Form 10-Q Financial Engines, Inc. For: Jun 30

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended June 30, 2016

OR

Commission File No. 001-34636

 

FINANCIAL ENGINES, INC.

(Exact name of registrant as specified in its charter)

 

 

1050 Enterprise Way, 3rd Floor

Sunnyvale, CA 94089

(Address of principal executive offices, Zip Code)

(408) 498-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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 definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  x

As of July 31, 2016, 61,787,476 shares of Common Stock, par value $0.0001, were outstanding.

 

 

 

 

 

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FINANCIAL ENGINES, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2016

 

 

 

 

 

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PART I: FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

FINANCIAL ENGINES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

NOTE 1 — Organization and Description of the Business

The Company

Financial Engines, Inc. (the Company) was incorporated on May 13, 1996 under the laws of the State of California and is headquartered in Sunnyvale, California. In February 2010, the Company was reincorporated under the laws of the State of Delaware.

Financial Engines is a leading provider of technology-enabled comprehensive financial advisory services, including financial planning, investment management and retirement income solutions, covering accounts including employer-sponsored defined contribution (DC) accounts (401(k), 457, and 403(b) plans), IRA accounts, and taxable accounts. The Company helps individuals, either online or with an advisor, develop a strategy to reach investing and retirement goals by offering a comprehensive set of services, including holistic, personalized plans for saving and investing, assessments of retirement income, and the option to meet face-to-face with a dedicated financial advisor at one of more than 125 advisor centers nationwide. The Company’s services are primarily delivered in the workplace through relationships with leading plan providers and plan sponsors, and its clients are primarily individuals participating in DC retirement plans, as well as individuals outside the workplace. Clients are defined as individuals who utilize the Company’s services, including professional management, online advice, education or guidance. Included in its services is the use of the Company’s cost-efficient, proprietary and scalable advice technology platform.

The Company’s investment advisory and management services are provided through its subsidiary, Financial Engines Advisors L.L.C., a federally registered investment adviser. In February 2016, we completed the acquisition of Kansas City 727 Acquisition LLC, a Delaware limited liability corporation, as well as its subsidiaries (collectively, “The Mutual Fund Store”).

 

 

NOTE 2 — Basis of Presentation and Principles of Consolidation

Interim Financial Statements

The accompanying condensed consolidated financial statements and notes thereto are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, as filed on February 19, 2016 with the SEC (the 2015 Annual Report). The Condensed Consolidated Balance Sheet as of December 31, 2015, included herein, was derived from the audited financial statements as of that date but does not include all disclosures including notes required by GAAP.

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for the fair presentation of the Company’s Balance Sheets as of December 31, 2015 and June 30, 2016, the Company’s Statements of Income for the three and six months ended June 30, 2015 and 2016 and the Company’s Statements of Cash Flows for the six months ended June 30, 2015 and 2016. The results for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016.

The unaudited condensed consolidated financial statements include the accounts of the Company and all of its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income is the same as net income for all periods presented.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates under different assumptions or conditions.

 

 

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

 

Segment Information

The Company’s chief operating decision-maker, its chief executive officer, reviews the Company’s operating results on an aggregate, consolidated basis and manages its operations as a single operating segment. In addition, all of the Company’s operations and assets are based in the United States.  Following The Mutual Fund Store acquisition discussed in Note 3, the Company re-examined its reporting and operating structure, and determined it continues to operate as a single operating and reportable segment.  

Business Combinations

The Company accounts for business combinations under the acquisition method. The cost of an acquired company is assigned to the tangible and intangible assets acquired and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets acquired and liabilities assumed requires management to make estimates and use valuation techniques when market values are not readily available. Any excess of the aggregate purchase price over the fair value of net tangible and identifiable intangible assets acquired is allocated to goodwill. Transaction costs associated with business combinations are expensed as incurred.

Goodwill and Intangible Assets

Goodwill consists of the excess of the aggregate purchase price over the fair value of net tangible and identifiable intangible assets acquired by the Company. The carrying amount of goodwill is tested for impairment each year in the fourth quarter, or more frequently if facts and circumstances warrant a review, by using a two-step process. The Company has concluded that it has a single reporting unit for the purpose of goodwill impairment testing, and accordingly, all goodwill resides within a single reporting unit. The Company compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired. If the carrying value of the reporting unit exceeds its fair value, the Company would perform a measurement of the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied fair value of the goodwill. If the carrying amount of the goodwill is greater than the implied value, an impairment loss is recognized for the difference.

The Company does not have any indefinite lived intangible assets besides goodwill. Intangible assets with definite useful lives are recorded at cost less accumulated amortization. Intangible assets are reviewed for impairment whenever events or changes in circumstances may affect the recoverability of the net assets. Such reviews include an analysis of current results and take into consideration the undiscounted value of projected operating cash flows.

Intangible assets consist primarily of customer relationships, trademarks, trade names and internal use software. These intangible assets are acquired through business combinations or, in the case of capitalized software costs, are internally developed.  Intangible assets are amortized on a straight-line basis over their estimated useful lives which range from less than 1 year to 20 years.

Long-Lived Assets

Long-lived assets, such as property, equipment, capitalized internal use software, direct response advertising and intangible assets subject to depreciation and amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or an asset group may not be recoverable. When such events or changes in circumstances occur, the Company assesses recoverability by determining whether the carrying value of such assets or asset group will be recovered through the undiscounted expected future cash flows.  If the future undiscounted cash flows of the assets or asset group are less than their carrying amount, the Company would recognize an impairment loss based on any excess of the carrying amount of the asset or asset group over their fair value.  Impairment charges related to long-lived assets were immaterial for the periods presented.

 

Revenue Recognition

The Company recognizes revenue when all of the following conditions are met:

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The Company generates its revenue through three primary sources: professional management, platform and other revenue.

Professional Management.    The Company derives professional management revenue from client fees paid by or on behalf of both DC clients and individual investor clients who are enrolled in the Company’s professional management service for the management of their account assets. The professional management service is a discretionary investment advisory service that can include comprehensive financial planning, investment management and retirement income services. The services are generally made available to prospective clients by written agreements with the plan provider, the plan sponsor and the plan participant in a DC plan, and by written agreements with individual investors; and may be provided on a subadvisory basis.

The Company’s arrangements with clients generally provide for fees based on the value of assets the Company manages and are generally payable quarterly in arrears. Fees billed to clients are determined by the value of the assets in the client’s account at specified dates with no judgments or estimates on the part of the Company, and are recognized as the services are performed. The Company uses estimates primarily related to the portion of professional management revenue that has not been invoiced and is not otherwise due from the customer at period end, but has been earned by the Company. The Company estimates the amount of revenue that would be due to it at the end of the period as if the contract were terminated at that date. This calculation, referred to as the hypothetical liquidation method, is determined by multiplying the actual assets under management (AUM) at the end of the period for each client by the basis points of the respective client from the most recent quarterly billing cycle.

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. The Company recognizes revenue during certain of these fee deferral periods based on the estimate of the expected fee retention rate determined by historical experience of similar arrangements.

Platform.    The Company derives platform revenue from recurring, subscription-based fees for access to its services, including professional management, online advice, education and guidance, and to a lesser extent, from setup fees. The arrangements generally provide for fees to be paid by the plan sponsor, plan provider or the DC plan itself, depending on the plan structure. Platform revenue is generally paid annually or quarterly 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 seven years.

Other.    Other revenue includes franchise royalty fees, fees for non-retirement account servicing, reimbursement for a portion of marketing and client materials from certain subadvisory relationships and reimbursement for providing personal statements to prospective clients from a limited number of plan sponsors. Costs associated with these reimbursed printed fulfillment materials are expensed to cost of revenue as incurred. Franchise royalty fees are recognized as revenue as the services are performed by the franchisees based on specified percentages of the franchisees’ advisory fees billed to their clients. Franchise royalty fees charged by the franchisees to their clients are primarily based on predetermined percentages of the market value of the AUM and are affected by changes in the AUM. The fees for non-retirement account servicing do not impact client fees paid for professional management, and are disclosed in the applicable Form ADV of the Company’s advisory subsidiaries.

Cost of Revenue

Cost of revenue includes fees paid to plan providers for connectivity to plan and plan participant data, printed materials fulfillment costs for certain subadvisory relationships for which a portion are reimbursed, printed client materials, and employee-related costs for in-person dedicated advisor centers and call center advisors, operations, implementations, technical operations, portfolio management and client service administration. Costs in this area are related primarily to payments to third parties, employee compensation and related expenses, facilities expenses, purchased materials and depreciation.

The expenses included in cost of revenue 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 Company’s revenue are included in the category cost of revenue in the Unaudited Condensed Consolidated Statements of Income. A portion of the amortization of intangible assets, including internal use software, relates to the Company’s cost of revenue but is reflected together with all amortization of intangible assets as a separate line item in the Company’s Unaudited Condensed Consolidated Statements of Income.

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Recent Accounting Pronouncements

On May 28, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new standard may also impact how the Company accounts for certain direct costs associated with its revenues. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard would become effective for the Company on January 1, 2018 and early adoption would be permitted on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

On February 25, 2016, FASB issued ASU No. ASU 2016-02, Leases, which requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the balance sheet. The ASU also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Adoption of the standard will require a modified retrospective approach. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures.

In March 2016, FASB issued ASU No. ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”.  The ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  For public entities, the ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Although early adoption is permitted, the Company does not intend to adopt early. The Company is evaluating the effect that ASU 2016-09 will have on its consolidated financial statements and related disclosures.

 

 

NOTE 3 – Business Combinations

Acquisition of The Mutual Fund Store

On February 1, 2016, the Company completed the acquisition of The Mutual Fund Store pursuant to an Agreement and Plan of Mergers, dated November 5, 2015, as amended. The acquisition is expected to enable the Company to expand its independent advisory services to defined contribution participants through comprehensive financial planning and the option to meet face-to-face with a dedicated financial advisor.

The preliminary purchase price allocation is subject to certain closing and post-closing adjustments.  A portion of the purchase price was placed in an escrow fund for up to 14 months following the closing for the satisfaction of certain indemnification claims. Following the closing of the acquisition, investment funds affiliated with Warburg Pincus LLC, the former majority owner of The Mutual Fund Store, held approximately 13% of the Company’s then-outstanding shares of common stock. 

