above the rate that would
otherwise be applicable to such amounts.
Guarantees and
Security
The borrower, jointly and severally, unconditionally and
irrevocably, guarantees the prompt and complete payment and
performance of the note when due.
The term loan is secured by a security interest in all of our
personal property, including our deposit accounts, intellectual
property and intellectual property licenses, investment property
and receivables.
137
Covenants
The loan and security agreement contains covenants that, among
other things, limit our ability to merge or consolidate, dispose
of assets, repurchase or redeem capital stock and indebtedness,
make certain investments, acquisitions and capital expenditures,
enter into certain transactions with affiliates or change the
nature of our business.
The material financial covenants of the loan and security
agreement include the following:
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the maintenance of a ratio of (a) quick assets to
(b) the sum of (i) current liabilities plus
(ii) all advances and term loans minus (iii) deferred
revenue of at least 1.15 to 1.0 through September 30, 2009,
and at least 1.25:1.00 thereafter.
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maximum capital expenditures made in cash and not financed with
indebtedness shall not exceed $2,000,000 in the fiscal year
ending in 2009 and $4,000,000 in any fiscal year thereafter.
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a fixed charge coverage ratio of no less than 1.50 for the
period ending September 30, 2009, 2.0 for the period ending
December 31, 2009, 1.50 for the period ending
March 31, 2010, 2.0 for the period ending June 30,
2010 and 2.50 for the period ending September 30, 2010 and
thereafter.
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The loan and security agreement also limits our ability to incur
additional debt in excess of $250,000, to amend any subordinated
debt or make payment on any subordinated debt.
Events of
Default
Events of default, subject to certain exceptions and limitations
and whereupon the note shall become immediately due and payable
if not cured, include: non-payment of principal or interest as
such amounts become due, misrepresentation, breach of covenants,
other defaults, insolvency proceedings, bankruptcy filing,
judgments, cross-defaults, dissolution or liquidation and
cessation of the enforceability of any material provision of the
note or any lien created therein.
138
MATERIAL U.S.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material
U.S. federal income and estate tax consequences of the
purchase, ownership and disposition of our common stock as of
the date hereof that may be relevant to you if you are a
non-U.S. Holder.
As used in this discussion, the term
non-U.S. Holder
means any person that is not, for U.S. federal income tax
purposes, a partnership nor any of the following:
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an individual citizen or resident of the United States;
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a corporation (or any other entity treated as a corporation for
U.S. federal income tax purposes) created or organized in
or under the laws of the United States, any state thereof or the
District of Columbia;
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an estate the income of which is subject to U.S. federal
income taxation regardless of its sources; or
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a trust if it (1) is subject to the primary supervision of
a court within the United States and one or more United States
persons have the authority to control all substantial decisions
of the trust or (2) has a valid election in effect under
applicable United States Treasury regulations to be treated as a
United States person.
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This discussion is based on the provisions of the Internal
Revenue Code of 1986, as amended, or the Code (particularly
Parts I (section 861, et seq.) and II
(section 871, et seq.) of Subchapter N of Chapter 1 of
the Code and Chapter 3 (section 1441, et seq.) of the
Code), and regulations, rulings and judicial decisions as of the
date hereof. Those authorities may be changed, possibly with
retroactive effect, or different interpretations. This
discussion is limited to
non-U.S. Holders
who hold shares of our common stock as capital assets. Moreover,
this discussion does not address all the U.S. federal
income tax consequences and does not address foreign, state,
local or other tax considerations that may be relevant to you in
light of your personal circumstances, nor does it discuss
special tax provisions that may apply to you if you relinquished
U.S. citizenship or residence. In addition, it does not
represent a detailed description of the U.S. federal income
tax consequences to you if you are subject to special treatment
under the U.S. federal income tax laws (including, for
example, if you are an expatriate, controlled foreign
corporation, passive foreign investment
company, financial institution, insurance company,
tax-exempt organization or a partnership or other pass-through
entity for U.S. federal income tax purposes). If you are a
partnership holding our common stock, the tax treatment of a
partner will generally depend upon the status of the partner and
the activities of the partnership. If you are a partner in a
partnership holding our common stock, you should consult your
tax advisor.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT A TAX
ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL AND
FOREIGN INCOME, ESTATE AND OTHER TAX CONSEQUENCES OF PURCHASING,
OWNING AND DISPOSING OF OUR COMMON STOCK.
Distributions on
Common Stock
In general, if distributions are made with respect to our common
stock, such distributions will be treated as dividends to the
extent of our current and accumulated earnings and profits as
determined for U.S. federal income tax purposes and will be
subject to withholding as discussed below. Any portion of a
distribution that exceeds our current and accumulated earnings
and profits will first be applied to reduce the
non-U.S. Holders
basis in the common stock and, to the extent such portion
exceeds the
non-U.S. Holders
basis, the excess will be treated as gain from the disposition
of the common stock, the tax treatment of which is discussed
below under Gain on Disposition of Common Stock.
If dividends are paid on our common stock, as a
non-U.S. Holder,
you will generally be subject to withholding of
U.S. federal income tax at a 30% rate or such lower rate as
may be specified by an
139
applicable income tax treaty. To claim the benefit of a lower
rate under an income tax treaty, you must properly file with the
payor an Internal Revenue Service
Form W-8BEN,
or successor form, certifying under penalty of perjury that you
are not a United States person (as defined under the Code) and
claiming an exemption from or reduction in withholding under the
applicable tax treaty. Special certification and other
requirements apply to you if you are a pass-through entity
rather than a corporation or individual or if our common stock
is held through certain foreign intermediaries.
If dividends are considered effectively connected with the
conduct of a trade or business by you within the United States
and, where a tax treaty applies, are attributable to a
U.S. permanent establishment of yours, those dividends will
not be subject to withholding tax, but instead will be subject
to U.S. federal income tax on a net basis at applicable
graduated individual or corporate rates as if you were a United
States person (as defined under the Code), unless an applicable
income tax treaty provides otherwise, provided an Internal
Revenue Service
Form W-8ECI,
or successor form, is filed with the payor. In addition, if you
are required to provide an Internal Revenue Service
Form W-8ECI
or successor form, as discussed above, you must also provide
your tax identification number. If you are a foreign
corporation, any effectively connected dividends may, under
certain circumstances, be subject to an additional branch
profits tax at a rate of 30% or such lower rate as may be
specified by an applicable income tax treaty.
If you are eligible for a reduced rate of U.S. withholding
tax pursuant to an income tax treaty, you may obtain a refund of
any excess amounts withheld by filing an appropriate claim for
refund with the Internal Revenue Service.
Gain on
Disposition of Common Stock
As a
non-U.S. Holder,
you generally will not be subject to U.S. federal income
tax on any gain recognized on the sale or other disposition of
our common stock unless:
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the gain is considered effectively connected with the conduct of
a trade or business by you within the United States and, where a
tax treaty applies, is attributable to a U.S. permanent
establishment of yours, in which case, you will generally be
subject to tax on the net gain derived from the sale under
regular graduated U.S. federal income tax rates as if you
were a United States person (as defined in the Code) and, if you
are a corporation, you may be subject to an additional branch
profits tax equal to 30% or such lower rate as may be specified
by an applicable income tax treaty;
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you are an individual who is present in the United States for
183 or more days in the taxable year of the sale or other
disposition and certain other conditions are met, in which case,
you will be subject to a 30% tax on the gain derived from the
sale, which may be offset by United States source capital
losses; or
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we are or have been a United States real property holding
corporation for U.S. federal income tax purposes at
any time within the shorter of the five-year period ending on
the date of disposition or the period you held our common stock.
As long as our common stock is regularly traded on an
established securities market, within the meaning of
section 897(c)(3) of the Code, these rules will apply only
if you actually or constructively hold more than 5% of such
regularly traded common stock at any time during the applicable
period that is specified in the Code. We believe that we are not
currently, and are not likely to become, a United States real
property holding corporation.
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Federal Estate
Tax
If you are an individual, our common stock held at the time of
your death will be included in your gross estate for
U.S. federal estate tax purposes and may be subject to
U.S. federal estate tax, unless an applicable estate tax
treaty provides otherwise.
140
Current U.S. federal tax law provides for reductions in
U.S. federal estate tax through 2009 and the elimination of
such estate tax entirely in 2010. Under this law, such estate
tax would be fully reinstated, as in effect prior to the
reductions, in 2011, unless further legislation is enacted.
Information
Reporting and Backup Withholding Tax
We must report annually to the Internal Revenue Service and to
each of you the amount of dividends paid to you and the tax
withheld with respect to those dividends, regardless of whether
withholding was required. Copies of the information returns
reporting those dividends and withholding may also be made
available by the Internal Revenue Service to the tax authorities
in the country in which you reside under the provisions of an
applicable income tax treaty or other applicable agreements.
Backup withholding tax may also apply to dividend payments made
to you on or with respect to our common stock unless you certify
under penalty of perjury that you are a
non-U.S. Holder
(and we do not have actual knowledge or reason to know that you
are a United States person (as defined under the Code)) or you
otherwise establish an exemption.
Information reporting and, depending on the circumstances,
backup withholding will apply to the proceeds of a sale of our
common stock within the United States or conducted through
United States-related financial intermediaries unless the
beneficial owner certifies under penalty of perjury that it is a
non-U.S. Holder
(and the payor does not have actual knowledge or reason to know
that the beneficial owner is a United States person (as defined
under the Code)) or the holder otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules
generally will be allowed as a refund or a credit against your
U.S. federal income tax liability provided that the
required procedures are followed.
You should consult your tax advisor regarding the application of
the information reporting and backup withholding rules to you.
Recent
Legislative Developments
Proposed legislation recently passed by the United States House
of Representatives would generally impose a 30% withholding tax
on dividends on our common stock and the gross proceeds of a
disposition of our common stock paid to (i) a foreign
financial institution unless such institution enters into an
agreement with the United States Treasury to collect and
disclose information regarding United States account holders of
such institution (including certain account holders that are
foreign entities with United States owners) and (ii) a
non-financial foreign entity unless such entity provides the
payor with a certification identifying the direct and indirect
United States owners of the entity. Under certain circumstances,
a
non-U.S. Holder
of our common stock may be eligible for refunds or credits of
such taxes. You are encouraged to consult with your own tax
advisor regarding the possible implications of this proposed
legislation on your investment in our common stock.
141
UNDERWRITING
We, the selling stockholders and the underwriters named below,
have entered into an underwriting agreement with respect to the
shares being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman,
Sachs & Co. is the representative of the underwriters.
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Underwriter
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Number of Shares
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Goldman, Sachs & Co.
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UBS Investment Bank
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Piper Jaffray & Co.
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Cowen and Company, LLC
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Total
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10,900,000
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The underwriters are committed to take and pay for all the
shares being offered, if any are taken, other than those shares
covered by the option described below.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an additional 1,635,000 shares from us. They may
exercise that option for 30 days. If any shares are
purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion
as set forth in the table above.
The following tables show the per share and total underwriting
discounts and commissions to be paid to the underwriters by us
and the selling stockholders. Such amounts are shown assuming
both no exercise and full exercise of the underwriters
option to purchase 1,635,000 additional shares.
Paid by
Us
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Full
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No Exercise
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Exercise
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Per Share
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$
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$
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Total
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$
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$
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Paid by the
Selling Stockholders
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Full
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No Exercise
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Exercise
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Per Share
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$
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$
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Total
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$
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$
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Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the initial
public offering price. If all the shares are not sold at the
initial public offering price, the representative may change the
offering price and the other selling terms. The offering of the
shares by the underwriters is subject to receipt and acceptance
and subject to the underwriters right to reject any order
in whole or in part.
We and our officers, directors and holders of substantially all
of our common stock, including the selling stockholders, have
agreed, subject to certain exceptions, not to dispose of or
hedge any of our common stock or securities convertible into or
exchangeable for shares of common stock during the period from
the date of this prospectus continuing through the date
163 days after the date of this prospectus, except with the
prior written consent of the representative. This agreement does
not apply
142
to any existing employee benefit plans. See
Shares Eligible for Future Sale for a
discussion of certain transfer restrictions.
The
163-day
restricted period described in the preceding paragraph will be
automatically extended if (i) during the last 17 days
of the
163-day
restricted period the company issues an earnings release or
announces material news or a material event or (ii) prior
to the expiration of the
163-day
restricted period, the company announces that it will release
earnings results during the
15-day
period following the last day of the
163-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
17-day
period beginning on the issuance of the earnings release of the
announcement of the material news or material event.
Prior to the offering, there has been no public market for the
shares. The initial public offering price will be negotiated
among us and the representative. Among the factors to be
considered in determining the initial public offering price of
the shares, in addition to prevailing market conditions, will be
our historical performance, estimates of our business potential
and earnings prospects, an assessment of our management and the
consideration of the above factors in relation to market
valuation of companies in related businesses.
We have applied to list the common stock on The Nasdaq Global
Market under the symbol FNGN.
In connection with the offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Shorts
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in the offering.
Covered short sales are sales made in an amount not
greater than the underwriters option to purchase
additional shares from the company and selling stockholders in
the offering. The underwriters may close out any covered short
position by either exercising their option to purchase
additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase additional
shares pursuant to the option granted to them. Naked
short sales are any sales in excess of such option. The
underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock
in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions
consist of various bids for or purchases of common stock made by
the underwriters in the open market prior to the completion of
the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representative has repurchased shares sold by or for the account
of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of the companys
stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be
higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on
The Nasdaq Global Market, in the
over-the-counter
market or otherwise.
The underwriters do not expect sales to discretionary accounts
to exceed five percent of the total number of shares offered.
We and the selling stockholders estimate that our share of the
total expenses of the offering, excluding underwriting discounts
and commissions, will be approximately $2.6 million.
143
We and the selling stockholders have agreed to indemnify the
several underwriters against certain liabilities, including
liabilities under the Securities Act of 1933.
Goldman, Sachs & Co. is acting as an underwriter of
this offering, and we will enter into an underwriting agreement
with them.
Goldman, Sachs & Co. owns 1,307,837 shares of
Series E preferred stock as of December 31, 2009 and,
upon the completion of the offering, will receive
80,587 shares of our common stock issuable to Goldman,
Sachs & Co. as a holder of Series E preferred
stock.
The underwriters and their respective affiliates are full
service financial institutions engaged in various activities,
including securities trading, commercial and investment banking,
financial advisory, investment management, principal investment,
hedging, financing and brokerage activities. Certain of the
underwriters and their respective affiliates have, from time to
time, performed, and may in the future perform, various
financial advisory and investment banking services for the
issuer, for which they received or will receive customary fees
and expenses.
In the ordinary course of their various business activities, the
underwriters and their respective affiliates may make or hold a
broad array of investments and actively trade debt and equity
securities (or related derivative securities) and financial
instruments (including bank loans) for their own account and for
the accounts of their customers and may at any time hold long
and short positions in such securities and instruments. Such
investment and securities activities may involve securities and
instruments of the issuer.
European Economic
Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), each underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make
an offer of shares to the public in that Relevant Member State
prior to the publication of a prospectus in relation to the
shares which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with
the Prospectus Directive, except that it may, with effect from
and including the Relevant Implementation Date, make an offer of
shares to the public in that Relevant Member State at any time:
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the representative for
any such offer; or
(d) in any other circumstances which do not require the
publication by us of a prospectus pursuant to Article 3 of
the Prospectus Directive.
For the purposes of this provision, the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Relevant Member State by any measure
implementing the Prospectus Directive in that Relevant Member
State and the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
144
Notice to
Investors in the United Kingdom
Each underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue or sale of the shares in
circumstances in which Section 21(1) of the FSMA does not
apply to us; and
(b) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom.
Notice to
Residents of Hong Kong
The shares may not be offered or sold by means of any document
other than (i) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), or (ii) to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong
Kong) and any rules made thereunder, or (iii) in other
circumstances which do not result in the document being a
prospectus within the meaning of the Companies
Ordinance (Cap. 32, Laws of Hong Kong), and no
advertisement, invitation or document relating to the shares may
be issued or may be in the possession of any person for the
purpose of issue (in each case whether in Hong Kong or
elsewhere), which is directed at, or the contents of which are
likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the laws of Hong Kong) other
than with respect to shares which are or are intended to be
disposed of only to persons outside Hong Kong or only to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)
and any rules made thereunder.
Notice to
Residents of Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore, or SFA, (ii) to a
relevant person, or any person pursuant to Section 275(1A),
and in accordance with the conditions, specified in
Section 275 of the SFA or (iii) otherwise pursuant to,
and in accordance with the conditions of, any other applicable
provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
Notice to
Residents of Japan
The securities have not been and will not be registered under
the Securities and Exchange Law of Japan (the Securities and
Exchange Law) and each underwriter has agreed that it will not
offer or
145
sell any securities, directly or indirectly, in Japan or to, or
for the benefit of, any resident of Japan (which term as used
herein means any person resident in Japan, including any
corporation or other entity organized under the laws of Japan),
or to others for re-offering or resale, directly or indirectly,
in Japan or to a resident of Japan, except pursuant to an
exemption from the registration requirements of, and otherwise
in compliance with, the Securities and Exchange Law and any
other applicable laws, regulations and ministerial guidelines of
Japan.
LEGAL
MATTERS
The validity of the common stock offered by this prospectus will
be passed upon for us by Pillsbury Winthrop Shaw Pittman LLP,
Palo Alto, California. Certain legal matters relating to the
offering will be passed upon for the underwriters by Gibson,
Dunn & Crutcher LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of Financial Engines, Inc.
as of December 31, 2008 and 2009 and for each of the years
in the three-year period ended December 31, 2009 have been
included herein and in the registration statement in reliance
upon the report of KPMG LLP, independent registered public
accounting firm, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN
FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement under the
Securities Act of 1933 with respect to the common stock offered
by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement and the
exhibits and schedules to the registration statement. Please
refer to the registration statement, exhibits and schedules for
further information with respect to the common stock offered by
this prospectus. Statements contained in this prospectus
regarding the contents of any contract or other document are
only summaries. With respect to any contract or document filed
as an exhibit to the registration statement, you should refer to
the exhibit for a copy of the contract or document, and each
statement in this prospectus regarding that contract or document
is qualified by reference to the exhibit. A copy of the
registration statement and its exhibits and schedules may be
inspected without charge at the Securities and Exchange
Commissions public reference room, located at
100 F Street, NE, Washington, D.C. 20549. Please
call the SEC at
1-800-SEC-0330
for further information on the public reference room. Our SEC
filings are also available to the public from the SECs
website at
www.sec.gov
.
Upon completion of this offering, we will be subject to the
information reporting requirements of the Securities Exchange
Act of 1934, and we intend to file reports, proxy statements and
other information with the SEC. These periodic reports, proxy
statements and other information will be available for
inspection and copying at the SECs public reference room
and the website of the SEC referred to above.
146
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
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Page
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F-2
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Consolidated Financial Statements:
|
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|
|
|
|
|
F-3
|
|
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|
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F-4
|
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|
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F-5
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F-6
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F-7
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|
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Financial Engines, Inc.:
We have audited the accompanying consolidated balance sheets of
Financial Engines, Inc. and subsidiaries as of December 31,
2008 and 2009, 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, 2009. 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, 2008 and 2009, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Mountain View, California
February 21, 2010
F-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,857
|
|
|
$
|
20,713
|
|
|
|
|
|
Accounts receivable, net of allowance of $180 in 2008 and $48 in
2009
|
|
|
12,826
|
|
|
|
17,975
|
|
|
|
|
|
Prepaid expenses
|
|
|
1,537
|
|
|
|
1,922
|
|
|
|
|
|
Other current assets
|
|
|
1,575
|
|
|
|
3,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
30,795
|
|
|
|
44,001
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,991
|
|
|
|
2,558
|
|
|
|
|
|
Internal use software, net
|
|
|
6,474
|
|
|
|
8,743
|
|
|
|
|
|
Other assets
|
|
|
2,042
|
|
|
|
3,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
42,302
|
|
|
$
|
58,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,405
|
|
|
$
|
7,579
|
|
|
|
|
|
Accrued compensation
|
|
|
2,283
|
|
|
|
9,101
|
|
|
|
|
|
Deferred revenue
|
|
|
7,040
|
|
|
|
7,354
|
|
|
|
|
|
Bank borrowings and note payable
|
|
|
13,500
|
|
|
|
3,333
|
|
|
|
|
|
Other current liabilities
|
|
|
77
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
28,305
|
|
|
|
27,439
|
|
|
|
|
|
Bank borrowings
|
|
|
|
|
|
|
4,722
|
|
|
|
|
|
Deferred revenue
|
|
|
2,271
|
|
|
|
1,487
|
|
|
|
|
|
Other liabilities
|
|
|
457
|
|
|
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
31,033
|
|
|
|
34,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.0001 par value. Authorized
24,192,000 shares; issued and outstanding
22,349,972 and 22,441,623 shares at December 31,
2008 and 2009, respectively; no shares issued or outstanding,
pro forma (unaudited). Aggregate liquidation preference of
$139,404 as of December 31, 2008 and 2009
|
|
|
2
|
|
|
|
2
|
|
|
$
|
|
|
Common stock, $0.0001 par value. Authorized
47,650,000 shares; issued and outstanding 10,287,881 and
10,647,223 shares at December 31, 2008 and 2009,
respectively; 33,545,489 shares issued and outstanding, pro
forma (unaudited)
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
Additional paid-in capital
|
|
|
174,749
|
|
|
|
182,018
|
|
|
|
182,018
|
|
Preferred stock warrant
|
|
|
1,191
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
(575
|
)
|
|
|
(394
|
)
|
|
|
(394
|
)
|
Accumulated deficit
|
|
|
(164,099
|
)
|
|
|
(157,361
|
)
|
|
|
(157,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
11,269
|
|
|
|
24,266
|
|
|
$
|
24,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
42,302
|
|
|
$
|
58,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional management
|
|
$
|
28,226
|
|
|
$
|
38,963
|
|
|
$
|
52,579
|
|
|
|
|
|
Platform
|
|
|
31,374
|
|
|
|
29,498
|
|
|
|
30,048
|
|
|
|
|
|
Other
|
|
|
3,750
|
|
|
|
2,810
|
|
|
|
2,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
63,350
|
|
|
|
71,271
|
|
|
|
84,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of amortization of internal use
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
software)
(1)
|
|
|
20,602
|
|
|
|
27,588
|
|
|
|
29,573
|
|
|
|
|
|
Research and
development
(1)
|
|
|
14,643
|
|
|
|
13,663
|
|
|
|
15,618
|
|
|
|
|
|
Sales and
marketing
(1)
|
|
|
19,871
|
|
|
|
21,157
|
|
|
|
22,515
|
|
|
|
|
|
General and
administrative
(1)
|
|
|
6,663
|
|
|
|
6,613
|
|
|
|
7,679
|
|
|
|
|
|
Withdrawn offering expense
|
|
|
|
|
|
|
3,031
|
|
|
|
|
|
|
|
|
|
Amortization of internal use
software
(1)
|
|
|
3,070
|
|
|
|
2,258
|
|
|
|
2,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
64,849
|
|
|
|
74,310
|
|
|
|
78,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,499
|
)
|
|
|
(3,039
|
)
|
|
|
6,784
|
|
|
|
|
|
Interest expense
|
|
|
(961
|
)
|
|
|
(799
|
)
|
|
|
(612
|
)
|
|
|
|
|
Interest and other income, net
|
|
|
687
|
|
|
|
236
|
|
|
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(1,773
|
)
|
|
|
(3,602
|
)
|
|
|
6,523
|
|
|
|
|
|
Income tax expense
|
|
|
31
|
|
|
|
12
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(1,804
|
)
|
|
|
(3,614
|
)
|
|
|
5,689
|
|
|
|
|
|
Less: Preferred stock dividend
|
|
|
|
|
|
|
2,362
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to holders of common stock
|
|
$
|
(1,804
|
)
|
|
$
|
(5,976
|
)
|
|
$
|
4,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to holders of common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.46
|
|
|
|
|
|
Diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.13
|
|
|
|
|
|
Shares used to compute net income (loss) per share attributable