 

 

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The total acquisition consideration has been preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition, including 22 franchised store agreements. The assets acquired consist primarily of customer relationships, accounts receivable, and trade names and trademarks. The intangible assets will be amortized based upon their estimated useful lives on a straight-lined basis.  The table below represents a preliminary allocation of the total acquisition consideration to The Mutual Fund Store’s tangible and intangible assets and liabilities as of February 1, 2016 based on the Company’s preliminary estimate of their respective fair values:

 

 

Upon completion of the fair value assessment after the acquisition, it is anticipated that the final purchase price allocation will differ from the preliminary allocation outlined above. Any changes to the initial estimates of the fair value of assets and liabilities that are made within the measurement period, which will not exceed one year, will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.

A summary of intangible assets acquired and estimated useful lives is as follows:

 

 

The preliminary purchase price allocations resulted in $293.6 million of goodwill, of which approximately $163.8 million is expected to be deductible for tax purposes. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, including the benefit of operational leverage resulting from expanding the Company’s independent advisory services, and the knowledge and experience of the acquired workforce.

The results of The Mutual Fund Store operations are included in the Unaudited Condensed Consolidated Statements of Income beginning February 1, 2016. The Mutual Fund Store’s revenue for the five-month period ended June 30, 2016 totaled $44.5 million.

The Company incurred transaction costs totaling $6.2 million during the six months ended June 30, 2016 that were expensed as incurred in general and administrative expense in its Unaudited Condensed Consolidated Statements of Income. There were no transaction expenses incurred for the three months ended June 30, 2016 in connection with this acquisition.

The Mutual Fund Store had an existing compensation arrangement with its key executives for $5.8 million.  Fifty percent of the compensation payment, approximately $2.9 million, was payable upon the closing of the acquisition and is reflected in the purchase consideration transferred at closing. The remaining fifty percent of the compensation payment, approximately $2.9 million, requires the executives to be employed with the Company for agreed-upon service periods and therefore will be accounted for as post-combination compensation expense. 

Pro forma results for Financial Engines, Inc. giving effect to The Mutual Fund Store acquisition (Unaudited)

The following unaudited pro forma financial information presents the combined results of operations of Financial Engines and The Mutual Fund Store for the three and six months ended June 30, 2015 and 2016 as if the acquisition had occurred as of January 1, 2015.

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The unaudited pro forma results presented include amortization charges for acquired intangible assets and stock-based compensation expense, and the elimination of intercompany transactions, imputed interest expense, and transaction-related expenses, and the related tax effect on the aforementioned items.

Unaudited pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisition had occurred as of January 1, 2015.

 

 

Acquisition of Franchises April 2016

In April 2016, the Company completed the acquisition of the seven franchises listed below for total aggregate cash consideration of $14.4 million.

 

 

The acquisitions are expected to enable the Company to have greater oversight and control over the operations of these advisor center locations. The preliminary purchase price allocation is subject to certain closing and post-closing adjustments. Approximately $0.8 million in holdback amounts have been reserved with respect to indemnification claims on behalf of the Company, which are expected to be paid in April 2017.

The total acquisition consideration has been preliminarily allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The assets acquired consist primarily of intangible customer relationships and reacquired franchise rights. The intangible assets will be amortized based upon their estimated useful lives on a straight-lined basis.  The table below represents a preliminary allocation of the aggregate acquisition consideration based on the Company’s preliminary estimate of their respective fair values:

 

 

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Upon completion of the fair value assessment after the acquisitions, it is anticipated that the final purchase price allocation will differ from the preliminary allocation outlined above. Any changes to the initial estimates of the fair value of assets and liabilities that are made within the measurement period, which will not exceed one year, will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.

A summary of intangible assets acquired and estimated useful lives is as follows:

 

 

The preliminary purchase price allocations resulted in $7.3 million of goodwill, all of which is expected to be deductible for tax purposes. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, including the benefit of operational leverage and the knowledge and experience of the acquired workforce.

The Company incurred transaction costs totaling $0.1 million during the three and six months ended June 30, 2016 that were expensed as incurred in general and administrative expense in its Unaudited Condensed Consolidated Statements of Income.  

Subsequent to these acquisitions, the Company still operates 15 franchises as of June 30, 2016, of which eight more were acquired in July and August 2016 (see Note 12).  The Company wrote off $0.2 million in notes receivable related to the July franchise acquisitions as they were deemed to be uncollectable during the three months ended June 30, 2016. 

 

 

NOTE 4 — 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. Cash equivalents are comprised of cash held primarily in money market accounts. Cash and cash equivalents consist of the following:

 

 

 

NOTE 5 — Short-Term Investments

Short-term investments consisted of U.S. Treasury securities. As of December 31, 2015, short-term investments of $39.9 million were held as available-for-sale and recorded on the balance sheet at fair market value.  In January 2016, the Company sold the total short-term investments of $39.9 million. Realized and unrealized gains or losses, net of tax, have been immaterial in every period presented.

 

NOTE 6 — Concentration of Credit Risk and Fair Value of Financial Instruments

The Company measures and reports its investments in money market funds at fair value on a recurring basis, which approximates their carrying value due to the short period of time to maturity, and reports its short-term investments in U.S. Treasury securities at fair value at each reporting period. There have been no changes in the Company’s valuation techniques during the three and six months ended June 30, 2016.  Both the money market funds and U.S. Treasury securities are classified as Level 1.

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis:

 

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents primarily in highly-rated taxable money market funds located in the United States, in which deposits may exceed federal deposit insurance limits. The fair value of the Company’s accounts receivable and accounts payable approximates the carrying amount due to their short duration.

The Company’s customers are concentrated in the United States. 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:

 

 

 

NOTE 7 — Goodwill and Intangible Assets

Goodwill as of December 31, 2015 and June 30, 2016 consisted of the following:

 

 

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

Intangible assets as of December 31, 2015 and June 30, 2016 consisted of the following:

 

 

Amortization expense related to intangible assets was as follows:

 

 

 

The following table presents the estimated future amortization of intangible assets as of June 30, 2016:

 

 

 

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

NOTE 8 — Stockholders’ Equity

Stock-based Compensation

The following table summarizes the stock-based compensation, as included in the Unaudited Condensed Consolidated Statements of Income, by functional area:

 

 

Cash Dividends

On July 26, 2016, the Board of Directors declared a quarterly dividend of $0.07 per share to be paid on October 4, 2016 to record-holders as of September 20, 2016. While the Company currently expects to pay comparable cash dividends on a quarterly basis in the future, any future determination with respect to the declaration and payment of dividends will be at the discretion of the Board of Directors. As of June 30, 2016, the Company had a dividend payable balance of $3.7 million, which was paid to stockholders in July 2016.

Stock Repurchase Program

On November 5, 2014, the Board of Directors approved a stock repurchase program of up to $50.0 million of the Company’s common stock in the open market over a twelve-month period funded by available working capital, of which $47.6 million had been utilized before the stock repurchase program expired on November 4, 2015.  The repurchases were recorded as treasury stock and resulted in a reduction of stockholder’s equity.

2009 Stock Incentive Plan

In February 2016, the Board of Directors approved an executive severance and change in control policy for the Company’s executive officers, which provides that the executive officers may receive 100% accelerated vesting of outstanding equity awards and extended exercise rights for outstanding stock option awards, subject to severance and change in control conditions and contingent upon the execution by the executive officer of a full release of claims against the Company and any of its affiliates. The change in control provisions apply to the equity awards made to the Company’s executive officers under the 2009 Stock Incentive Plan on May 20, 2016.

These new provisions are in addition to existing provisions whereby certain awards under the 2009 Stock Incentive Plan also provide for partial acceleration in the event of involuntary termination within 12 months of a change in control event, death or total and permanent disability.

 

 

NOTE 9 — Net Income Per Common Share

Basic net income per common share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period less the weighted average number of common shares repurchased by the Company during the period. Diluted net income per common share is computed by giving effect to all dilutive potential common shares, including options, RSUs, and PSUs. Repurchased shares are held as treasury stock and outstanding shares used to calculate earnings per share have been reduced by the weighted number of repurchased shares.

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

On February 1, 2016, the Company issued 9,885,889 shares of its common stock as part of the consideration to acquire The Mutual Fund Store.

The following table sets forth the computation of basic and diluted net income per share:

 

 

Diluted net income per share does not include the effect of the following anti-dilutive common equivalent shares:

 

 

 

NOTE 10 — Income Taxes

The Company recorded an income tax provision of $3.6 million and $5.6 million for the three months ended June 30, 2015 and 2016, respectively. The Company’s effective tax rate was 30% and 38% for the three months ended June 30, 2015 and 2016, respectively.  This increase in the effective tax rate was due primarily to the recognition of tax benefits upon resolution of income tax uncertainties and changes in state taxes during the three months ending June 30, 2015, which lowered our effective tax rate during that period.

The Company recorded an income tax provision of $7.9 million and $9.7 million for the six months ended June 30, 2015 and 2016, respectively.  The Company’s effective tax rate was 33% and 44% for the six months ended June 30, 2015 and 2016, respectively. This increase in the effective tax rate was due primarily to non-deductible expenditures incurred in connection with acquiring The Mutual Fund Store during the three months ended March 31, 2016.  The lower effective tax rate for the six months ended June 30, 2015 was due primarily to the recognition of tax benefits upon resolution of income tax uncertainties and changes in state taxes.

The Company is subject to income taxes in the U.S. federal jurisdiction and various state jurisdictions. All tax years since inception are open due to loss carryforwards and may be subject to examination in one or more jurisdictions.

 

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FINANCIAL ENGINES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

 

At December 31, 2015, the Company had net operating loss carryforwards for federal purposes of approximately $98.8 million that expire at varying dates through 2035.

As of December 31, 2015, the Company continued to believe that sufficient positive evidence exists from historical operations and future projections to conclude that it is more likely than not to fully realize its deferred tax assets in future periods. The Company continuously evaluates facts representing positive and negative evidence in the determination of the realizability of the deferred tax assets. As of December 31, 2015, the Company had gross unrecognized tax benefits for income taxes associated with uncertain tax positions of $6.7 million, and does not expect this to change materially for the remainder of the year.

On February 1, 2016, the Company closed its acquisition of The Mutual Fund Store and recorded deferred tax assets of $19.5 million related to the acquisition, primarily for acquired net operating losses available to be utilized in future periods.

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred taxes by requiring that deferred tax assets and liabilities, and any related valuation allowance, to be classified as non-current. The Company early adopted ASU 2015-17 as of December 31, 2015 on a prospective basis.