to holders of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
10,106
|
|
|
|
|
|
Diluted
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
34,866
|
|
|
|
|
|
Pro forma net income per share (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
$
|
0.17
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
$
|
0.16
|
|
|
|
|
|
Shares used to compute pro forma net income per share
(unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
33,005
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
35,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes stock-based
compensation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
648
|
|
|
$
|
817
|
|
|
|
1,391
|
|
|
|
|
|
Research and development
|
|
|
1,134
|
|
|
|
796
|
|
|
|
1,721
|
|
|
|
|
|
Sales and marketing
|
|
|
1,150
|
|
|
|
1,112
|
|
|
|
1,942
|
|
|
|
|
|
General and administrative
|
|
|
1,434
|
|
|
|
801
|
|
|
|
1,612
|
|
|
|
|
|
Amortization of internal use
software
|
|
|
50
|
|
|
|
63
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
4,416
|
|
|
$
|
3,589
|
|
|
$
|
6,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Preferred
|
|
|
Deferred
|
|
|
Stockholder
|
|
|
|
|
|
Total
|
|
|
|
Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Stock
|
|
|
Notes
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Warrant
|
|
|
Compensation
|
|
|
Receivable
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance, January 01, 2007
|
|
|
22,142,791
|
|
|
$
|
2
|
|
|
|
9,871,601
|
|
|
$
|
1
|
|
|
$
|
166,867
|
|
|
$
|
1,191
|
|
|
$
|
(1,469
|
)
|
|
$
|
(144
|
)
|
|
$
|
(158,681
|
)
|
|
$
|
7,767
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
304,199
|
|
|
|
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
909
|
|
Repayment of stockholder notes receivable for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
144
|
|
Repurchase of unvested shares
|
|
|
|
|
|
|
|
|
|
|
(37,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation under the intrinsic
value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
546
|
|
|
|
|
|
|
|
|
|
|
|
546
|
|
Stock-based compensation under the fair value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,843
|
|
Non-employee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
Net loss and comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,804
|
)
|
|
|
(1,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
22,142,791
|
|
|
|
2
|
|
|
|
10,138,300
|
|
|
|
1
|
|
|
|
171,728
|
|
|
|
1,191
|
|
|
|
(923
|
)
|
|
|
|
|
|
|
(160,485
|
)
|
|
|
11,514
|
|
Antidilution issuance of Series E preferred stock
|
|
|
207,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
236,042
|
|
|
|
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552
|
|
Net share settlements for restricted stock awards minimum tax
withholdings
|
|
|
|
|
|
|
|
|
|
|
(86,461
|
)
|
|
|
|
|
|
|
(830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(830
|
)
|
Amortization of deferred stock compensation under the intrinsic
value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
Stock-based compensation under the fair value method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,303
|
|
Non-employee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
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 EITF
07-5,
codified into 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
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,792
|
|
Non-employee stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,284
|
|
|
|
1,641
|
|
|
|
1,729
|
|
Amortization of internal use software
|
|
|
3,020
|
|
|
|
2,196
|
|
|
|
2,711
|
|
Amortization of stock-based compensation
|
|
|
4,416
|
|
|
|
3,589
|
|
|
|
6,768
|
|
Amortization of deferred sales commissions
|
|
|
1,034
|
|
|
|
991
|
|
|
|
1,153
|
|
Amortization of direct response advertising
|
|
|
|
|
|
|
|
|
|
|
64
|
|
Prepayment discount on note payable
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
Fair value adjustment of warrant
|
|
|
|
|
|
|
|
|
|
|
(142
|
)
|
Provision for doubtful accounts
|
|
|
451
|
|
|
|
136
|
|
|
|
20
|
|
Excess tax benefit associated with stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
(88
|
)
|
Loss on fixed asset disposal
|
|
|
|
|
|
|
2
|
|
|
|
5
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(8,253
|
)
|
|
|
2,828
|
|
|
|
(5,168
|
)
|
Prepaid expenses
|
|
|
(49
|
)
|
|
|
45
|
|
|
|
(335
|
)
|
Other assets
|
|
|
(923
|
)
|
|
|
(1,466
|
)
|
|
|
(2,499
|
)
|
Accounts payable
|
|
|
204
|
|
|
|
1,726
|
|
|
|
998
|
|
Accrued compensation
|
|
|
854
|
|
|
|
(4,469
|
)
|
|
|
6,818
|
|
Deferred revenue
|
|
|
405
|
|
|
|
(419
|
)
|
|
|
(470
|
)
|
Other liabilities
|
|
|
131
|
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
770
|
|
|
|
3,188
|
|
|
|
17,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,426
|
)
|
|
|
(2,456
|
)
|
|
|
(1,167
|
)
|
Capitalization of internal use software
|
|
|
(3,560
|
)
|
|
|
(4,092
|
)
|
|
|
(4,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,986
|
)
|
|
|
(6,548
|
)
|
|
|
(5,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from term loan payable
|
|
|
|
|
|
|
|
|
|
|
9,950
|
|
Payments on term loan payable
|
|
|
|
|
|
|
|
|
|
|
(1,944
|
)
|
Repayment of notes payable
|
|
|
|
|
|
|
|
|
|
|
(9,800
|
)
|
Proceeds from bank borrowings
|
|
|
|
|
|
|
3,500
|
|
|
|
|
|
Repayment of bank borrowings
|
|
|
|
|
|
|
|
|
|
|
(3,500
|
)
|
Payments on capital lease obligations
|
|
|
(18
|
)
|
|
|
(20
|
)
|
|
|
(15
|
)
|
Proceeds from issuance of common stock
|
|
|
909
|
|
|
|
552
|
|
|
|
691
|
|
Net share settlements for stock-based awards minimum tax
withholdings
|
|
|
|
|
|
|
(830
|
)
|
|
|
(396
|
)
|
Repayment of stockholder notes receivable
|
|
|
144
|
|
|
|
|
|
|
|
|
|
Excess tax benefit associated with stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Initial public offering issuance costs
|
|
|
|
|
|
|
|
|
|
|
(426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,035
|
|
|
|
3,202
|
|
|
|
(5,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(3,181
|
)
|
|
|
(158
|
)
|
|
|
5,856
|
|
Cash and cash equivalents, beginning of year
|
|
|
18,196
|
|
|
|
15,015
|
|
|
|
14,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
15,015
|
|
|
$
|
14,857
|
|
|
$
|
20,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flows information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
9
|
|
|
$
|
150
|
|
|
$
|
48
|
|
Interest paid
|
|
|
961
|
|
|
|
867
|
|
|
|
645
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
|
|
|
|
|
|
2,362
|
|
|
|
1,082
|
|
Capitalized stock-based compensation for internal use software
|
|
|
133
|
|
|
|
120
|
|
|
|
399
|
|
Accounts payable for purchases of property and equipment
|
|
|
33
|
|
|
|
121
|
|
|
|
148
|
|
Accounts payable for initial public offering issuance costs
|
|
|
|
|
|
|
|
|
|
|
1,153
|
|
See accompanying notes to the consolidated financial statements.
F-6
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
|
|
NOTE 1
|
THE COMPANY AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The
Company
Financial Engines, Inc. (the Company) was incorporated on
May 13, 1996 under the laws of the state of California and
is headquartered in Palo Alto, California. In February 2010, the
Company was reincorporated into the State of Delaware.
The Company is a provider of independent, technology-enabled
portfolio management services, investment advice and retirement
help to participants in employer-sponsored defined contribution
retirement plans such as 401(k) plans. The Company uses its
proprietary advice technology platform to provide its services
to retirement plan participants, regardless of personal wealth
or account size, on a cost-efficient basis. The Companys
business model is based on workplace delivery of its services.
The Company targets three key constituencies in the retirement
plan markets: plan participants (employees of companies offering
defined contribution plans, collectively referred to as 401(k)
plans), plan sponsors (employers offering 401(k) plans to their
employees) and plan providers (companies providing
administrative services to retirement plan sponsors).
The Company continues to devote the majority of its resources to
the growth of the Companys business in accordance with its
business plan. The Companys activities have been financed
primarily through the sale of equity securities and, to a lesser
extent, cash flows from operations and notes payable and other
borrowings.
Basis of
Presentation and Principles of Consolidation
The accompanying consolidated financial statements were prepared
in accordance with accounting principles generally accepted in
the United States of America (GAAP).
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
intercompany balances and transactions have been eliminated in
consolidation.
The Company evaluated subsequent events through
February 21, 2010.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expense during the reporting period. Significant items subject
to such estimates and assumptions include revenue recognition,
direct response advertising, deferred sales commissions, the
carrying amount and useful lives of property, equipment and
internal use software cost, valuation allowance for deferred
income tax assets, stock-based compensation and valuation of
common and preferred stock. 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.
F-7
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Concentration
of Credit Risk and Fair Value of Financial
Instruments
The Company believes the fair value of its financial
instruments, principally cash and cash equivalents, accounts
receivable, bank borrowings, note and accounts payable,
approximate their recorded values due to the short-term nature
of the instruments or interest rates, which are comparable with
current rates.
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.
The following table summarizes the Companys financial
assets measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant Other
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
Total Fair Value
|
|
|
(Level
1)
(1)
|
|
|
(Level
2)
(2)
|
|
|
(Level
3)
(3)
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
$
|
13,973
|
|
|
$
|
13,973
|
|
|
$
|
|
|
|
$
|
|
|
December 31, 2009
|
|
|
20,428
|
|
|
|
20,428
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
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,
|
|
|
2008
|
|
2009
|
|
Percentage of accounts receivable:
|
|
|
|
|
|
|
|
|
ING
|
|
|
21
|
%
|
|
|
3
|
%
|
JPMorgan
|
|
|
22
|
|
|
|
20
|
|
F-8
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
ING
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
8
|
%
|
JPMorgan
|
|
|
15
|
|
|
|
17
|
|
|
|
18
|
|
Vanguard
|
|
|
10
|
|
|
|
11
|
|
|
|
10
|
|
Allowance for
Doubtful Accounts
The Company maintains an allowance for doubtful accounts to
reserve for potentially uncollectible trade receivables. The
Company reviews its trade receivables by aging category to
identify significant customers with collection issues. For
accounts not specifically identified, the Company provides
reserves based on historical bad debt loss experience.
Property and
Equipment
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated
useful lives of the assets 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
|
|
|
3
|
|
Furniture, fixtures, and equipment
|
|
|
5
|
|
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 consists of (1) systems
developed for tracking membership data, including AUM, customer
cancellations and other related customer statistics for internal
use and (2) enhancements to the Companys advisory service
platform. The capitalized costs are amortized using the
straight-line method over an estimated life of two to four
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, 2007, 2008 and 2009,
the Company capitalized approximately $3.7 million,
$4.2 million and $5.1 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, 2007, 2008 and
F-9
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2009, the Company capitalized $75,000, $104,000 and $84,000,
respectively, of interest and $133,000, $120,000 and $399,000,
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 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, 2007, 2008 and 2009.
Sales
Commissions
Deferred sales commissions consist of incremental costs paid to
the Companys direct sales force associated with the
execution of noncancelable customer contracts. The deferred
sales commission amounts are recoverable through future revenue
streams under the noncancelable customer contracts. The Company
believes this is the preferable method of accounting as the
commission charges are so closely related to the revenue from
the noncancelable customer contracts that they should be
recorded as an asset and charged to expense over the life of the
related noncancelable customer contracts, which is typically
three years. Amortization of deferred sales commissions is
included in marketing and sales expense in the accompanying
consolidated statements of operations.
The Company capitalized sales commission of $1.1 million,
$1.0 million and $799,000 during the years ended
December 31, 2007, 2008 and 2009, respectively, and
amortized $1.0 million, $991,000 and $1.2 million of
deferred sales commissions during the years ended
December 31, 2007, 2008 and 2009, respectively.
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 nonowner 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;
|
F-10
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Delivery has occurred or the service has been made available to
the customer, which occurs upon completion of implementation and
connectivity services and acceptance by the customer;
|
|
|
|
The collectibility of the fees is reasonably assured; and
|
|
|
|
The amount of fees to be paid by the customer is fixed or
determinable.
|
The Company generates its revenue through three primary sources:
professional management, platform and other revenue.
Professional Management.
The Company
derives Professional Management revenue from management fees
paid by plan participants for its Professional Management
service. This discretionary investment management service
includes a Retirement Plan analyzing investments, contribution
rate and projected retirement income, and a Retirement Checkup
designed to help plan participants to develop a strategy for
closing the gap, if any, between the participants
retirement goal and current retirement income forecast. The
services are generally made available to plan participants in a
401(k) plan by written agreements between the Company and the
plan provider, plan sponsor and the plan participant. The
arrangement generally provides for management fees based on the
value of assets 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 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 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 year ended December 31, 2009 was higher by
approximately $0.3 million compared to the years ended
December 31, 2007 and 2008.
Platform.
The Company derives platform
revenue from recurring, subscription-based platform fees for
access to either its full suite of services, including
Professional Management, Online Advice and Retirement
Evaluation, or its Online Advice service only, 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 customer life, which is usually three to five years.
Other.
Other revenue includes
reimbursement for marketing and member materials from certain
subadvisory relationships, reimbursement for providing personal
statements to participants from a limited number of plan
sponsors and plan implementation fees. A small portion of other
revenue is derived from a defined benefit consulting business.
Revenue is recognized as the related services are performed, in
accordance with the specific terms of the contract with the
customers.
F-11
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
Revenue
Deferred revenue primarily consists of billings or payments
received in advance of revenue recognition generated by the
Companys platform 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.
Cost of
Revenue
Cost of revenue excludes amortization of internal use software
and includes expenses from portfolio management, operations,
advisor call center operations, technical operations, including
information technology, customer support, installation and
set-up
costs, data connectivity fees and printed materials costs for
members and certain subadvisory relationships where the
reimbursed costs are included in other revenue. These expenses
are shared across the different revenue categories and the
Company is not able to meaningfully allocate such costs between
separate categories of revenue. Consequently, all costs and
expenses applicable to the Companys revenue are included
in the category cost of revenue in the Companys statements
of operations. Amortization of internal use software, a portion
of which relates to cost of revenue, is reflected as a separate
line item in the accompanying statement of operations.
Advertising
Costs
The Companys advertising costs consist primarily of print
materials associated with new customer solicitations. Print
materials costs primarily relate to either Active Enrollment
campaigns, where marketing materials are sent to solicit
enrollment in professional management, or Passive Enrollment
campaigns, where the plan sponsor defaults all eligible members
into the professional management service unless they decline.
Advertising costs relating to Passive Enrollment campaigns do
not qualify as direct response advertising and are expensed to
sales and marketing in the period the advertising activities
first take place. Advertising costs associated with 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 services based on the ratio of current period revenue
for the direct response advertising cost pool as compared to the
total estimated revenue expected for the direct response
advertising cost pool over future periods.
Effective July 1, 2009, the Company commenced
capitalization of direct-response advertising cost associated
with 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. As
of December 31, 2009, $1.4 million of advertising
costs associated with direct response advertising were reported
in other assets in the accompanying consolidated balance sheet.
Advertising expense was $1.8 million, $2.6 million and
$2.2 million for the years ended December 31, 2007, 2008
and 2009, respectively, of which direct advised Active
Enrollment campaign expense was $1.6 million,
$2.5 million and $2.0 million, respectively.
Income
Taxes
The Company uses the asset and liability method to account for
income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and net
operating loss carryforwards. Deferred tax assets and
liabilities are measured using
F-12
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. The Company records
a valuation allowance to reduce deferred tax assets to an amount
whose realization is more likely than not. In accordance with
its accounting policy, the Company recognizes accrued interest
and penalties related to unrecognized tax benefits as a
component of income tax expense.
Stock-Based
Compensation
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 option 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 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 FASB issued Accounting Standards Update
(ASU)
2009-13
Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue
Arrangements a consensus of the FASB Emerging Issues
Task Force
(ASU
2009-13).
ASU
2009-13
addresses how to measure and allocate arrangement consideration
to one or more units of accounting within a multiple-deliverable
arrangement. ASU
2009-13
modifies the requirements for determining whether a deliverable
can be treated as a separate unit of accounting by removing the
criteria that objective evidence of fair value exists for the
undelivered elements in order to account for those undelivered
elements as a single unit of accounting. ASU
2009-13
is
effective for the Company prospectively for revenue arrangements
entered into or materially modified beginning January 1,
2011. Early adoption is permitted. The Company is currently
evaluating the impact the adoption of ASC
2009-13
will
have on its financial condition and results of operations.
F-13
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2008, the FASB ratified EITF Issue
07-05,
Determining Whether an Instrument (or an Embedded Feature) is
indexed to an Entitys Own Stock
, or
EITF 07-5,
codified into FASB ASC Subtopic
815-40,
Contracts in Entitys Own Equity
.
EITF 07-5
provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or
embedded feature) is indexed to its own stock, including
evaluating the instruments contingent exercise and
settlement provisions.
EITF 07-5
is effective for fiscal years beginning after December 15,
2008. On adoption of
EITF 07-5
effective January 1, 2009, the Company recorded a warrant
liability for approximately $144,000 and a corresponding charge
of $1.0 million to the accumulated deficit to reflect the
cumulative effect of this change in accounting principle. The
warrant expired unexercised in October 2009.
Unaudited Pro
Forma Information
The Company has filed a registration statement with the United
States Securities and Exchange Commission to sell shares of its
common stock to the public. Upon completion of the offering,
each share of the Companys preferred stock will convert
into one share of the Companys common stock in accordance
with the automatic conversion provisions under Section 4 of
its charter. The unaudited pro forma information as of
December 31, 2009 gives effect to the assumed conversion of
all outstanding shares of the Companys convertible
preferred stock into an aggregate of 22,441,623 shares of
common stock upon the assumed completion of the Companys
initial public offering and 456,643 shares of common stock
issuable to holders of Series E preferred stock upon the
completion of the initial public offering. Unaudited pro forma
stockholders equity and net income per share for the year
ended December 31, 2009, as adjusted for the assumed
conversion of the convertible preferred stock is set forth on
the face of the Companys consolidated balance sheet,
consolidated statement of operations and Note 2 of the
financial statements.
F-14
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 2
|
NET INCOME (LOSS)
PER SHARE
|
The following table sets forth the computation of basic and
diluted net income (loss) per share attributable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Numerator (basic and diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,804
|
)
|
|
$
|
(3,614
|
)
|
|
$
|
5,689
|
|
Less: Preferred stock dividend
|
|
|
|
|
|
|
2,362
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to holders of common stock
|
|
$
|
(1,804
|
)
|
|
$
|
(5,976
|
)
|
|
$
|
4,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (basic):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
9,989
|
|
|
|
10,183
|
|
|
|
10,450
|
|
Less: Weighted average unvested restricted common shares subject
to repurchase
|
|
|
(562
|
)
|
|
|
(416
|
)
|
|
|
(344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net weighted average common shares outstanding
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
10,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator (diluted):
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
10,106
|
|
Dilutive stock options and awards outstanding
|
|
|
|
|
|
|
|
|
|
|
2,052
|
|
Unvested restricted common shares subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
344
|
|
Weighted average common shares from preferred stock
|
|
|
|
|
|
|
|
|
|
|
22,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net weighted average common shares outstanding
|
|
|
9,427
|
|
|
|
9,767
|
|
|
|
34,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to holders of common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.61
|
)
|
|
$
|
0.13
|
|
Diluted net income (loss) per share does not include the effect
of the following antidilutive common equivalent shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Stock options and awards outstanding
|
|
|
8,982
|
|
|
|
9,169
|
|
|
|
5,722
|
|
Common equivalent shares from preferred stock warrant
|
|
|
108
|
|
|
|
108
|
|
|
|
86
|
|
Unvested restricted common shares subject to repurchase
|
|
|
562
|
|
|
|
416
|
|
|
|
|
|
Common shares from preferred stock
|
|
|
22,143
|
|
|
|
22,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total antidilutive common equivalent shares
|
|
|
31,795
|
|
|
|
31,856
|
|
|
|
5,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unaudited Pro
forma Net Income per Share
The Company has filed a registration statement with the United
States Securities and Exchange Commission to sell shares of its
common stock to the public. Upon completion of the offering,
each share of the Companys preferred stock will convert
into one share of the Companys common stock in accordance
with the automatic conversion provisions under Section 4 of
its charter. The unaudited pro forma net income per share for
the year ended December 31, 2009 gives effect to the
assumed conversion of all outstanding shares of the
Companys convertible preferred stock into an aggregate of
22,441,623 shares of common stock upon the assumed
completion of the Companys initial public offering and
approximately 456,666 shares of common stock issuable to
holders of Series E preferred stock upon the assumed
completion of the initial public offering. All shares to be
issued in the offering are excluded from the unaudited pro forma
basic and diluted net income per share calculation since the
proceeds will be used for general corporate purposes.
The following table sets forth the computation of unaudited pro
forma basic and diluted net income per share:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
2009
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Numerator (basic and diluted):
|
|
|
|
|
Net income
|
|
$
|
5,689
|
|
|
|
|
|
|
Denominator (basic):
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
10,450
|
|
Less: Weighted average restricted common shares subject to
repurchase
|
|
|
(344
|
)
|
Add: Common shares from preferred stock
|
|
|
22,442
|
|
Add: Common shares issued to preferred shareholders upon
completion of initial public offering
|
|
|
457
|
|
|
|
|
|
|
Pro forma net weighted average common shares outstanding
|
|
|
33,005
|
|
|
|
|
|
|
Denominator (diluted):
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
33,005
|
|
Dilutive stock options and awards outstanding
|
|
|
2,052
|
|
Unvested restricted common shares subject to repurchase
|
|
|
344
|
|
|
|
|
|
|
Pro forma net weighted average common shares outstanding
|
|
|
35,401
|
|
|
|
|
|
|
Pro forma net income per share:
|
|
|
|
|
Basic
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
0.16
|
|
F-16
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pro forma diluted net income per share does not include the
effect of the following anti-dilutive common equivalent shares:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
2009
|
|
|
|
(In thousands)
|
|
|
Stock options and awards outstanding
|
|
|
5,722
|
|
Common equivalent shares from preferred stock warrant
|
|
|
86
|
|
|
|
|
|
|
Total antidilutive common equivalent shares
|
|
|
5,808
|
|
|
|
|
|
|
|
|
NOTE 3
|
BALANCE SHEET
ITEMS
|
Cash and Cash
Equivalents
Cash and cash equivalents consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Cash
|
|
$
|
884
|
|
|
$
|
285
|
|
Money market fund
|
|
|
13,973
|
|
|
|
20,428
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
14,857
|
|
|
$
|
20,713
|
|
|
|
|
|
|
|
|
|
|
Allowance for
Doubtful Accounts
The following table summarizes the changes to the allowance for
doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
44
|
|
|
$
|
309
|
|
|
$
|
180
|
|
Add: Provisions for doubtful accounts
|
|
|
451
|
|
|
|
136
|
|
|
|
20
|
|
Less: Write-offs
|
|
|
(186
|
)
|
|
|
(265
|
)
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
309
|
|
|
$
|
180
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property and
Equipment
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Computer equipment
|
|
$
|
7,258
|
|
|
$
|
8,238
|
|
Computer software
|
|
|
3,358
|
|
|
|
3,601
|
|
Office equipment, furniture, and fixtures
|
|
|
2,290
|
|
|
|
2,332
|
|
Leasehold improvements
|
|
|
665
|
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
13,571
|
|
|
|
14,846
|
|
Less: Accumulated depreciation
|
|
|
(10,580
|
)
|
|
|
(12,288
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
2,991
|
|
|
$
|
2,558
|
|
|
|
|
|
|
|
|
|
|
Included in property and equipment as of December 31, 2008
and 2009 are assets acquired under capital lease obligations
with original costs of approximately $81,000 and $41,000,
respectively. Accumulated depreciation on the leased assets was
approximately $39,000 and $28,000 as of December 31, 2008
and 2009, respectively. Depreciation and amortization expense
was $1.3 million, $1.6 million and $1.7 million for
the years ended December 31, 2007, 2008 and 2009,
respectively.
Internal Use
Software
Internal use software consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Capitalized internal use software
|
|
$
|
24,452
|
|
|
$
|
29,533
|
|
Accumulated amortization
|
|
|
(17,978
|
)
|
|
|
(20,790
|
)
|
|
|
|
|
|
|
|
|
|
Internal use software, net
|
|
$
|
6,474
|
|
|
$
|
8,743
|
|
|
|
|
|
|
|
|
|
|
Other Current
Assets
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Deferred sales commissions
|
|
$
|
1,132
|
|
|
$
|
1,195
|
|
Initial public offering issuance costs
|
|
|
|
|
|
|
1,579
|
|
Other
|
|
|
443
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
Total other current assets
|
|
$
|
1,575
|
|
|
$
|
3,391
|
|
|
|
|
|
|
|
|
|
|
F-18
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revolving Line
of Credit
In April 2009, the Company executed an agreement to renew its
$7.0 million revolving credit facility. The interest rate
is set at 0.75% points above the banks prime rate. As of
December 31, 2009, a total of $950,000 of the borrowing
limit has been pledged as security related to the Companys
operating leases. There was $3.5 million and $0 outstanding
under this line of credit as of December 31, 2008 and 2009,
respectively. The agreement expires on April 19, 2010.