 

 

NOTE 11— Commitments and Contingencies

Commitments

In June 2015, the Company entered into a non-cancelable operating lease amendment for its Phoenix, Arizona facility. The lease amendment includes a tenant improvement allowance of approximately $0.4 million and as of June 30, 2016 the receivable balance associated with this tenant improvement allowance was received in full.

The Company classifies tenant improvement allowances in its Unaudited Condensed Consolidated Balance Sheets under deferred rent and in its Unaudited Condensed Consolidated Statements of Cash Flows under operating activities.

In February 2016, as a result of the acquisition of The Mutual Fund Store, the Company acquired non-cancelable operating leases, including an existing facility in Overland Park, Kansas, which will expire in September 2016, as well as a new 33,100 square foot facility in Overland Park, Kansas. There were remaining future minimum payments associated with the new lease of approximately $7.5 million as of February 1, 2016 and it expires in March 2027. This lease also includes a tenant improvement allowance of approximately $1.8 million, which is being directly paid by the landlord. As of the acquisition date of February 1, 2016, the total remaining future minimum payments associated with the acquired non-cancelable operating leases were approximately $17.6 million with expiration dates varying through March 2027. Future minimum payments associated with non-cancelable operating leases related to franchise acquisitions to date were immaterial.

Contingencies

The Company includes service level commitments to its customers warranting certain levels of reliability and performance. The maximum total commitments under these obligations would have less than a $1.0 million impact on the Company’s annual operating results.

 

 

NOTE 12 – Subsequent Events

In July and August 2016, the Company completed the acquisition of the eight franchises for total aggregate cash consideration of $12.3 million.

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Report contains forward-looking statements that involve risks and uncertainties. In some cases, you can identify forward-looking statements by terms such as “may,” “might,” “will,” “objective,” “goal,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “designed to,” “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 regarding anticipated trends and challenges in our business and the markets in which we operate; the capabilities, benefits and effectiveness of our services; our strategy; our plans for future services, enhancements of existing services and our growth; the potential impact of the acquisition of The Mutual Fund Store on our business, financial condition and operating results, including our revenue and expenses; franchise acquisitions and the potential impact thereof, including with respect to franchise royalty fees and advisory fees; the anticipated effects of our methodologies on the impact of financial market volatility on our revenue; our expectations around the timing of workplace campaigns; our expenses and revenue; our effective tax rate; our deferred tax assets; cash payments related to tax withholding obligations, including timing and amounts thereof; our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing; factors which may impact our professional management operating metrics; the utility of these metrics, including our belief that DC AUC and eligible prospective clients are useful indicators of potential DC AUM and clients available for enrollment into our professional management service; the anticipated effect of campaigns, promotions and stock market performance on client cancellations; our ability to retain and attract customers; our regulatory environment; our expectations regarding the amounts, timing and frequency of any payment of dividends; our expectations for increasing headcount and granting equity awards, and the potential financial and accounting impact related thereto; impact of our accounting policies; and non-GAAP financial measures. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the risks set forth throughout this Report, including under Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Financial Engines, Inc. was incorporated on May 13, 1996 under the laws of the state of California and is headquartered in Sunnyvale, California. In February 2010, Financial Engines, Inc. was reincorporated in the state of Delaware. The Company’s investment advisory and management services are provided through its subsidiary, Financial Engines Advisors L.L.C., a federally registered investment adviser. In February 2016, we completed the acquisition of Kansas City 727 Acquisition LLC, a Delaware limited liability corporation, as well as its subsidiaries and certain affiliates (collectively, “The Mutual Fund Store”). The Mutual Fund Store operates as a nationwide system of registered investment advisors. References in this Report to “Financial Engines,” “our company” “we,” “us” and “our” refer to Financial Engines, Inc. and its consolidated subsidiaries during the periods presented unless the context requires otherwise.  

Overview

Headquartered in Sunnyvale, CA, Financial Engines was co-founded in 1996 by Nobel Prize-winning economist William F. Sharpe with the goal of offering affordable, personalized investment advice and management, free of product conflicts, to all individuals, regardless of their wealth or investment expertise.

We are a leading provider of technology-enabled comprehensive financial advisory services, including financial planning, investment management and retirement income solutions, covering accounts including employer-sponsored defined contribution (DC) accounts (401(k), 457, and 403(b) plans), IRA accounts, and taxable accounts. We help individuals, either online or with an advisor, develop a strategy to reach investing and retirement goals by offering a comprehensive set of services, including holistic, personalized plans for saving and investing, assessments of retirement income, and the option to meet face-to-face with a dedicated financial advisor at one of more than 125 advisor centers nationwide.

Our services are primarily delivered in the workplace through relationships with leading plan providers and plan sponsors, and our clients are primarily individuals participating in DC retirement plans, as well as individual investors outside the workplace. Clients are defined as individuals who utilize our services, including professional management, online advice, education or guidance. Included in our services is the use of our cost-efficient, proprietary and scalable advice technology platform.

 

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We maintain two types of relationships with DC plan providers. In direct advisory relationships, we are the primary advisor and a plan fiduciary. In subadvisory relationships, the plan provider (or its affiliate) is the primary advisor and plan fiduciary, and we act in a subadvisory capacity.

Revenue

We generate revenue through three primary sources: professional management, platform and other revenue.

Professional Management Revenue

We derive professional management revenue from client fees paid by or on behalf of both DC and individual investor clients who are enrolled in our professional management service for the management of their account assets. Our professional management service is a discretionary investment advisory service that can include comprehensive financial planning, investment management and retirement income services that are designed to help clients develop and execute a savings and investing strategy for reaching their retirement and other financial goals.  Our professional management service includes advice on DC accounts, IRA accounts and taxable accounts. Our retirement income solutions, including Income+ and Retirement Paycheck, which are features of our professional management service, provide clients approaching or in retirement with discretionary portfolio management with an income objective and steady monthly payments from their accounts during retirement, including Social Security claiming guidance and planning. The services are generally made available to prospective clients by written agreements with the plan provider, the plan sponsor and the plan participant in a DC plan and by written agreements with individual investors; and may be provided on a subadvisory basis.

Our arrangements with clients using professional management services generally provide for fees based on the value of assets we manage and are generally payable quarterly in arrears. The majority of our professional management client fees across both advisory and subadvisory relationships for DC accounts are calculated on a monthly basis, as the product of client fee rates and the value of assets under management (AUM) at or near the end of each month. In general, we expect this methodology to reduce the impact of financial market volatility on our professional management revenue, although this methodology may result in lower client fees if the financial markets are down when client fees are calculated, even if the market had performed well earlier in the month or the quarter. For IRA and taxable accounts, our client fees are calculated on a quarterly basis beginning at the end of the three-month period following service initiation.

Pursuant to the contracts with our clients, we calculate the fees billed to clients based on the asset amounts in data files as received directly from the account provider or custodian, with no judgments or estimates on our part. None of our professional management fee revenue is based on investment performance or other incentive arrangements. Our fees generally are based on AUM, which is influenced by market performance. Our fees are not based on a share of the capital gains or appreciation in a client’s account. In some cases, our client fees or the applicable fee schedule may adjust downward based on overall participant or DC AUM enrollment performance milestones over time. Our client fees are determined by the value of the assets in the client’s account at specified dates and are recognized as the services are performed.

In order to encourage utilization of our professional management services, we use a variety of promotional and communication techniques, some of which can potentially impact the amount of revenue recognized, the timing of revenue recognition or both. Historically, we have seen a general preference from workplace plan sponsors to commence campaigns in the second and third quarters of the year and we expect this trend to continue. We would generally expect our professional management revenue to continue to increase as a percentage of overall revenue, which will cause our revenue to become increasingly more sensitive to market performance.

Professional management revenue is earned as services are performed. We use estimates primarily related to the portion of professional management revenue that has not been invoiced and is not otherwise due from the customer at period end. We estimate the amount of revenue that would be due at the end of the period as if the contract were terminated as of that date. This calculation, referred to as the hypothetical liquidation method, is determined by multiplying the actual AUM at the end of the period for each client by the basis points of the respective client from the most recent quarterly billing cycle.

Professional Management Revenue Metrics

AUM is defined as the amount of assets that we manage as part of our professional management service, including assets managed through franchises. Our AUM is the value of assets under management as reported by plan providers and custodians at or near the end of each month or quarter.

 

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DC AUM is the DC asset balances associated with clients enrolled in the professional management service, including those at plan sponsors where enrollment campaigns are not yet concluded or have not yet commenced, as of a specified date. We measure enrollment in our professional management service by DC clients as a percentage of eligible DC prospective clients and by DC AUM as a percentage of defined contribution account Assets Under Contract (DC AUC). IRA and taxable account AUM represent the IRA and taxable account asset balances associated with those clients enrolled in the professional management service as of a specified date.

As of June 30, 2016, we had approximately $115.3 billion of DC AUM and $10.0 billion of IRA and taxable account AUM.

DC AUC is defined as the amount of assets in DC plans under contract for which the professional management service has been made available to eligible prospective clients in the workplace. Our DC AUC and eligible prospective clients do not include assets or prospective clients in DC plans where we have signed contracts but for which we have not yet made the professional management service available. Eligible prospective clients and DC AUC are reported by plan providers with varying frequency and at different points in time, and are not always updated or marked to market. If markets have declined or if assets have left the plan since the reporting date, our DC AUC may be overstated. If markets have risen, or if assets have been added to the plan, since the reporting date, our DC AUC may be understated. Some prospective clients 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 prospective client. Certain securities within a plan prospective client’s account may be ineligible for management by us, such as employer stock subject to trading restrictions, and we do not manage or charge a fee for that portion of the account. In both of these circumstances, assets of the relevant prospective clients may be included in DC AUC but cannot be converted to DC AUM. We believe that DC AUC can be a useful indicator of the additional DC plan assets available for enrollment efforts that, if successful, would result in these assets becoming DC AUM. We believe that total eligible prospective clients provides a useful approximation of the number of workplace-based prospective clients available for enrollment into our professional management service.

As of June 30, 2016, we had approximately $992 billion of DC AUC and 9.4 million prospective clients in DC plans for which the professional management service is available, which includes approximately $417 billion of DC AUC and 4.0 million prospective clients in DC plans at 184 plan sponsors for which Income+ has been made available to prospective clients.

As of June 30, 2016, we had 348 Income+ plan sponsor contracts, including the aforementioned 184 plan sponsors where Income+ has been made available to prospective clients and 164 plan sponsors for which the service has not yet been made available, representing a total of approximately $558 billion of DC AUC and 5.4 million prospective clients.