Note Payable
and Term Loan
In September 2006, the Company borrowed $10.0 million under
a promissory note. The Note has 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.
In April 2009, the Company executed an agreement to add a new
$10.0 million term loan with the same lender that provides
the revolving line of credit. The interest rate on the term loan
is set at 1.50% above the banks prime rate for prime rate
loans, with a minimum 4.00% prime rate, and 4.00% above the
LIBOR rate for LIBOR rate loans, with a minimum 1.50% LIBOR
rate. The bank is granted a first priority perfected security
interest and the credit facility is collateralized by
substantially all of the current and future assets of the
Company. There was an $8.1 million principal balance
outstanding on the term loan as of December 31, 2009. The
term loan is repayable in 36 equal installments through
May 1, 2012. The aggregate principal payments of the term
loan for each of the years subsequent to December 31, 2009
are: $3.3 million in 2010, $3.4 million in 2011 and
$1.4 million in 2012.
The Company is subject to income taxes only in the United
States. Provision for income tax expense consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
25
|
|
|
$
|
(3
|
)
|
|
$
|
(183
|
)
|
State
|
|
|
6
|
|
|
|
15
|
|
|
|
1,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31
|
|
|
$
|
12
|
|
|
$
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The difference between income tax expense 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,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Federal tax at statutory rate
|
|
$
|
(621
|
)
|
|
$
|
(1,261
|
)
|
|
$
|
2,283
|
|
State taxes, net of federal benefit
|
|
|
6
|
|
|
|
15
|
|
|
|
1,017
|
|
Nondeductible expenses
|
|
|
25
|
|
|
|
38
|
|
|
|
27
|
|
Nondeductible stock compensation
|
|
|
553
|
|
|
|
559
|
|
|
|
1,056
|
|
Research and development credit
|
|
|
(131
|
)
|
|
|
(12
|
)
|
|
|
(448
|
)
|
Change in valuation allowance
|
|
|
224
|
|
|
|
673
|
|
|
|
(3,051
|
)
|
Other
|
|
|
(25
|
)
|
|
|
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31
|
|
|
$
|
12
|
|
|
$
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
57,910
|
|
|
$
|
50,222
|
|
Research and other credits
|
|
|
2,558
|
|
|
|
2,396
|
|
Deferred revenue
|
|
|
775
|
|
|
|
477
|
|
Capital loss carryforward
|
|
|
488
|
|
|
|
|
|
Stock-based compensation
|
|
|
1,887
|
|
|
|
3,224
|
|
Other temporary differences
|
|
|
422
|
|
|
|
4,379
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
64,040
|
|
|
|
60,698
|
|
Valuation allowance
|
|
|
(61,694
|
)
|
|
|
(57,914
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
2,346
|
|
|
|
2,784
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible amortization
|
|
|
(2,346
|
)
|
|
|
(2,784
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(2,346
|
)
|
|
|
(2,784
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
In making such determination, management considers all available
positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, tax
planning strategies and recent financial performance. In order
to support a conclusion that a valuation allowance is not
needed, positive evidence of sufficient quantity and quality is
necessary to overcome negative evidence. The ultimate
realization of deferred tax assets is dependent upon the
generation of the future taxable income during the periods in
which those temporary differences become deductible. As of
December 31, 2008 and 2009, a valuation allowance is
recorded for the net deferred tax assets as a result of
uncertainties regarding realization of the asset including the
lack of profitability prior to 2009 and the uncertainty over
future operating profitability and taxable income.
F-20
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, the Company has net operating loss
carryforwards for federal and state income tax purposes of
approximately $134 million and $60 million,
respectively, available to reduce future income subject to
income taxes. The federal net operating loss carryforwards
expire through 2029. The state net operating loss carryforwards
expire through 2019.
As of December 31, 2009, approximately $6.3 million of
the net operating losses will benefit additional paid in capital
when realized. As of December 31, 2009, the Company also
has research credit carryforwards for federal and California
income tax purposes of approximately $1.8 million and
$853,000, respectively, available to reduce future income taxes.
The federal research credit carryforwards expire through 2029.
The California research credit carries forward indefinitely.
The Internal Revenue Code of 1986 and applicable state tax laws
impose substantial restrictions on the ability of a company to
utilize net operating losses and tax credit carryforwards in the
event of an ownership change as defined in Section 382 of
the Internal Revenue Code. The Companys federal and state
tax losses and tax credit carryover incurred through that date
of change are subject to an annual limitation.
As of December 31, 2009, unrecognized tax benefits
approximated $9.6 million all of which would affect the
effective tax rate if recognized. Included in the balance at
December 31, 2009 is $396,000 of current year tax
positions, which would affect the Companys income tax
expense if recognized. As of December 31, 2009, 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 any adjustments would result in a material
change to its financial position. For the years ended
December 31, 2008 and 2009, the Company did not recognize
interest or penalties related to unrecognized tax benefits. A
reconciliation of the beginning and ending balances of the total
amounts of gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
6,877
|
|
|
$
|
8,444
|
|
Increase in tax positions for prior years
|
|
|
1,504
|
|
|
|
748
|
|
Decrease in tax positions for prior years
|
|
|
(5
|
)
|
|
|
|
|
Increase in tax positions for current year
|
|
|
68
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
8,444
|
|
|
$
|
9,588
|
|
|
|
|
|
|
|
|
|
|
The Company files income tax returns in the U.S. federal
jurisdiction and various states jurisdictions. The 1996 through
2009 tax years are open and may be subject to potential
examination in one or more jurisdictions. The Company is
currently under examination by the Internal Revenue Service for
its domestic federal income tax returns for the years ended
December 31, 2006 and 2007. The Company anticipates a
decrease to its gross unrecognized tax benefits, including those
associated with research credits, related to prior returns
resulting from such examinations in the range of $0 to
$3.8 million.
F-21
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 6
|
STOCKHOLDERS
EQUITY
|
Convertible
Preferred Stock
As of December 31, 2009, the Companys Articles of
Incorporation, as amended, designate and authorizes the Company
to issue 24,192,000 shares of convertible preferred stock,
of which the following are outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
Noncumulative
|
|
|
|
Shares
|
|
|
Shares
|
|
|
|
|
|
Liquidation
|
|
|
Dividend per
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Amount
|
|
|
Preference
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Series A
|
|
|
1,030,006
|
|
|
|
1,030,006
|
|
|
$
|
509
|
|
|
$
|
515
|
|
|
$
|
0.03
|
|
Series B
|
|
|
3,445,858
|
|
|
|
3,445,858
|
|
|
|
4,270
|
|
|
|
4,301
|
|
|
|
0.06
|
|
Series C
|
|
|
3,123,573
|
|
|
|
3,123,573
|
|
|
|
11,799
|
|
|
|
11,835
|
|
|
|
0.19
|
|
Series D
|
|
|
3,800,000
|
|
|
|
3,655,166
|
|
|
|
20,218
|
|
|
|
20,252
|
|
|
|
0.28
|
|
Series E
|
|
|
7,592,000
|
|
|
|
7,502,809
|
|
|
|
84,899
|
|
|
|
85,001
|
|
|
|
0.57
|
|
Series F
|
|
|
4,000,000
|
|
|
|
3,684,211
|
|
|
|
17,373
|
|
|
|
17,500
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,991,437
|
|
|
|
22,441,623
|
|
|
$
|
139,068
|
|
|
$
|
139,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
Each share of preferred stock is convertible at the right and
option of the stockholder into such number of fully paid and non
assessable shares of common stock as is determined by dividing
(A) (i) $0.50 for Series A preferred stock,
(ii) $1.25 for Series B preferred stock,
(iii) $3.79 for Series C preferred stock,
(iv) $5.54 for Series D preferred stock,
(v) $11.33 for Series E preferred stock and
(vi) $4.75 for Series F preferred stock, by
(B) the conversion price applicable to such share in effect
on the date the certificate is surrendered for conversion. The
conversion price applicable to each series of preferred stock is
(i) $0.50 for Series A preferred stock,
(ii) $1.25 for Series B preferred stock,
(iii) $3.79 for Series C preferred stock,
(iv) $5.54 for Series D preferred stock,
(v) $11.33 for Series E preferred stock and
(vi) $4.75 for Series F preferred stock. The
conversion price is subject to adjustment for certain dilutive
issuances, splits and combinations.
Each share of Series A, B, C, D, E and F preferred stock
will automatically convert into common stock on a one-for-one
basis in the event of the closing of an underwritten public
offering of the Companys common stock from which the
Company receives proceeds in excess of $25.0 million and
for which the offering price is not less than $19.00 per share
of common stock, or (a) as to Series A, B, C and D
preferred stock, the date specified by written consent or
agreement of the holders of a majority of the then outstanding
shares of Series A, B, C and D preferred stock, voting
together as a class and on an as-converted basis, (b) as to
Series E preferred stock, the date specified by written
consent or agreement of the holders of the majority of the then
outstanding shares of Series E preferred stock, voting as a
single class and (c) as to Series F preferred stock,
the date specified by written consent or agreement of the
holders of the majority of the then-outstanding shares of
Series F preferred stock, voting as a single class. If the
automatic conversion of the Series D preferred stock is effected
other than in connection with an underwritten public offering of
the Companys common stock from which the Company receives
proceeds in excess of $25.0 million and for which the offering
price is not less than $19.00 per share of common stock, then
the vote of the holders of a majority of the then outstanding
shares of Series D preferred stock shall also be required for
the automatic conversion of the Series D preferred stock.
F-22
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Liquidation
In the event of any liquidation, dissolution, or winding up of
the Company, either voluntary or involuntary, each stockholder
of Series A, B, C, D, E and F preferred stock shall be
entitled to receive, prior and in preference to any distribution
of any assets or surplus funds to the holders of common stock,
an amount per share equal to $0.50, $1.25, $3.79, $5.54, $11.33
and $4.75, respectively. If the full amount is not available for
distribution, amounts shall be paid out in proportion to the
aggregate preferential amounts owed. After the distributions
described above have been paid in full, the remaining assets of
the Company shall always be distributed ratably among the
holders of common stock.
Voting
Rights
Each share of each series of preferred stock have the right to
one vote for each share of common stock into which such
preferred stock could be converted and with respect to such
vote, such holder will have full voting rights and powers equal
to holders of common stock, and shall be entitled to notice of
any stockholders meeting and shall be entitled to vote with
respect to any question upon which holders of common stock have
the right to vote.
Dividends
Each stockholder of Series A, B, C, D, E and F preferred
stock is entitled to receive annual dividends at the rate of
$0.03, $0.06, $0.19, $0.28, $0.57 and $0.24, respectively, per
share per annum when and if declared by the board of directors,
prior to payment of dividends on common stock. Dividends are
noncumulative, and no dividends have been declared to date.
Preferred Stock
Dividend
In accordance with certain antidilution provisions contained in
the Series B, C, D and E preferred stock agreements,
certain increases to the number of shares available for issuance
under the 1998 Stock Plan resulted in an antidilution adjustment
for the holders of those preferred shares during the years ended
December 31, 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 such that each of those series maintained a
one-for-one
conversion ratio to common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
|
Preferred
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
Stock
|
|
|
Fair Value of
|
|
|
Stock
|
|
|
Fair Value of
|
|
|
|
Dividend
|
|
|
Dividend
|
|
|
Dividend
|
|
|
Dividend
|
|
|
Series E
|
|
|
207,181
|
|
|
$
|
2,361,863
|
|
|
|
91,651
|
|
|
$
|
1,082,398
|
|
The fair value of dividend amounts for each period is derived
from the valuation of the underlying preferred stock on the date
the preferred stock dividends were declared. The valuations of
the common stock use the income approach method, which involves
applying appropriate risk-adjusted discount rates to estimated
debt-free cash flows, based on forecasted revenues and costs.