As of June 30, 2016, approximately 10.0% of DC eligible prospective clients were enrolled as clients and 11.6% of DC AUC was enrolled as DC AUM.

As of June 30, 2016, the approximate aggregate style exposure of the accounts we managed was as follows:

 

 

 

The percentages in the table above can be affected by the asset exposures of the overall market portfolio of the accounts we manage, the demographics of our client population including the adoption of Income+, the number of clients 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 clients for whom we have completed the transition from their initial portfolio.

 

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Changes in AUM

The following definitions are provided and relate to the table below illustrating estimated changes in our AUM over the last four quarters.

New assets from new clients represents the aggregate amount of new AUM, measured at or near the end of the quarter, from new clients who enrolled in our professional management service within the quarter. We receive DC account balances for each new client at least weekly, and accordingly, we are generally able to measure the DC account asset balances within a week of the end of the quarter for new clients. For new clients with new IRA and taxable accounts assets, we are generally able to measure the account balances as of the last day of the quarter.  New client assets for IRA and taxable accounts are those assets acquired within a ninety-day period after enrollment during which assets may be rolled into those accounts, and new client assets acquired in the subsequent quarter after enrollment are valued as of the last day of that subsequent quarter.

New assets from existing clients represents the aggregate amount of new AUM within the quarter from existing clients who originally enrolled in our professional management service during a prior period. These new assets include employer and employee contributions into DC plan accounts, as well as assets added by existing clients into new or existing IRA and taxable accounts. Employer and employee DC contributions data is estimated each quarter from annual contribution rates based on data received from plan providers or plan sponsors. Typically, we receive data from plan providers or plan sponsors via weekly client files, allowing us to estimate contributions for those clients for whom we have received this data. After the first 90 days, new clients become existing clients. For new IRA and taxable account assets, we are generally able to measure the new assets from existing clients as of the date the additional assets are deposited.

Voluntary cancellations represent the aggregate amount of assets, measured at or near the start of the quarter, for clients who have voluntarily terminated their professional management service relationship within the period. Clients may cancel at any time without any requirement to provide advance notice. Our quarter-end AUM excludes all of the assets of any accounts cancelled by a client prior to the end of the last day of the quarter. We receive DC account balances for each client at least weekly, and accordingly, we are able to measure the DC account asset balances within a week of the start of the quarter for existing clients. For existing IRA and taxable accounts assets, we are able to measure the account balances as of the first day of the quarter.

Involuntary cancellations represent the aggregate amount of DC assets, measured at or near the start of the quarter, for clients whose professional management service relationship was terminated within the quarter period for reasons other than a voluntary termination.  Such cancellations may occur when all of the client’s account balances have been reduced to zero or when the cancellation of a plan sponsor contract for the professional management service has become effective within the period. Plan sponsors may cancel their contract for the provision of professional management services 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 clients of that plan sponsor is included in our AUM until the effective date of the cancellation, after which it is no longer part of our AUM. If a client’s accounts value falls to zero, either upon the effective date of a sponsor cancellation or as a result of the client transferring the entire balance of their accounts, we will terminate their professional management service relationship.

Assets withdrawn by existing clients includes voluntary withdrawals from IRA and taxable accounts.  Voluntary withdrawals represent the aggregate amount of assets, measured at the time of withdrawal, for clients who took automatic distributions or who otherwise withdrew funds from their managed IRA or taxable accounts without terminating their professional management service relationship within the period.

Market movement and other factors affecting AUM include estimated market movement, plan administrative and investment advisory fees, client loans, hardship and other defined contribution account withdrawals, defined contribution account retirement income drawdown payouts and timing differences for the data feeds for clients enrolled in our professional management service throughout the period. We would expect that market movement would typically represent the most substantial portion of this line item in any given quarter.

 

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The following table illustrates estimated changes in our AUM over the last four quarters:

 

 

For the last four quarters, the weekly member files contained annual contribution rates, employer matching and salary levels for a subset of our total members, representing approximately 92-97% of our overall AUM. The average contribution rate is calculated using this data and extrapolated to approximate 100% of employee and employer contributions for our overall AUM. Our AUM increases or decreases based on several factors. AUM can increase due to market performance, by the addition of new assets as prospective clients enroll into our professional management service at existing and new sponsors, and by the addition of new assets from existing clients, including from employee and employer contributions into their DC accounts. AUM can decrease due to market performance and by the reduction of assets as a result of clients terminating their relationships, clients rolling their assets out of their accounts, and sponsors canceling the professional management service. Historically, client cancellation rates have typically increased during periods where there has been a significant decline in stock market performance. In addition, client cancellation rates are typically the highest during the six months immediately following the completion of a given promotion, and certain types of promotional techniques may result in higher than average cancellation rates at the end of the promotional period.

A substantial portion of the assets we manage is invested in equity securities, the market prices of which can vary substantially based on changes in economic conditions. An additional portion is invested in fixed income securities, which will generally have lower volatility than the equity market. Therefore, while any changes in equity market performance would significantly affect the value of our AUM, particularly for the AUM invested in equity securities, such changes would typically result in lower volatility for our AUM than the volatility of the equity market as a whole. Because a substantial portion of our revenue is derived from the value of our AUM, changes in fixed income or equity market performance could significantly affect the amount of revenue in a given period. If any of these factors reduces our AUM, the amount of client fees we would earn for managing those assets would decline, which in turn could negatively impact our revenue.

The trends associated with our professional management revenue are driven primarily by trends related to our AUM, as well as the trends related to client fees. The factors primarily affecting our AUM include our ability to enroll and retain clients in our professional management services, to retain existing and to sign new contracts with sponsors, providers and custodians, the level of employee, employer and individual investor contributions and market performance. The factors primarily affecting our client fees include the value of services provided and related industry pricing trends, as well as the contractually-negotiated fee rates we receive for our DC subadvisory services and fee changes as a result of achieving certain sponsor-based enrollment milestones for our DC direct advisory services.

 

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Platform Revenue

We derive platform revenue from recurring, subscription-based fees for access to our services, including professional management, online advice, education and guidance, and to a lesser extent, from setup fees. Online advice is a non-discretionary, Internet-based investment advisory service, which includes features such as: recommendations among the investment alternatives available in the DC 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. The service also provides investment advice on IRA and taxable accounts where made available by the plan sponsor and selected by the client. Clients may use the service as frequently as they choose to monitor progress toward their financial goals, receive forecasts and investment recommendations and access educational content at our website. The arrangements generally provide for our fees to be paid by the plan sponsor, plan provider or the DC plan itself, depending on the plan structure. Platform revenue is generally paid annually or quarterly 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 seven years.

Other Revenue

Other revenue includes franchise royalty fees, fees for non-retirement account servicing, reimbursement for a portion of marketing and client materials from certain subadvisory relationships and reimbursement for providing personal statements to prospective clients from a limited number of plan sponsors. Franchise royalty fees are recognized as revenue as the services are performed by the franchisees based on specified percentages of the franchisees’ advisory fees billed to their clients. Franchise royalty fees charged by the franchisees to their clients are primarily based on predetermined percentages of the market value of the AUM and are affected by changes in the AUM. The fees for non-retirement account servicing do not impact client fees paid for professional management, and are disclosed in the applicable Form ADV of the Company’s advisory subsidiaries. Costs associated with reimbursed printed fulfillment materials are expensed to cost of revenue as incurred.

Costs and Expenses

Employee compensation and related expenses represent our largest expense and include wages expense, cash incentive compensation expense, variable cash compensation expense, commission expense, benefits expenses, employer payroll tax expense and non-cash stock-based compensation expense. Our cash incentive compensation plan is based, in part, on achieving pre-determined annual corporate financial objectives and may result in an increased current period expense while the anticipated revenue benefits associated with the achievement of such corporate financial objectives may be realized in future periods. We allocate compensation and other related expenses including non-cash stock-based compensation to our cost of revenue, research and development, sales and marketing, general and administrative and internal use software, which is included in amortization of intangible assets. We expect our headcount to increase over time, and to be a primary area of growth in our costs and expenses. We anticipate granting equity awards to board members and certain of our employees each year that may result in significant non-cash stock-based compensation expense. The largest grant events typically occur in the first and fourth quarters, although significant awards may also be granted at other times. We anticipate providing annual compensation increases to certain of our employees each year, typically in the second quarter, that may result in an increase primarily to wages and cash incentive compensation expenses.

Other costs and expenses include the costs of fees paid to plan providers related to the exchange of plan and prospective client data as well as implementing our transaction instructions for client accounts, printed marketing and client materials and postage, advertising, consulting and professional service expenses, facilities expenses, and amortization and depreciation for hardware and software purchases and support.

The following summarizes our cost of revenue and certain significant operating expenses:

Cost of Revenue. Cost of revenue includes fees paid to plan providers for connectivity to plan and plan prospective client data, printed materials fulfillment costs for certain subadvisory relationships for which a portion are reimbursed, printed client materials, and employee-related costs for in-person dedicated advisor centers, including variable cash compensation expense related to ongoing asset servicing activities, and call center advisors, operations, implementations, technical operations, portfolio management and client service administration. Costs in this area are related primarily to payments to third parties, employee compensation and related expenses, facilities expenses, purchased materials and depreciation. Costs for connectivity to plan and prospective client data are expected to increase proportionally with our professional management revenue related to DC AUM. The expenses included in cost of revenue are shared across the different revenue categories, and we are not able to meaningfully allocate such costs between separate categories of revenue. Consequently, all costs and expenses applicable to our revenue are included in the category cost of revenue in our Unaudited Condensed Consolidated Statements of Income.

 

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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, investment methodology, financial research, quality assurance, related administration and other costs that do not qualify for capitalization. Costs in this area are related primarily to employee compensation for our engineering, product development and investment research personnel and associated expenses and, to a lesser extent, external consulting expenses, which relate primarily to support and maintenance of our existing services.

Sales and Marketing. Sales and marketing expense includes costs associated with product and consumer marketing, provider and sponsor relationship management, provider and sponsor marketing, direct sales, corporate communications, public relations, analytics, creative services, sales related call center activities, advertising and live seminars, and printing of, and postage for, marketing materials for direct advisory relationships, including amortization of direct response advertising. Costs in this area are related primarily to employee compensation for sales and marketing personnel and related expenses, and also include commissions, printed materials and general marketing programs. Amounts received for support of marketing and client acquisition efforts are credited ratably to marketing expense. The fees for such support do not impact client fees paid for professional management, and are disclosed in the applicable Form ADV of the company advisory subsidiaries.

General and Administrative. General and administrative expense includes costs for finance, accounting, legal, compliance, risk management and administration. Costs in this area include employee compensation and related expenses and fees for consulting and professional services. We have incurred and we expect that we will continue to incur expenses as a result of being a public company for, among other things, SEC reporting and compliance, including compliance with the Sarbanes-Oxley Act of 2002, director compensation, insurance, and other similar expenses.

Amortization of Intangible Assets. Amortization of intangible assets includes the amortization of acquisition-related assets such as customer relationships, trademarks and trade names over the estimated useful lives using a straight-line method of amortization. It also includes the amortization of internal use software, which includes engineering costs associated with enhancing our advisory service platform and developing internal systems for tracking client data, including AUM, client cancellations and other related client and customer experience statistics. Associated direct development costs are capitalized and amortized using the straight-line method over the estimated lives, typically two to three years, of the underlying technology. Costs associated with internal use software include employee compensation and related expenses, and fees for external consulting services.

Recent Developments       

Acquisition of The Mutual Fund Store

On February 1, 2016, we completed the acquisition of The Mutual Fund Store pursuant to an Agreement and Plan of Mergers (the “Merger Agreement”), dated as of November 5, 2015, as amended, by and among Financial Engines,  Mayberry Acquisition Sub I, LLC, a Delaware limited liability company and a direct wholly owned subsidiary of Financial Engines, Mayberry Acquisition Sub, Inc., a Delaware corporation and a direct wholly owned subsidiary of Financial Engines, Mayberry Acquisition Sub II, LLC, a Delaware limited liability company and a wholly owned third tier subsidiary of Merger Sub 1, Kansas City 727 Acquisition Corporation, a Delaware corporation, TMFS Holdings, Inc., a Nevada corporation, Kansas City 727 Acquisition LLC, a Delaware limited liability corporation (together with its subsidiaries, “The Mutual Fund Store”), and, solely in its capacity as representative of the Sellers, WP Fury Holdings, LLC.  Pursuant to the Merger Agreement, after a series of transactions, The Mutual Fund Store became a wholly-owned subsidiary of Financial Engines.  

At the closing of the Merger, pursuant to the Merger Agreement, we paid an aggregate purchase price of $513 million consisting of approximately $246 million in cash and 9,885,889 shares of our common stock, subject to closing and post-closing adjustments.  A portion of the acquisition consideration was placed in an escrow fund for up to 14 months following the closing for the satisfaction of certain indemnification claims.

Following the closing of the acquisition, investment funds affiliated with Warburg Pincus LLC, the former majority owner of The Mutual Fund Store, held approximately 13% of our then-outstanding shares of common stock.

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which was originally filed as an exhibit to our Current Report on Form 8-K filed on November 9, 2015.  

Franchise Acquisitions in April 2016

In April 2016, the Company completed the acquisition of seven franchises for total aggregate cash consideration of $14.4 million.

 

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Critical Accounting Estimates

Except as described below, there have been no changes in the matters for which we make critical accounting estimates in the preparation of our unaudited condensed consolidated financial statements during the three months ended June 30, 2016, as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2015 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which requires us to make judgments, assumptions and estimates that affect the amounts reported. We have established policies and control procedures which seek to ensure that estimates and assumptions are appropriately governed and applied consistently from period to period. However, actual results could differ from our assumptions and estimates, and such differences could be material.

We believe that the following addition to our critical accounting estimates is necessary to fully understand and evaluate our reported financial results.  Critical accounting estimates involve our most subjective or complex management judgments, and they result from the need to make estimates about the effect of matters that are inherently uncertain and unpredictable.

Purchase Price Accounting

On February 1, 2016, we completed the acquisition of The Mutual Fund Store for aggregate consideration totaling approximately $513 million, consisting of approximately $246 million in cash and 9,885,889 shares of our common stock, subject to certain closing and post-closing adjustments.  A portion of the acquisition consideration was placed in an escrow fund for up to 14 months following the closing for the satisfaction of certain indemnification claims. In April 2016, the Company completed the acquisition of seven franchises for total aggregate cash consideration of $14.4 million. For more information on these acquisitions, see Note 3 to the unaudited condensed consolidated financial statements.

We are required to allocate the purchase consideration paid in a business combination to the tangible and intangible assets acquired and to the liabilities assumed based on their respective acquisition-date fair values, and any residual purchase price is recorded as goodwill. Determining the fair market values of the assets acquired and liabilities assumed at the date of acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of considerable judgment regarding estimates and assumptions. Assumed liabilities are valued based on estimates of anticipated expenditures to be incurred to satisfy the assumed obligations, including contractual liabilities assumed, which require the exercise of professional judgment as to amounts and timing of settlement. Our estimates may include, but are not limited to, future cash flows of an acquired business, the appropriate discount rate, expected customer retention rates and the cost savings expected to be derived from an acquisition. These estimates are inherently difficult, subjective and unpredictable, and if different estimates were used, the purchase price allocation to the acquired assets and liabilities would be different. In addition, we make estimates when we assign useful lives to intangible assets identified as part of our acquisitions. These estimates are also inherently uncertain and if different estimates were used, the useful life over which we amortize intangible assets would be different. Therefore, our assessment of the estimated fair value of each of these assets and liabilities can have a material effect on our financial statements.

We review finite-lived intangible assets for triggering events such as significant changes in operations, customers or future revenue that might indicate the need to impair the assets acquired or change the useful lives of the assets acquired. Intangible assets consist of customer relationships, trademarks and trade names, franchise agreements and favorable/unfavorable operating leases. Factors that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business or significant negative industry or economic trends. If this evaluation indicates that the value of the intangible asset may be impaired, we make an assessment of the recoverability of the net carrying value of the asset over its remaining useful life. If this assessment indicates that the intangible asset is not recoverable, based on the estimated undiscounted future cash flows over the remaining useful life, we reduce the net carrying value of the related intangible asset to fair value. Any such impairment charge could be significant and could have a material adverse effect on our reported financial results. There were no impairments or changes in useful lives of acquired intangible assets during the six months ended June 30, 2016.

 

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Revenue Recognition

We derive professional management revenue from client fees paid by or on behalf of both DC and individual investor clients who are enrolled in our professional management service for the management of their account assets. Our professional management service is a discretionary investment advisory service that can include comprehensive financial planning, investment management and retirement income services that are designed to help clients develop and execute a savings and investing strategy for reaching their retirement and other financial goals.  Franchise royalty fees are categorized to other revenue and are recognized as revenue as the services are performed by the franchisees based on specified percentages of the franchisees’ advisory fees billed to their clients. We recognize revenue when all four of the following revenue recognition criteria have been met: persuasive evidence of an arrangement exists, the service has been performed, the fee is fixed or determinable and collection is probable.  

Determining whether and when certain criteria have been satisfied often involves estimates that can have an impact on the amount of revenue we report.  These estimates primarily relate to a portion of our professional management revenue related to IRA and taxable accounts, and to a lesser extent, to franchise royalties in other revenue, which are earned as services performed, but that has not been invoiced and is not otherwise due from the customer at period end.  

We generate professional management and franchise fee revenue based on the value of these assets managed for clients, the balance of which can fluctuate every period due to inflows and outflows of assets, as well as market movement. For IRA and taxable account assets, including franchise fees, our client fees are calculated on a quarterly basis beginning at the end of the three-month period following service initiation. The Company estimates the amount of revenue that would be due to it at the end of the period as if the contract were terminated at that date. This calculation, referred to as the hypothetical liquidation method, is determined by multiplying the actual AUM at the end of the period for each client by the basis points of the respective client from the most recent quarterly billing cycle.

A substantial portion of the assets we manage is invested in equity securities, the market prices of which can vary substantially based on changes in economic conditions. Actual revenue may be higher or lower depending upon changes in the AUM and basis points used as of the end of our quarter versus the actual AUM and or basis points used when calculating client fees at the next quarterly billing cycle.  We will record this adjustment to professional management revenue in the subsequent quarterly period in which the next billing cycle occurs. In the event of client cancellations before the next billing cycle, we would calculate and initiate an interim, pro-rata billing which would allow for payment by the client for the fees we have earned during the interim performance period.

The amount of professional management revenue recognized using these estimates was $8.4 million for the three months ended June 30, 2016. The table below evaluates the sensitivity of the most significant component of the estimated revenue, which is a change in AUM due to market movement. The table provides an estimate of the increase (decrease) in revenue compared to what was recognized due to different levels of change in AUM between the estimated and the actual calculation.

 

 

In addition, when utilizing certain types of promotional periods, fees payable by clients are deferred for a specified period, and are waived if the client cancels within the specified introductory period. The Company recognizes revenue during certain of these fee deferral periods based on the estimate of the expected fee retention rate determined by historical experience of similar arrangements. The revenue recognized related to this estimate was immaterial for the three months ended June 30, 2016.

 

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Results of Operations

The following tables set forth our results of operations. The period to period comparison of financial results is not necessarily indicative of future results.

Comparison of Three Months Ended June 30, 2015 and 2016

 

 

Revenue

Total revenue increased $28.0 million, or 36%, from $78.2 million for the three months ended June 30, 2015 to $106.2 million for the three months ended June 30, 2016. This increase was due primarily to growth in professional management revenue and other revenue of $26.4 million and $2.2 million, respectively, for the three months ended June 30, 2016 compared to the three months ended June 30, 2015, offset by a decrease of $0.6 million in platform revenue. Revenue due to the acquisition of The Mutual Fund Store was $27.4 million for the three months ended June 30, 2016. Professional management revenue and platform revenue comprised 90% and 7%, respectively, of total revenue for the three months ended June 30, 2016, and 89% and 10%, respectively, of total revenue for the three months ended June 30, 2015.

As we repurchase franchises, we would expect franchise royalty fees categorized in other revenue to decrease and professional management revenue to increase, as we will be entitled to receive all of the advisory fees rather than a royalty percentage. We estimate the incremental annual revenue run rate related to the remaining franchises as of June 30, 2016 to be approximately $7 million based on AUM as of June 30, 2016.

Professional Management Revenue

Professional management revenue increased $26.4 million, or 38%, from $69.7 million for the three months ended June 30, 2015 to $96.1 million for the three months ended June 30, 2016. This increase was due primarily to an increase in the average AUM used to calculate fees from approximately $113.0 billion for the three months ended June 30, 2015 to approximately $125.0 billion for the three months ended June 30, 2016, as well as an increase in average basis points over the prior period as result of client agreements associated with acquired assets. This increase in average AUM was driven by new assets from new and existing clients, new AUM of $10.0 billion as measured on June 30, 2016 acquired through The Mutual Fund Store acquisition, partially offset by cancellations and market performance. Approximately $25.2 million of professional management revenue for the three months ended June 30, 2016 was associated with acquisitions.  