The discount rate applied to the cash flows was based on a
weighted average cost of capital, which represents the blended,
after-tax costs of debt and equity. The projections used in
connection with the valuations were based on expected operating
performance over the forecast period. The valuations also
considered the public company market multiple method to evaluate
the reasonableness of the income approach. The valuations
consider differences between the preferred and common stock with
F-23
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respect to liquidation preferences, conversion rights, voting
rights and other features. The valuations also considered
appropriate adjustments to recognize lack of marketability. No
other discounts were applied to arrive at the fair value amount,
other than the lack of marketability discount. The enterprise
value is used in the context of several option models in order
to determine the value of all of the Companys common and
preferred shares. In the valuation of both the common stock and
Series E preferred stock, the value of the entire Company
(representing the value associated with all debt, preferred and
common shares) was determined using income-based and
market-based approaches. Option pricing models were then used to
allocate that enterprise value between the various capital
interest holders (debt, preferred and common shares) based on
differences between them with respect to liquidation
preferences, conversion rights, voting rights and other
features. All assumptions used in arriving at the value of one
share class (e.g., the Companys common stock) were
entirely consistent with the assumptions used in deriving the
value of any other share classes (e.g., the preferred stock,
including the Series E preferred stock). The primary
assumptions used to allocate the enterprise value between the
various share classes included the following: company
volatility, expected term to a liquidity event, risk free rate
consistent with the expected term, and liquidation preference
levels and indifference thresholds calculated for each class of
shares. Therefore, all concluded values related to both the
common and preferred shares were reconciled, as the assumptions
used in the analysis of both types of shares were identical.
There is inherent uncertainty in the estimates used in the
valuations. If different discount rates, assumptions or
weightings had been used, the valuations would have been
different.
Warrant
Issued
In October 1999, the Company issued a warrant to purchase
100,000 shares of Series D preferred stock at a price
of $10.00 per share to a Company in connection with an
interactive marketing and services agreement. The warrant
expires in October 2009. The fair value of the warrant, as
determined using the Black-Scholes option pricing model, was
approximately $1.2 million and was 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.
Common Stock
Reserved for Future Issuance
As of December 31, 2009, the Company has reserved the
following shares of common stock for issuance in connection with:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Convertible preferred stock
|
|
|
22,441,623
|
|
Stock option and stock purchase plans
|
|
|
11,630,440
|
|
Stock options available for grant
|
|
|
3,326,788
|
|
Restricted stock awards
|
|
|
25,000
|
|
|
|
|
|
|
Total shares reserved
|
|
|
37,423,851
|
|
|
|
|
|
|
F-24
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock Option
and Restricted Stock Plans
1996 Stock Option
Plan
Under the 1996 Stock Option Plan (the 1996 Plan), as amended,
the board of directors may grant incentive and nonstatutory
stock options to employees, consultants and directors at an
exercise price of not less than 100% or 85%, respectively, of
the fair market value, as determined by the board of directors,
at the date of grant. Stock options vest ratably over periods
determined by the board of directors, generally 4 years,
and expire no later than 10 years from the date of grant.
In the event of voluntary or involuntary termination of
employment with the Company for any reason, with or without
cause, all unvested options are forfeited and all vested options
must be exercised within a
60-day
period or they are forfeited. Options are exercisable
immediately upon grant.
Upon termination of employment with the Company for any reason,
the Company has an irrevocable, exclusive option to repurchase
the unvested shares purchased prior to vesting at the original
exercise price. This repurchase option exists for a period of
60 days from termination. The plan expired in 2006 and as
of December 31, 2009, no shares were subject to repurchase
and there were no remaining shares of common stock available for
grant under the 1996 Plan.
1996 Restricted
Stock Purchase Plan
Under the 1996 Restricted Stock Purchase Plan (the Restricted
Plan), the board of directors may grant stock purchase rights to
employees, consultants and directors at an exercise price equal
to the fair market value of the underlying common stock on the
date of grant. Stock purchase rights must be exercised within
30 days of grant and vest ratably over a period as
determined by the board of directors, generally four years.
Upon termination of employment with the Company for any reason,
the Company has an irrevocable, exclusive option to repurchase
the unvested shares purchased prior to vesting at the original
exercise price. This repurchase option exists for a period of
60 days from termination. The plan expired in 2006 and as
of December 31, 2009, no shares were subject to repurchase
and there were no remaining shares of common stock available for
grant under the Restricted Plan.
1998 Stock
Plan
The Company has reserved 18,955,276 shares of its common
stock for issuance under its 1998 Stock Plan (the 1998 Plan).
Under the 1998 Plan, the board of directors may grant stock
purchase rights and incentive and nonstatutory stock options to
employees, consultants and directors at fair market value on the
date of grant. Vesting provisions of stock purchase rights and
options granted under the 1998 Plan are determined by the board
of directors. Stock purchase rights have a
30-day
expiration period, and options expire no later than
10 years from the date of grant. In the event of voluntary
or involuntary termination of employment with the Company for
any reason, with or without cause, all unvested options are
forfeited and all vested options must be exercised within three
months or they are forfeited. Stock purchase rights or options
acquired under the 1998 Plan are exercisable upon grant;
however, they generally vest over a period of four years.
In the event of voluntary or involuntary termination of
employment with the Company for any reason, with or without
cause, the Company shall, upon the date of such termination,
have an irrevocable, exclusive option to repurchase the unvested
shares purchased prior to vesting, at the original exercise
price. This repurchase option exists for a period of
60 days from termination. As of December 31, 2009, no
shares were subject to repurchase and 1,326,788 shares were
available for future grant. In October 2009, the Company
obtained shareholder approval to extend the 1998 Stock Plan for
an additional year to expire in April 2011.
F-25
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2009 Stock
Incentive Plan
In November 2009, the board of directors adopted the 2009 Stock
Incentive Plan, subject to stockholder approval. The 2009 Stock
Incentive Plan will become effective immediately prior to the
offering. Under the 2009 Stock Incentive Plan,
2,000,000 shares of the Companys common stock have
been authorized for issuance. In addition, shares originally
reserved for issuance under the 1998 Stock Plan but which are
not subject to outstanding options on the effective date of the
2009 Stock Incentive Plan, and shares subject to outstanding
options under the 1998 Stock Plan on the effective date of the
2009 Stock Incentive Plan that are subsequently forfeited or
terminated for any reason before being exercised, up to a number
of additional shares not to exceed 2,000,000, will also become
available for awards under the 2009 Stock Incentive Plan. There
have been no grants under the 2009 Stock Incentive Plan as of
December 31, 2009.
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 generally vest over a period of two years.
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, 2009, there have been no
grants under the 2009 Stock Incentive Plan and
2,000,000 shares were available for future grant.
Special Executive
Restricted Stock Purchase Plan
The Company has reserved 1,000,000 shares of its common
stock for issuance under its Special Executive Restricted Stock
Purchase Plan (the Special Restricted Plan). Under the Special
Restricted Plan, the board of directors may grant stock purchase
rights to employees and consultants at an exercise price
determined by the board of directors at the date of grant.
In June 2001, 350,000 stock purchase rights were issued, and
subsequently exercised, under the Special Restricted Plan to
members of the executive management team at $0.10 per share. At
that time, the Company recorded deferred stock compensation of
$3.5 million, which is being amortized over the vesting
period of the stock purchase rights. These shares cliff vest
over an initial vesting period of seven years. The restriction
lapsed in June 2008 when all shares vested.
In January 2004, 175,000 stock purchase rights were issued, and
subsequently exercised, under the Special Restricted Plan to
members of the executive management team at $0.01 per share.
These shares cliff vest over an initial vesting period of three
years. The restriction lapsed in January 2007, when all shares
vested.
In February and May 2005, 400,000 stock purchase rights were
issued in aggregate, and subsequently exercised, under the
Special Restricted Plan to members of the executive management
team at $0.01 per share. These shares cliff vest over an initial
vesting period of seven years. The restriction lapses upon a
change of control or following an initial public offering, as to
50% of the shares, after six months and as to the remaining 50%
of the shares after 12 months, or in February and May 2012,
respectively.
F-26
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In January and March 2009, 50,000 stock purchase rights were
issued in aggregate, and subsequently exercised, under the
Special Restricted Plan to members of the executive management
team at $0.01 per share. These shares cliff vest over an initial
vesting period of seven years. The restriction lapses upon a
change of control or following an initial public offering, as to
50% of the shares, after six months and as to the remaining 50%
of the shares after 12 months, or in January and March
2016, respectively.
Upon termination of employment or consulting relationship with
the Company, for any reason, the Company has an irrevocable,
exclusive option to repurchase the unvested shares purchased
prior to vesting at the original exercise price. This repurchase
option exists for a period of 90 days from termination. In
connection with the issuances of stock purchase rights, the
Company recorded $546,000, $348,000 and $182,000 as amortization
of deferred compensation in the years ended December 31,
2007, 2008 and 2009, respectively. As of December 31, 2009,
350,000 shares were subject to repurchase, and
25,000 shares were available for future grant.
The following table summarizes option activity under the 1996
Plan and the 1998 Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Balance, January 1, 2007
|
|
|
9,041,197
|
|
|
|
0.67 - 10.00
|
|
|
|
4.91
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
503,000
|
|
|
|
8.00 - 9.50
|
|
|
|
8.76
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(304,199
|
)
|
|
|
0.83 - 7.50
|
|
|
|
2.99
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(417,088
|
)
|
|
|
1.00 - 10.00
|
|
|
|
6.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
8,822,910
|
|
|
|
0.67 - 10.00
|
|
|
|
5.12
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,026,850
|
|
|
|
6.51 - 9.60
|
|
|
|
7.06
|
|
|
|
|
|
|
|
|
|
Exercised
(1)
|
|
|
(237,042
|
)
|
|
|
0.07 - 8.00
|
|
|
|
2.37
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(540,435
|
)
|
|
|
0.83 - 10.00
|
|
|
|
6.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
11,072,283
|
|
|
|
1.00 - 10.00
|
|
|
|
5.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
6.46 years
|
|
|
$
|
32,103,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable, December 31, 2009
|
|
|
7,125,663
|
|
|
|
1.00 - 10.00
|
|
|
|
5.26
|
|
|
|
4.79 years
|
|
|
|
25,691,032
|
|
|
|
|
(1)
|
|
Exercises for the years ended
December 31, 2008 and 2009 include 1,000 shares and
890,554 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, 2009 of $8.75, 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, 2008 and 2009 was $982,000 and
$4.3 million, respectively. The weighted average fair value
per share of options granted to employees for the years ended
December 31, 2007, 2008 and 2009 was approximately $3.70,
$3.63 and $4.07, respectively. Total cash received from
employees as a result of employee stock option exercises for the
years ended December 31, 2007, 2008 and 2009 was $909,000,
$552,000 and $691,000, respectively.
F-27
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following weighted average assumptions were used to value
options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2007
|
|
2008
|
|
2009
|
|
Expected life in years
|
|
|
6.08
|
|
|
|
6.06
|
|
|
|
6.07
|
|
Risk-free interest rate
|
|
|
4.46
|
%
|
|
|
2.58
|
%
|
|
|
2.62
|
%
|
Volatility
|
|
|
35
|
|
|
|
52
|
|
|
|
53
|
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, there was $9.6 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 1.6 years.
The following table summarizes restricted stock purchase right
activity under the Special Restricted Plan:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Unvested
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Value
|
|
|
Balance, January 1, 2007
|
|
|
712,500
|
|
|
$
|
6.05
|
|
Granted
|
|
|
|
|
|
|
|
|
Released
|
|
|
(125,000
|
)
|
|
|
3.00
|
|
Forfeited
|
|
|
(37,500
|
)
|
|
|
4.25
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
550,000
|
|
|
|
6.86
|
|
Granted
|
|
|
|
|
|
|
|
|
Released
(1)
|
|
|
(250,000
|
)
|
|
|
10.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
300,000
|
|
|
|
4.25
|
|
Granted
|
|
|
50,000
|
|
|
|
6.15
|
|
Released
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
350,000
|
|
|
$
|
4.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Shares released on vesting for the year ended
December 31, 2008 include 86,461 shares which were
tendered in exchange for minimum tax withholding.
|
The balance in deferred stock-based compensation of $575,000 and
$394,000 as of December 31, 2008 and 2009, respectively,
comprises executive restricted stock purchase rights issued
prior to December 31, 2005. As of December 31, 2009,
the unamortized deferred stock compensation related to
restricted stock granted in 2005 will be amortized over
29 months.
F-28
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the prices whereby the Company
granted employees stock options during the year ended
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price and Fair
|
|
|
|
|
Market Value of Common
|
Grant Date
|
|
Options Granted
|
|
Stock (per Share)
|
|
January 27, 2009 February 3, 2009
|
|
|
36,920
|
|
|
$
|
6.51
|
|
March 3, 2009 May 7, 2009
|
|
|
61,800
|
|
|
|
5.79
|
|
June 17, 2009 August 17, 2009
|
|
|
122,500
|
|
|
|
6.04
|
|
September 5, 2009
|
|
|
5,000
|
|
|
|
6.95
|
|
September 17, 2009 November 2, 2009
|
|
|
41,500
|
|
|
|
7.10
|
|
November 9, 2009 December 8, 2009
|
|
|
1,915,400
|
|
|
|
7.99
|
|
December 16, 2009 December 17, 2009
|
|
|
19,000
|
|
|
|
8.75
|
|
The board of directors determined the exercise price was the
fair market value on the respective grant dates. The
methodology, techniques, estimates and assumptions used in the
valuation of the common stock is described under the preceding
section entitled Preferred Stock Dividend. The
Company performed contemporaneous valuations to determine the
fair value of the Companys common stock at the following
dates:
|
|
|
|
|
|
|
Fair Market
|
|
|
Value
|
|
October 31, 2008
|
|
$
|
6.51
|
|
January 31, 2009
|
|
|
5.79
|
|
April 30, 2009
|
|
|
6.04
|
|
July 31, 2009
|
|
|
6.95
|
|
October 31, 2009
|
|
|
7.99
|
|
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 with a
weighted average volatility rate of 35%, 55% and 60% for the
years ended December 31, 2007, 2008 and 2009, respectively;
a contractual life of five years; a risk-free interest rate
ranging from 1.8% to 2.7% in 2009; and an expected dividend
yield of zero. The Company granted 4,320 shares of stock
options to non-employees during the year ended December 31,
2009. As of December 31, 2009, there was $16,000 of
unrecognized compensation cost related to unvested stock options
granted to non-employees, to be recognized over the weighted
average period of 1.4 years.
Compensation expense for equity instruments issued to
non-employees recognized in the years ended December 31,
2007, 2008 and 2009 was $109,000, $(4,000) and $94,000,
respectively.
The Company maintains a savings plan under Section 401(k)
of the Internal Revenue Code. Under the plan, employees may
contribute up to 75% of their pre-tax salaries per year, but not
more than the statutory limits. The Company may, at its
discretion, make matching contributions to the 401(k) Plan. For
the year ended December 31, 2009, the Company made no
matching contributions. For the years ended December 31,
2007 and 2008, the Company made matching contributions of 50% of
employee contributions up to 3% of salary (including
commissions) for every employee, which totaled $667,000 and
$730,000, respectively.
F-29
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 8
|
RELATED PARTY
TRANSACTIONS
|
One of the Companys founding directors provided consulting
services to the Company for which compensation was provided. The
Company incurred consulting expenses of $300,000, $300,000 and
$285,000 during the years ended December 31, 2007, 2008 and
2009, respectively. As of December 31, 2008 and 2009,
respectively, the Company had accrued liabilities of $125,000
and $145,000, respectively, for consulting fees payable to this
director. As of June 2009, this director resigned from his
director position but is still providing consulting services for
which compensation is provided.
One of the Companys directors provided consulting services
to the Company for which the Company incurred consulting fees of
$86,000, $0 and $0 during the years ended December 31,
2007, 2008 and 2009, respectively. As of December 31, 2008
and 2009, there were no unpaid consulting fees relating to
consulting services from this director.
In connection with the purchase of shares of common stock, the
Company provided full recourse loans to certain officers, with
annual interest rates ranging from 4.77% to 6.32%, pursuant to
promissory notes secured by pledges of restricted shares. In
September 2007, the remaining note was paid in full.
Goldman, Sachs & Co., one of the Companys
underwriters in the Companys proposed initial public
offering, owned 1,324,014 shares of Series E Preferred
Stock as of December 31, 2009.
|
|
NOTE 9
|
COMMITMENTS AND
CONTINGENCIES
|
Commitments
The Company leases its facilities under noncancelable operating
leases expiring at various dates through the year 2015. Rent
expense for all operating leases totaled approximately
$2.0 million for each of the years ended December 31,
2007, 2008 and 2009. 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 $491,000 and $441,000 as of December 31, 2008 and
2009, respectively.
In November 2009, the Company extended its Phoenix facilities
lease, which was originally set to expire in March 2010, through
May 31, 2015. The new terms are effective January 2010.
F-30
FINANCIAL
ENGINES, INC. AND SUBSIDIARIES
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Minimum future lease payments under all noncancelable operating
and capital leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Lease
|
|
|
Lease
|
|
|
|
(In thousands)
|
|
|
Year ending December 31:
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
6
|
|
|
$
|
2,000
|
|
2011
|
|
|
|
|
|
|
2,084
|
|
2012
|
|
|
|
|
|
|
1,673
|
|
2013
|
|
|
|
|
|
|
869
|
|
2014
|
|
|
|
|
|
|
876
|
|
Thereafter
|
|
|
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
6
|
|
|
$
|
7,655
|
|
|
|
|
|
|
|
|
|
|
Less: Amounts representing interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments
|
|
|
6
|
|
|
|
|
|
Less: Current obligations
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingencies
The Company is a party to two consulting agreements pursuant to
which it may be obligated to indemnify the other party with
respect to certain matters. Typically, these obligations arise
in the context of contracts entered into by the Company under
which the Company customarily agrees to hold the other party
harmless against losses arising from a breach of representation
and covenants.
The Company includes service level commitments to its customers
warranting certain levels of reliability and performance. To
date, the Company has not incurred any material costs as a
result of such commitments and has not accrued any liabilities
related to such obligations.
NOTE 10
SUBSEQUENT EVENTS
In January 2010, the board of directors and shareholders
approved the issuance of an aggregate of 456,643 shares of
the Companys common stock to holders of Series E
preferred stock immediately following the closing of this
offering such that each share of preferred stock including the
Series E preferred stock, would maintain a
one-for-one
conversion ratio to common stock.
In February 2010, the Company reincorporated to the State of
Delaware.
F-31
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|
10,900,000 Shares
Financial Engines,
Inc.
Common Stock
Goldman, Sachs &
Co.
UBS Investment Bank
|
|
Piper
Jaffray
|
Cowen and Company
|
Part II
INFORMATION NOT
REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other Expenses
of Issuance and Distribution
|
The following table sets forth the various expenses expected to
be incurred by the Registrant in connection with the sale and
distribution of the securities being registered hereby, other
than underwriting discounts and commissions. All amounts are
estimated except for the Securities and Exchange Commission
registration fee, the Financial Industry Regulatory Authority
filing fee and The Nasdaq Global Market listing fee.
|
|
|
|
|
Securities and Exchange Commission registration fee
|
|
$
|
8,281
|
|
Financial Industry Regulatory Authority filing fee
|
|
|
10,500
|
|
The Nasdaq Global Market listing fee
|
|
|
100,000
|
|
Blue Sky fees and expenses
|
|
|
10,000
|
|
Accounting fees and expenses
|
|
|
1,500,000
|
|
Legal fees and expenses
|
|
|
800,000
|
|
Printing and engraving expenses
|
|
|
100,000
|
|
Registrar and Transfer Agents fees
|
|
|
25,000
|
|
Miscellaneous fees and expenses
|
|
|
46,219
|
|
|
|
|
|
|
Total
|
|
$
|
2,600,000
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Section 102 of the Delaware General Corporation Law allows
a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director,
except where the director breached the duty of loyalty, failed
to act in good faith, engaged in intentional misconduct or
knowingly violated a law, authorized the payment of a dividend
or approved a stock repurchase in violation of the Delaware
General Corporation Law or obtained an improper personal benefit.
Section 145 of the Delaware General Corporation Law
provides, among other things, that we may indemnify any person
who was or is a party, or is threatened to be made a party, to
any threatened, pending or completed action, suit or proceeding,
other than an action by or in the right of the Registrant, by
reason of the fact that the person is or was a director,
officer, agent or employee of the Registrant, or is or was
serving at our request as a director, officer, agent or employee
of another corporation, partnership, joint venture, trust or
other enterprise against expenses, including attorneys
fees, judgments, fines and amounts paid in settlement actually
and reasonably incurred by the person in connection with such
action, suit or proceeding. The power to indemnify applies
(a) if such person is successful on the merits or otherwise
in defense of any action, suit or proceeding, or (b) if
such person acting in good faith and in a manner he or she
reasonably believed to be in the best interest, or not opposed
to the best interest, of the Registrant, and with respect to any
criminal action or proceeding had no reasonable cause to believe
his or her conduct was unlawful. The power to indemnify applies
to actions brought by or in the right of the Registrant as well
but only to the extent of defense expenses, including
attorneys fees but excluding amounts paid in settlement,
actually and reasonably incurred and not to any satisfaction of
judgment or settlement of the claim itself, and with the further
limitation that in such actions no indemnification shall be made
in the event of any adjudication of liability to the Registrant,
unless the court believes that in light of all the circumstances
indemnification should apply.
II-1
Section 174 of the Delaware General Corporation Law
provides, among other things, that a director, who willfully or
negligently approves of an unlawful payment of dividends or an
unlawful stock purchase or redemption, may be held liable for
such actions. A director who was either absent when the unlawful
actions were approved or dissented at the time, may avoid
liability by causing his or her dissent to such actions to be
entered in the books containing minutes of the meetings of the
board of directors at the time such action occurred or
immediately after such absent director receives notice of the
unlawful acts.
The Registrants amended and restated bylaws, attached as
Exhibit 3.(ii)(2) hereto, provide that the Registrant shall
indemnify its directors and executive officers to the fullest
extent not prohibited by the Delaware General Corporation Law or
any other applicable law. In addition, the Registrant has
entered into separate indemnification agreements, attached as
Exhibit 10 hereto, with its directors and officers which
would require the Registrant, among other things, to indemnify
them against certain liabilities which may arise by reason of
their status or service as directors or officers to the fullest
extent not prohibited by law. These indemnification provisions
and the indemnification agreements may be sufficiently broad to
permit indemnification of the Registrants officers and
directors for liabilities, including reimbursement of expenses
incurred, arising under the Securities Act of 1933, as amended,
which we refer to as the Securities Act. The Registrant also
intends to maintain director and officer liability insurance, if
available on reasonable terms.
The form of Underwriting Agreement, to be attached as
Exhibit 1.1 hereto, provides for indemnification by the
Underwriters of us and our officers and directors for certain
liabilities, including liabilities arising under the Securities
Act, and affords certain rights of contribution with respect
thereto.
|
|
Item 15.
|
Recent Sales
of Unregistered Securities
|
The following sets forth information regarding all unregistered
securities sold since our inception through January 31,
2010 and gives effect to the
three-for-two
forward stock split effected in June 1999:
Since inception through January 31, 2010, we granted stock
options to purchase 426,000 shares of our common stock to
our directors, officers, employees and consultants pursuant to
our 1996 Stock Plan, with exercise prices ranging from $0.07 to
$0.17 per share.
Since inception through January 31, 2010, we granted stock
options to purchase 23,411,289 shares of our common stock
to our directors, officers, employees and consultants pursuant
to our 1998 Stock Plan, with exercise prices ranging from $0.17
to $10.00 per share.
On June 7, 1996, we issued and sold 3,000,000 shares
of our common stock to our three founders, at a purchase price
of $0.0007 per share, for an aggregate consideration of $2,100.
On September 2, 1996, we issued and sold an additional
225,000 shares of our common stock to one of our executive
officers at a purchase price of $0.0067 per share, for an
aggregate consideration of $1,508.
On various dates between December 1996 and October 1997, we
issued and sold 847,500 shares of our common stock to 10
accredited investors pursuant to our 1996 Restricted Stock
Purchase Plan. The purchase prices ranged from $0.07 to $0.17
per share, for an aggregate consideration of $70,778.
On various dates between May 1998 and December 2001, we issued
and sold an aggregate of 414,125 shares of our common stock
to our directors, officers, employees and consultants pursuant
to the exercise of options granted under our 1996 Stock Plan.