 

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Platform Revenue

Platform revenue decreased $0.6 million, or 7%, from $7.7 million for the three months ended June 30, 2015 to $7.2 million for the three months ended June 30, 2016. This decrease was due primarily to a small number of sponsor terminations, as well as platform fee reductions resulting from a small number of sponsors converting to a subadvisory plan provider or adding new services. These decreases were partially offset by an increase in platform fees due to service availability at new sponsors.

Other Revenue

Other revenue increased $2.2 million, or 269%, from $0.8 million for the three months ended June 30, 2015 to $3.0 million for the three months ended June 30, 2016. This increase was due primarily to the addition of account servicing fee revenue and franchise royalty of $2.0 million as a result of acquisition activity.

Costs and Expenses

Costs and expenses increased $24.9 million, or 38%, from $66.2 million for the three months ended June 30, 2015 to $91.1 million for the three months ended June 30, 2016. Cost of revenue increased $12.8 million, research and development expense increased $0.1 million, sales and marketing expense increased $5.6 million, general and administrative expense increased $3.5 million and amortization of intangible assets increased $2.8 million for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. Expenses increased during the three months ended June 30, 2016 due primarily to increased personnel and operations related to the acquisition of The Mutual Fund Store.

Across all functional areas, employee-related expenses such as wages and cash incentive compensation expense increased primarily as a result of acquisition activity, which included the addition of approximately 300 new employees as of February 1, 2016. Non-cash stock-based compensation also increased across all functional areas due primarily to awards granted to employees acquired in February 2016, as well as to awards granted to certain executives in May 2016.  

Our Board of Directors approved equity awards with an estimated expense value of $14.3 million, net of estimated forfeitures, to certain of the new executive and non-executive employees related to acquisition activity, which were granted in February 2016. We will account for these equity awards over a four-year vesting period utilizing the graded-vesting attribution method.

In February 2016, our Compensation Committee approved the future grant of stock options and RSUs in May 2016 to certain executives and other employees, contingent upon receiving stockholder approval at the annual meeting of stockholders in May 2016 for additional shares to be made available under our 2009 Stock Incentive Plan.  In May 2016, upon obtaining such stockholder approval, $10.9 million of stock options and RSUs were granted to certain executives and other employees, net of estimated forfeitures. We will account for these equity awards over a four-year vesting period utilizing the graded-vesting attribution method.

The non-cash stock-based compensation expense associated with these awards will be in addition to the amortization of both previously and subsequently granted stock awards, including other awards granted in 2016, and expected to be granted in 2016, all of which will utilize the graded-vesting attribution method. We plan to continue to grant equity awards during fiscal year 2016 to certain of our existing employees, new employees and board members.

Effective February 1, 2016, the performance metrics related to the 2013-2017 Long-Term Incentive Program (LTIP) will be based on the financial results at the consolidated level, per the terms of the LTIP agreements. The amounts earned under the LTIP based on such consolidated financial results may result in an increase or decrease in non-cash stock-based compensation expense for the year ended December 31, 2016.

 

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Cost of Revenue

Cost of revenue increased $12.8 million, or 38%, from $33.7 million for the three months ended June 30, 2015 to $46.5 million for the three months ended June 30, 2016. There was a $4.6 million increase in employee-related expenses, including wages, a $0.6 million increase in cash incentive compensation expense and a $0.7 million increase non-cash stock-based compensation for the three months ended June 30, 2016 compared to the three months ended June 30, 2015, due primarily to the majority of acquired employees categorized to cost of revenue as they are advisors and other employees associated with advisor center servicing activities. Variable cash compensation expense related to ongoing asset servicing activities by advisor center advisors resulted in an increase of $3.1 million.  Facilities–related overhead expenses, including rent and depreciation, increased by $3.3 million, due primarily to increased allocation based on headcount, as well as increased facilities expenses related to the acquired advisor centers. Non-capitalized equipment-related expenses increased $0.5 million and a variety of other expenses increased $0.8 million in total. These increases were partially offset by a $0.4 million decrease in data connectivity fees due to revisions to fees paid to certain plan providers and a $0.4 million decrease in printed member materials costs as we move more towards electronic delivery. As a percentage of revenue, cost of revenue increased from 43% for the three months ended June 30, 2015 to 44% for the three months ended June 30, 2016. The increase as a percentage of revenue was due primarily to variable cash compensation expense for advisors, facilities-related overhead expenses and other employee-related expenses, including wages, increasing at a faster rate than revenue, partially offset by data connectivity fees increasing at a slower rate than revenue. We expect our cost of revenue as a percent of revenue to be approximately 43% for the year ended December 31, 2016, which we expect will include costs related to advisor centers personnel and operations after the repurchase of franchises.

Research and Development

Research and development expense increased $0.1 million, or 1%, from $8.8 million for the three months ended June 30, 2015 to $9.0 million for the three months ended June 30, 2016. There was a $0.8 million increase in employee-related expense, including wages due primarily to annual compensation increases and headcount growth, and a $0.3 million increase in non-cash stock-based compensation expense for the three months ended June 30, 2016 compared to the three months ended June 30, 2015.  A variety of other expenses increased $0.3 million in total. These increases were partially offset by a $0.4 million decrease in consulting expense and a $0.9 million increase in the amount of internal use software capitalized, due primarily to increased labor rates and the number of hours dedicated to internal use software projects. As a percentage of revenue, research and development expense decreased from 11% for the three months ended June 30, 2015 to 9% for the three months ended June 30, 2016. The decrease as a percentage of revenue was due primarily to employee-related expense, including wages, growing at a slower rate than revenue as well as a decrease in consulting expenses and an increase in capitalized internal use software.

Sales and Marketing

Sales and marketing expense increased $5.6 million, or 35%, from $16.1 million for the three months ended June 30, 2015 to $21.7 million for the three months ended June 30, 2016. There was a $2.5 million increase in marketing programs expense, due primarily to radio and digital advertising, partially offset by amounts received for support of marketing and client acquisition efforts for the three months ended June 30, 2016 compared to the three months ended June 30, 2015.  Travel and entertainment expenses increased $1.1 million due primarily to an annual national advisors conference. There was a $0.5 million increase in employee-related expenses, including wages and a $0.4 million increase in cash incentive compensation expense due primarily to the addition of employees as the result of acquisition activity and annual compensation increases, as well as a $0.5 million increase non-cash stock-based compensation. Consulting expenses increased $0.3 million and facilities–related overhead expenses, including rent and depreciation, increased by $0.3 million.  As a percentage of revenue, sales and marketing expense decreased from 21% for the three months ended June 30, 2015 to 20% for the three months ended June 30, 2016. The decrease as a percentage of revenue was due primarily to employee-related expense, including wages, growing at a slower rate than revenue, partially offset by marketing programs due primarily to radio and digital advertising growing at a faster rate than revenue.

 

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General and Administrative

General and administrative expense increased $3.5 million, or 56%, from $6.3 million for the three months ended June 30, 2015 to $9.8 million for the three months ended June 30, 2016. There was a $1.0 million increase in employee-related expenses, including wages, and a $0.5 million increase in cash incentive compensation expense, due primarily to the addition of employees as the result of acquisition activity and annual compensation increases, as well as a $0.7 million increase in non-cash stock-based compensation expense for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. There was also a $0.9 million  increase in consulting and professional services expenses due primarily to acquisition-related integration activities. In addition, there was a $0.3 million increase in travel and entertainment expenses and an increase of $0.4 million in a variety of other expenses in total. These increases were partially offset by a $0.3 million decrease in facilities–related overhead expenses, including rent and depreciation. As a percentage of revenue, general and administrative expense increased from 8% for the three months ended June 30, 2015 to 9% for the three months ended June 30, 2016. The increase as a percentage of revenue was due primarily to consulting expense, employee-related expenses, including wages and cash incentive compensation expense increasing at a faster rate than revenue as the result of acquisition activity.

Amortization of Intangible Assets

Amortization of intangible assets increased $2.8 million, or 220%, from $1.3 million for the three months ended June 30, 2015 to $4.1 million for the three months ended June 30, 2016, due primarily to the addition of amortization of customer relationships, trademarks and trade names associated with acquisition activity.

Income Taxes

Income tax expense increased from $3.6 million for the three months ended June 30, 2015 to $5.6 million for the three months ended June 30, 2016. Our effective tax rate increased from 30% for the three months ended June 30, 2015 to 38% for the three months ended June 30, 2016. This increase in the effective tax rate was due primarily to the recognition of tax benefits upon resolution of income tax uncertainties and changes in state taxes during the three months ending June 30, 2015, which lowered our effective tax rate during that period. We would expect to see an effective tax rate of approximately 38-40%, excluding the effect of research and development credits, any changes in valuation allowances, and discrete items such as disqualifying stock dispositions in future periods.

As of June 30, 2016, we continue to believe that sufficient positive evidence exists from historical operations and future projections to conclude that we are more likely than not to fully realize our federal deferred tax assets and our State of California deferred tax assets in future periods. We continuously evaluate additional facts representing positive and negative evidence in the determination of the realizability of the deferred tax assets.

 

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Comparison of Six Months Ended June 30, 2015 and 2016

 

 

Revenue

Total revenue increased $45.1 million, or 29%, from $153.2 million for the six months ended June 30, 2015 to $198.3 million for the six months ended June 30, 2016. This increase was due primarily to growth in professional management revenue and other revenue of $42.6 million and $3.9 million, respectively, for the six months ended June 30, 2016 compared to the six months ended June 30, 2015, offset by a decrease of $1.4 million in platform revenue. Revenue due to the acquisition of The Mutual Fund Store was $44.5 million for the six months ended June 30, 2016. Professional management revenue and platform revenue comprised 90% and 7%, respectively, of total revenue for the six months ended June 30, 2016, and 89% and 10%, respectively, of total revenue for the six months ended June 30, 2015.

Professional Management Revenue

Professional management revenue increased $42.6 million, or 31%, from $136.3 million for the six months ended June 30, 2015 to $178.9 million for the six months ended June 30, 2016. This increase was due primarily to an increase in the average AUM used to calculate fees from approximately $109.6 billion for the six months ended June 30, 2015 to approximately $119.9 billion for the six months ended June 30, 2016, as well as an increase in average basis points over the prior period as a result of client agreements associated with acquired assets. This increase in average AUM was driven by new assets from new and existing clients, new AUM of $10.0 billion as measured on June 30, 2016 acquired through The Mutual Fund Store acquisition, partially offset by cancellations and market performance. Approximately $40.6 million of professional management revenue for the six months ended June 30, 2016 was associated with acquisitions.

Platform Revenue

Platform revenue decreased $1.4 million, or 9%, from $15.6 million for the six months ended June 30, 2015 to $14.3 million for the six months ended June 30, 2016. This decrease was due primarily to a small number of sponsor terminations, as well as platform fee reductions resulting from a small number of sponsors converting to a subadvisory plan provider or adding new services. These decreases were partially offset by an increase in platform fees due to service availability at new sponsors.

 

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Other Revenue

Other revenue increased $3.9 million, or 301%, from $1.3 million for the six months ended June 30, 2015 to $5.1 million for the six months ended June 30, 2016. This increase was due primarily to the addition of account servicing fee revenue and franchise royalty of $3.7 million as a result of acquisition activity.

Costs and Expenses

Costs and expenses increased $46.8 million, or 36%, from $129.0 million for the six months ended June 30, 2015 to $175.8 million for the six months ended June 30, 2016. Cost of revenue increased $21.3 million, research and development expense increased $0.5 million, sales and marketing expense increased $9.4 million, general and administrative expense increased $11.0 million and amortization of intangible assets increased $4.7 million for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Expenses increased during the six months ended June 30, 2016 due primarily to increased personnel and operations related to the acquisition of The Mutual Fund Store.

Across all functional areas, employee-related expenses such as wages and cash incentive compensation expense increased primarily as a result of acquisition activity, which included the addition of approximately 300 new employees as of February 1, 2016.

Cost of Revenue

Cost of revenue increased $21.3 million, or 33%, from $64.6 million for the six months ended June 30, 2015 to $85.9 million for the six months ended June 30, 2016. There was a $7.5 million increase in employee-related expenses, including wages, a $1.0 million increase in cash incentive compensation expense and a $1.0 million increase non-cash stock-based compensation for the six months ended June 30, 2016 compared to the six months ended June 30, 2015, due primarily to the majority of acquired employees categorized to cost of revenue as they are advisors and other employees associated with advisor center servicing activities. Variable cash compensation expense related to ongoing asset servicing activities by advisor center advisors resulted in an increase of $5.0 million.  Facilities–related overhead expenses, including rent and depreciation, also increased by $5.5 million, due primarily to increased allocation based on headcount as well as increased facilities expenses related to the acquired advisor centers. Non-capitalized equipment-related expenses increased $0.9 million, hosting and production services increased $0.3 million, business operations expenses increased $0.3 million and a variety of other expenses increased $0.7 million in total. These increases were partially offset by a $0.6 million decrease in printed marketing and member materials costs as we move more towards electronic delivery and a $0.3 million decrease in data connectivity fees due to revisions to fees paid to certain plan providers. As a percentage of revenue, cost of revenue increased from 42% for the six months ended June 30, 2015 to 43% for the six months ended June 30, 2016. The increase as a percentage of revenue was due primarily to variable cash compensation expense for advisors, facilities-related overhead expenses and other employee-related expenses, including wages, increasing at a faster rate than revenue, partially offset by data connectivity fees increasing at a slower rate than revenue.

Research and Development

Research and development expense increased $0.5 million, or 3%, from $17.8 million for the six months ended June 30, 2015 to $18.2 million for the six months ended June 30, 2016. There was a $2.1 million increase in employee-related expense, including wages, and a $0.5 million increase in cash incentive compensation expense, due primarily to annual compensation increases and headcount growth for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. Facilities–related overhead expenses, including rent and depreciation, increased by $0.3 million. These increases were partially offset by a $0.8 million decrease in consulting expense and a $1.6 million increase in the amount of internal use software capitalized, due primarily to increased labor rates and the number of hours dedicated to internal use software projects. As a percentage of revenue, research and development expense decreased from 11% for the six months ended June 30, 2015 to 9% for the six months ended June 30, 2016. The decrease as a percentage of revenue was due primarily to employee-related expense, including wages, and non-cash stock-based compensation expense growing at a slower rate than revenue as well as a decrease in consulting expenses and an increase in capitalized internal use software.

 

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Sales and Marketing

Sales and marketing expense increased $9.4 million, or 31%, from $30.7 million for the six months ended June 30, 2015 to $40.1 million for the six months ended June 30, 2016. There was a $4.0 million increase in marketing programs expense, due primarily to radio and digital advertising, partially offset by amounts received for support of marketing and client acquisition efforts for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.  Travel and entertainment expenses increased $1.2 million due primarily to an annual national advisors conference. Consulting expenses increased $1.4 million, due primarily to outside marketing services related mainly to brand and pricing evaluations. There was a $1.4 million increase in employee-related expense, including wages, and a $0.9 million increase in cash incentive compensation expense, due primarily to the addition of employees as the result of acquisition activity and annual compensation increases, as well as a $0.6 million increase in non-cash stock-based compensation expense. Facilities–related overhead expenses, including rent and depreciation, increased by $0.4 million. These increases were partially offset by a total of $0.5 million in decreases related to a variety of other expenses.  As a percentage of revenue, sales and marketing expense remained constant at 20% for both the six month periods ended June 30, 2015 and 2016.

General and Administrative

General and administrative expense increased $11.0 million, or 82%, from $13.4 million for the six months ended June 30, 2015 to $24.4 million for the six months ended June 30, 2016. There was a $6.9 million increase in consulting and professional services expenses, due primarily to fees related to the acquisition of The Mutual Fund Store for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 when there was no acquisition activity. In addition, there was a $2.2 million increase in employee-related expenses, including wages, and a $1.1 million increase in cash incentive compensation expense, due primarily to the addition of employees as the result of acquisition activity, as well as annual compensation increases. In addition, there was a $0.5 million increase in travel and entertainment expenses and a $0.3 million increase in other equipment related expenses. As a percentage of revenue, general and administrative expense increased from 9% for the six months ended June 30, 2015 to 13% for the six months ended June 30, 2016. The increase as a percentage of revenue was due primarily to consulting and professional services expense increasing at a faster rate than revenue as the result of acquisition activity.

Amortization of Intangible Assets

Amortization of intangible assets increased $4.7 million, or 190%, from $2.5 million for the six months ended June 30, 2015 to $7.1 million for the six months ended June 30, 2016, due primarily to the addition of amortization of customer relationships, trademarks and trade names associated with acquisition activity.

Income Taxes

Income tax expense increased from $7.9 million for the six months ended June 30, 2015 to $9.7 million for the six months ended June 30, 2016. Our effective tax rate increased from 33% for the six months ended June 30, 2015 to 44% for the six months ended June 30, 2016. This increase in the effective tax rate was due primarily to non-deductible expenditures incurred in connection with acquiring The Mutual Fund Store during the three months ended March 31, 2016.  The lower effective tax rate for the six months ended June 30, 2015 was due primarily to the recognition of tax benefits upon resolution of income tax uncertainties and changes in state taxes.

 

 

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Non-GAAP Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share

Adjusted EBITDA represents net income before net interest expense (income), income tax expense (benefit), depreciation, amortization of intangible assets, including internal use software, amortization and impairment of direct response advertising, amortization of deferred sales commissions, non-cash stock-based compensation expense and expenses related to the closing and integration of acquisitions, if applicable for the period. Adjusted net income represents net income before non-cash stock-based compensation expense, amortization of intangible assets related to assets acquired, including customer relationships, trade names and trademarks, expenses related to the closing and integration of acquisitions and certain other items such as the income tax benefit from the release of valuation allowances, if applicable for the period, partially offset by the related tax impact of these items. Adjusted earnings per share is defined as adjusted net income divided by the weighted average of dilutive common share equivalents outstanding.

Our management uses adjusted EBITDA, adjusted net income and adjusted earnings per share as measures of operating performance, for planning purposes (including the preparation of annual budgets), to allocate resources to enhance the financial performance of our business, to evaluate the effectiveness of our business strategies and in communications with our Board of Directors concerning our financial performance. In addition, management currently uses non-GAAP measures in determining cash incentive compensation.

We present adjusted EBITDA, adjusted net income and adjusted earnings per share as supplemental performance measures because we believe that these measures provide our Board of Directors, management and investors with additional information and greater transparency with respect to our performance and decision-making. We feel these performance measures provide investors and others with a better understanding and ability to evaluate our operating results and future prospects and provides the same performance measurement information as utilized by management. Adjusted EBITDA reflects the elements of profitability that can be most directly impacted by employees and our management believes that tracking this metric motivates executives to focus on profitable growth. Management believes it is useful to exclude non-cash stock-based compensation expense from our non-GAAP metrics because this expense is based upon the historical value of each award at the time of grant, which may not be reflective of the current compensation value, and the ongoing expense is outside of the control of management in the current reporting period. Adjusted EBITDA also excludes non-cash items such as depreciation and various types of amortization, as well as income taxes, which are largely non-cash at this point in time. We exclude expenses related to the closing and integration of acquisitions for comparability purposes as these are short-term in nature. Management believes it is useful to exclude these items as they do not necessarily reflect how our business is performing during the period reported.  Adjusted net income and adjusted earnings per share exclude non-cash stock-based compensation expense, expenses related to the closing and integration of acquisitions for comparability purposes as these are short-term in nature, and amortization of intangible assets related to acquired assets including customer relationships, trade names and trademarks for comparability purposes. Adjusted EBITDA, adjusted net income and adjusted earnings per share are not measurements of our financial performance under GAAP and should not be considered as an alternative to net income, operating income, earnings per share or any other performance measures derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.

We understand that, although adjusted EBITDA, adjusted net income and adjusted earnings per share are frequently used by securities analysts, lenders and others in their evaluation of companies, adjusted EBITDA, adjusted net income and adjusted earnings per share have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for an analysis of our results as reported under GAAP. In particular you should consider:

 

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Given the limitations associated with using adjusted EBITDA, adjusted net income and adjusted earnings per share, these financial measures should be considered in conjunction with our financial statements presented in accordance with GAAP and the reconciliation of adjusted EBITDA and adjusted net income to the most directly comparable GAAP measure, net income, and adjusted earnings per share to the most directly comparable GAAP measure, diluted earnings per share. Further, management also reviews GAAP measures and evaluates individual measures that are not included in adjusted EBITDA, such as our level of capital expenditures and equity issuance, among other measures.