The exercise prices ranged from $0.07 to $0.17 per share, for an
aggregate consideration of $62,285.
On various dates between May 1998 and January 2010, we issued
and sold an aggregate of 6,110,664 shares of our common
stock to our directors, officers, employees and consultants
pursuant
II-2
to the exercise of options granted under our 1998 Stock Plan.
The exercise prices ranged from $0.17 to $10.00 per share, for
an aggregate consideration of $15,178,558.
On February 20, 2001, we issued and sold
1,246,980 shares of our common stock to one accredited
investor for a purchase price of $10 per share, for
consideration of $12,246,980.
On various dates between June 2001 and March 2009, we issued and
sold 975,000 shares of our common stock to 11 accredited
investors pursuant to our Special Executive Restricted Stock
Purchase Plan. The purchase prices ranged from $0.01 to $0.10
per share, for an aggregate consideration of $41,250.
From September 20, 1996 through February 5, 1997, we
issued and sold an aggregate of 1,030,006 shares of our
series A preferred stock at $0.50 per share to 16
accredited investors for an aggregate consideration of $515,003.
On March 28, 1997, we issued and sold 3,394,740 shares
of our series B preferred stock at $1.2666 per share to 13
accredited investors for an aggregate consideration of
$4,299,981. In December 2001 we issued an additional
51,118 shares of series B preferred stock to the 13
accredited investors as a result of anti-dilution adjustments.
From June 5, 1998 through December 31, 1998, we issued
and sold an aggregate of 2,958,674 shares of our
series C preferred stock at $4.00 per share to 29
accredited investors for an aggregate consideration of
$11,834,696. In December 2001, we issued an additional
164,899 shares of series C preferred stock to the 29
accredited investors as a result of anti-dilution adjustments.
On April 30, 1999, we issued and sold an aggregate of
3,375,337 shares of our series D preferred stock at
$6.00 per share to 26 accredited investors for an aggregate
consideration of $20,252,022. Between December 2001 and March
2005, we issued an additional 279,829 shares of
series D preferred stock to the 26 accredited investors as
a result of anti-dilution adjustments.
On October 18, 1999, we issued a warrant to purchase up to
108,290 shares of our series D preferred stock at an
exercise price of $10.00 per share. This warrant expired in
October 2009.
From November 23, 1999 through March 18, 2000, we
issued and sold an aggregate of 6,024,708 shares of our
series E preferred stock at $14.1086 per share to 42
accredited investors for an aggregate consideration of
$85,000,219. Between February 2001 and December 2009 we issued
an additional 1,478,101 shares of series E preferred
stock to the 42 accredited investors as a result of
anti-dilution adjustments.
From December 20, 2004 through February 2, 2005 we
issued and sold an aggregate of 3,684,211 shares of our
series F preferred stock at $4.75 per share to 35
accredited investors for an aggregate consideration of
$17,500,002.
Unless otherwise stated, the sales of the above securities were
deemed to be exempt from registration under the Securities Act
in reliance upon Section 4(2) of the Securities Act or
Regulation D or Regulation S promulgated thereunder,
or Rule 701 promulgated under Section 3(b) of the
Securities Act as transactions by an issuer not involving any
public offering or pursuant to benefit plans and contracts
relating to compensation as provided under Rule 701. The
recipients of the securities in each of these transactions
represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were
placed upon the stock certificates issued in these transactions.
All recipients had adequate access, through their relationships
with Financial Engines, to information about Financial Engines.
II-3
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|
Item 16.
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Exhibits and
Financial Statement Schedules
|
(a) Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement.
|
|
3
|
.(i)1**
|
|
Amended and Restated Articles of Incorporation of the Registrant.
|
|
3
|
.(i)2**
|
|
Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be effective upon the completion of the offering
to which this Registration Statement relates.
|
|
3
|
.(ii)1**
|
|
Bylaws of the Registrant (composite copy).
|
|
3
|
.(ii)2**
|
|
Form of Amended and Restated Bylaws of the Registrant, to be
effective upon the completion of the offering to which this
Registration Statement relates.
|
|
4
|
.1
|
|
Specimen Common Stock Certificate.
|
|
4
|
.2**
|
|
Fifth Amended and Restated Investors Rights Agreement
dated as of December 20, 2004.
|
|
5
|
.1
|
|
Opinion of Pillsbury Winthrop Shaw Pittman LLP.
|
|
10
|
.1**
|
|
Financial Engines, Inc. 1998 Stock Plan (as amended on
October 20, 2009) and related form stock option plan
agreements.
|
|
10
|
.2**
|
|
Financial Engines, Inc. 2009 Stock Incentive Plan.
|
|
10
|
.3**
|
|
Financial Engines, Inc. Special Executive Restricted Stock
Purchase Plan and related form stock purchase agreements.
|
|
10
|
.4**
|
|
Form of Indemnification Agreement between the Registrant and its
officers and directors.
|
|
10
|
.5**
|
|
Financial Engines, Inc. Consulting Agreement between the
Registrant and William F. Sharpe dated as of March 5, 1998,
including amendments thereto.
|
|
10
|
.6**
|
|
Financial Engines, Inc. Third Amended and Restated Consulting
Agreement between the Registrant and E. Olena Berg-Lacy dated as
of October 1, 2009.
|
|
10
|
.7.1**
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of July 14, 1997, including
amendments thereto.
|
|
10
|
.7.2**
|
|
Partial Lease Termination Agreement between Registrant and
Harbor Investment Partners dated as of May 16, 2001.
|
|
10
|
.8**
|
|
Second Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank dated as of
April 20, 2009.
|
|
10
|
.9**
|
|
Offer letter to Lawrence M. Raffone dated December 21,
2000.
|
|
10
|
.10**
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of December 7, 1999, including
amendments thereto.
|
|
10
|
.11**
|
|
Form of 2009 Stock Incentive Plan Stock Option Agreement.
|
|
10
|
.12**
|
|
Form of 2009 Stock Incentive Plan Restricted Stock Award
Agreement (Employees).
|
|
10
|
.13**
|
|
Form of 2009 Stock Incentive Plan Restricted Stock Award
Agreement (Executives).
|
|
10
|
.14**
|
|
Form of 2009 Stock Incentive Plan RSU Agreement.
|
|
21
|
.1**
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of KPMG LLP, independent registered public accounting
firm.
|
|
23
|
.2
|
|
Consent of Pillsbury Winthrop Shaw Pittman LLP (included in
Exhibit 5.1).
|
|
24
|
.1**
|
|
Power of Attorney.
|
|
24
|
.2**
|
|
Power of Attorney for John B. Shoven.
|
|
|
|
|
|
To be executed by all officers and directors upon the completion
of the reincorporation of the Registrant in Delaware.
|
(b) Consolidated Financial Statement Schedules
No consolidated financial statement schedules are provided
because the information called for is not required or is shown
either in the consolidated financial statements or the notes
thereto.
II-4
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the Act), may be
permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the
Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Act, each post effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To provide to the underwriters at the closing(s)
specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(4) That, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser, each prospectus
filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses
filed in reliance on Rule 430A, shall be deemed to be part
of and included in the registration statement as of the date it
is first used after effectiveness.
Provided, however
,
that no statement made in a registration statement or prospectus
that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first use.
For the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser in the initial
distribution of the securities:
The undersigned registrant undertakes that in a primary offering
of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
II-5
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 3 to the
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palo
Alto, State of California, on the
22
nd
day
of February, 2010.
FINANCIAL ENGINES, INC.
|
|
|
|
By
|
/s/ Jeffrey
N. Maggioncalda
|
Jeffrey N. Maggioncalda
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Jeffrey
N. Maggioncalda
Jeffrey
N. Maggioncalda
|
|
Chief Executive Officer (Principal Executive Officer), President
and Director
|
|
February 22, 2010
|
|
|
|
|
|
/s/ Raymond
J. Sims
Raymond
J. Sims
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
|
|
February 22, 2010
|
|
|
|
|
|
*
Paul
G. Koontz
|
|
Chairman
|
|
February 22, 2010
|
|
|
|
|
|
*
E.
Olena Berg-Lacy
|
|
Director
|
|
February 22, 2010
|
|
|
|
|
|
*
Heidi
K. Fields
|
|
Director
|
|
February 22, 2010
|
|
|
|
|
|
*
Joseph
A. Grundfest
|
|
Director
|
|
February 22, 2010
|
|
|
|
|
|
*
C.
Richard Kramlich
|
|
Director
|
|
February 22, 2010
|
|
|
|
|
|
*
John
B. Shoven
|
|
Director
|
|
February 22, 2010
|
|
|
|
|
|
*
Mark
A. Wolfson
|
|
Director
|
|
February 22, 2010
|
|
|
|
|
|
|
|
*By
|
|
/s/ Raymond
J. Sims
Raymond
J. Sims
|
|
Attorney-in-Fact
|
|
February 22, 2010
|
II-7
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement.
|
|
3
|
.(i)1**
|
|
Amended and Restated Articles of Incorporation of the Registrant.
|
|
3
|
.(i)2**
|
|
Form of Amended and Restated Certificate of Incorporation of the
Registrant, to be effective upon the completion of the offering
to which this Registration Statement relates.
|
|
3
|
.(ii)1**
|
|
Bylaws of the Registrant (composite copy).
|
|
3
|
.(ii)2**
|
|
Form of Amended and Restated Bylaws of the Registrant, to be
effective upon the completion of the offering to which this
Registration Statement relates.
|
|
4
|
.1
|
|
Specimen Common Stock Certificate.
|
|
4
|
.2**
|
|
Fifth Amended and Restated Investors Rights Agreement
dated as of December 20, 2004.
|
|
5
|
.1
|
|
Opinion of Pillsbury Winthrop Shaw Pittman LLP.
|
|
10
|
.1**
|
|
Financial Engines, Inc. 1998 Stock Plan (as amended on
October 20, 2009) and related form stock option plan
agreements.
|
|
10
|
.2**
|
|
Financial Engines, Inc. 2009 Stock Incentive Plan.
|
|
10
|
.3**
|
|
Financial Engines, Inc. Special Executive Restricted Stock
Purchase Plan and related form stock purchase agreements.
|
|
10
|
.4**
|
|
Form of Indemnification Agreement between the Registrant and its
officers and directors.
|
|
10
|
.5**
|
|
Financial Engines, Inc. Consulting Agreement between the
Registrant and William F. Sharpe dated as of March 5, 1998,
including amendments thereto.
|
|
10
|
.6**
|
|
Financial Engines, Inc. Third Amended and Restated Consulting
Agreement between the Registrant and E. Olena Berg-Lacy dated as
of October 1, 2009.
|
|
10
|
.7.1**
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of July 14, 1997, including
amendments thereto.
|
|
10
|
.7.2**
|
|
Partial Lease Termination Agreement between Registrant and
Harbor Investment Partners dated as of May 16, 2001.
|
|
10
|
.8**
|
|
Second Amended and Restated Loan and Security Agreement between
the Registrant and Silicon Valley Bank dated as of
April 20, 2009.
|
|
10
|
.9**
|
|
Offer letter to Lawrence M. Raffone dated December 21,
2000.
|
|
10
|
.10**
|
|
Lease Agreement by and between the Registrant and Harbor
Investment Partners dated as of December 7, 1999, including
amendments thereto.
|
|
10
|
.11**
|
|
Form of 2009 Stock Incentive Plan Stock Option Agreement.
|
|
10
|
.12**
|
|
Form of 2009 Stock Incentive Plan Restricted Stock Award
Agreement (Employees).
|
|
10
|
.13**
|
|
Form of 2009 Stock Incentive Plan Restricted Stock Award
Agreement (Executives).
|
|
10
|
.14**
|
|
Form of 2009 Stock Incentive Plan RSU Agreement.
|
|
21
|
.1**
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of KPMG LLP, independent registered public accounting
firm.
|
|
23
|
.2
|
|
Consent of Pillsbury Winthrop Shaw Pittman LLP (included in
Exhibit 5.1).
|
|
24
|
.1**
|
|
Power of Attorney.
|
|
24
|
.2**
|
|
Power of Attorney for John B. Shoven.
|
|
|
|
|
|
To be executed by all officers and directors upon the completion
of the reincorporation of the Registrant in Delaware.
|