The table below sets forth a reconciliation of net income to non-GAAP adjusted EBITDA based on our historical results:

 

 

The table below sets forth a reconciliation of net income to non-GAAP adjusted net income based on our historical results:

 

 

 

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The table below sets forth a reconciliation of diluted earnings per share to non-GAAP adjusted earnings per share based on our historical results:

 

 

For the non-GAAP metrics above, the variances in the comparable periods are consistent with the GAAP variances discussed in the comparisons of the three months ended June 30, 2015 and 2016 as presented above in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

We are currently estimating the remaining integration-related expenses in the second half of 2016 to be approximately $13 million, excluding non-cash stock-based compensation expense, with an additional $10.5 million incurred in the first half of 2016.  This estimate has increased from the estimate provided as of March 31, 2016 due primarily to the expected recognition of estimated future losses related to certain franchises upon acquisition. These expenses will be added back to net income in the calculation of non-GAAP adjusted EBITDA and will be added back to net income in the calculation of non-GAAP adjusted net income.  The related tax effect adjustment will be calculated using an estimated statutory tax rate of 38.2%.

 

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Liquidity and Capital Resources

Sources of Liquidity

As of June 30, 2016, we had total cash and cash equivalents of $101.2 million, compared to $345.2 million of cash, cash equivalents and short-term investments as of December 31, 2015. Since February 1, 2016, we have used approximately $254.6 million of cash related to acquisitions. Over the next twelve months, and in the longer term, we expect that our cash and liquidity needs will be met by existing resources, consisting of cash and cash equivalents and cash generated from ongoing operations. We plan to use existing cash and cash generated in the ongoing operations of our business to fund our current operations and capital expenditures, as well as possible future acquisitions or other strategic activity, including the repurchase of franchises.

Consolidated Cash Flow Data

 

 

Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2016 of $21.0 million was the result of net income of $12.4 million and adjustments for non-cash expenses of $29.1 million, primarily related to non-cash stock-based compensation expense, amortization of intangible assets, deferred tax assets, depreciation, and amortization and impairment of direct response advertising, as well as the excess tax benefit associated with non-cash stock-based compensation. In addition, there was a decrease in cash related to changes in operating assets and liabilities of $20.5 million. This decrease in cash related to operating assets and liabilities was due primarily to a decrease in accounts payable related mainly to payments of transaction expenses related to the acquisition activity, a decrease in accrued compensation as a result of the 2015 cash incentive program payments, a decrease in other liabilities due to payments of holdbacks related to franchise acquisitions made by The Mutual Fund Store in 2015, and an increase in accounts receivable, prepaid expense and other assets due primarily to acquisition activity.

Net cash provided by operating activities for the six months ended June 30, 2015 of $33.9 million was the result of net income of $16.4 million and adjustments for non-cash expenses of $9.1 million, primarily related to amortization of non-cash stock-based compensation, depreciation, amortization and impairment of direct response advertising, and amortization of internal use software, as well as the excess tax benefit associated with stock-based compensation. In addition, there was an increase in cash related to changes in operating assets and liabilities of $8.5 million. The increase in cash related to operating assets and liabilities was due primarily to an increase in accounts payable due primarily to an increase in excess tax benefit associated with stock-based compensation, partially offset by an increase in accounts receivable as revenue increased and direct response advertising costs capitalized in the period.

Investing Activities

Net cash used in investing activities was $222.2 million for the six months ended June 30, 2016 compared to $34.5 million for the six months ended June 30, 2015. For the six months ended June 30, 2016, cash paid for acquisitions, net of cash received, was $254.6 million. The purchase of property and equipment increased $1.4 million, as we spent $4.0 million related to capital expenditures during the six months ended June 30, 2016 which included capital equipment purchases related to the build out of the new Overland Park, Kansas facility, compared to $2.5 million for the six months ended June 30, 2015. For the six months ended June 30, 2016, the amount of internal use software costs we capitalized increased to $3.6 million compared to $2.2 million for the six months ended June 30, 2015.  Cash provided by the sale of short-term investments was $39.9 million for the six months ended June 30, 2016.

On February 1, 2016, we completed the acquisition of The Mutual Fund Store for approximately $241.0 million in cash consideration, net of $5.0 million cash acquired, and approximately $267 million in common stock consideration, subject to certain closing and post-closing adjustments. 

We expect remaining cash expenditures associated with capital equipment purchases related to the re-branding of advisor centers and other integration capital equipment items to be approximately $2.4 million for July 2016.

 

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In April 2016, we completed the acquisition of seven franchises for approximately $13.6 million in cash consideration, net of $0.8 million in holdbacks.

In July and August 2016, we completed the acquisition of eight franchises for approximately $12.3 million in cash consideration, subject to certain closing and post-closing adjustments.

Financing Activities

Net cash used in financing activities was $2.8 million for the six months ended June 30, 2016 compared to $18.6 million for the six months ended June 30, 2015. For the six months ended June 30, 2016, we received $1.1 million of proceeds from the issuance of common stock due to the exercise of stock options compared to $6.0 million during the six months ended June 30, 2015. Excess tax benefit associated with stock-based compensation were $5.4 million for the six months ended June 30, 2016 compared to $10.0 million for the six months ended June 30, 2015 due to a decrease in the amount of stock-based compensation offsetting cash income taxes.

On November 5, 2014, our Board of Directors approved a stock repurchase program of up to $50.0 million of our common stock over the subsequent twelve months. We used $27.3 million of cash to repurchase our common stock in the six months ended June 30, 2015. The stock purchase program expired on November 4, 2015.  The stock repurchase program was funded by available working capital.

For the six months ended June 30, 2016, we incurred cash dividend payments totaling $8.6 million, and incurred a subsequent payment of $3.7 million in July 2016 relating to dividends payable as of June 30, 2016. Based on the shares outstanding as of June 30, 2016 of 61,777,405 and assuming a $0.07 per share quarterly dividend for 2016, we would estimate the remaining dividend payments between July 1, 2016 and December 31, 2016 to total approximately $8.0 million. Any future determination with respect to the declaration and payment of dividends will be at the discretion of our Board of Directors. For the six months ended June 30, 2015, we incurred cash dividend payments totaling $6.7 million.

We expect to incur cash payments in an amount necessary to satisfy the minimum tax withholding obligations for restricted stock units previously granted to employees, which will be determined based on the fair value of our common stock and applicable tax rates on the vesting dates.  For the six months ended June 30, 2016, we incurred $0.7 million of cash payments related to minimum tax withholding obligations compared to $0.6 million for the six months ended June 30, 2015.  Based on the fair value of our common stock as of June 30, 2016 of $25.87 and assuming a 40% tax rate, the estimated minimum tax withholding obligations would be approximately $2.2 million for the period July 1, 2016 to December 31, 2016. We anticipate these cash payments to occur throughout each year with the largest amounts typically occurring in the first and fourth quarters, and with the payment amounts determined by the number of shares released, the fair value of our common stock and applicable tax rates at that point in time.

Off-Balance Sheet Arrangements

As of June 30, 2016, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk

Our exposure to market risk is directly related to our role as an investment manager for investor accounts for which we provide portfolio management services. For the six months ended June 30, 2016, 90% of our revenue was derived from fees based on the market value of AUM compared to 89% for the year ended December 31, 2015. In general, we expect the percentage of revenue that is derived from fees based on the market value of AUM to increase over time.

A substantial portion of the assets we manage is invested in equity securities, the market prices of which can vary substantially based on changes in economic conditions. An additional portion is invested in fixed income securities, which will generally have lower volatility than the equity market. Therefore, while any changes in equity market performance would significantly affect the value of our AUM, particularly for the AUM invested in equity securities, such changes would typically result in lower volatility for our AUM than the volatility of the equity market as a whole. Because a substantial portion of our revenue is derived from the value of our AUM, any changes in fixed income or equity market performance would significantly affect the amount of revenue in a given period. If any of these factors reduces our AUM, the amount of client fees we would earn for managing those assets would decline, which in turn could negatively impact our revenue.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (or the Exchange Act)) as of the end of the period covered by this report. Based on their evaluation, our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer) have concluded that our disclosure controls and procedures as of the end of the period covered by this report were designed and were functioning effectively at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The Company acquired The Mutual Fund Store on February 1, 2016 and is in the process of reviewing The Mutual Fund Store’s internal control structure. If necessary, the Company will make appropriate changes as it continues to integrate this acquisition into the Company’s overall internal control over financial reporting processes.

 

 

 

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PART II — OTHER INFORMATION

Item 1A. Risk Factors

You should carefully review and consider the information regarding certain factors that could materially affect our business, financial condition or future results set forth under Part I—Item 1A (Risk Factors) in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There have been no material changes from the risk factors disclosed in our 2015 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

For the three months ended June 30, 2016, we issued 57,487 shares of unregistered common stock for an aggregate purchase price of $0.4 million upon the exercise of previously granted options, which was paid in cash. These transactions were effected under Rule 701 of the Securities Act of 1933, applicable to our 1998 Stock Option Plan. All recipients either received adequate information about us or had access, through employment or other relationships, to such information. There were no underwriters employed in connection with these transactions.

 

 

 

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Item 6. Exhibits

 

 

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 3, 2016

 

 

 

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Exhibit Index

 

 

 

 

 

41

 

Exhibit 10.1

FINANCIAL ENGINES, INC.

Form of Executive Severance and Change in Control Agreement

 

This Executive Severance and Change in Control Agreement (the “Agreement”) is made and entered into by and between [●] (“Executive”) and Financial Engines, Inc., a Delaware corporation (the “Company”), effective as of ______________, 2016 (the “Effective Date”).

RECITALS

The Compensation Committee of the Board of Directors of the Company (the “Committee”) believes it is imperative (i) to assure that the Company will have the continued dedication and objectivity of Executive, notwithstanding the possibility, threat, or occurrence of a Change in Control and (ii) to provide Executive with an incentive to continue Executive’s employment through any Change in Control to maximize the value of the Company upon such Change in Control for the benefit of its stockholders.

The Committee believes it is in the best interests of the Company to enter into this Agreement to provide for the payment of severance benefits to Executive in the event that Executive is subject to qualifying employment terminations, and additional benefits if such qualifying employment terminations occur in connection with a Change in Control.

Certain capitalized terms used in the Agreement are defined in Section 5 below.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows:

  

(a) General Rules. Subject to the limitations set forth in this Section 1 and Section 3, in the event of a Covered Termination of Executive, the Company shall provide the severance benefits described in Section 2 to Executive.

(b) Exceptions to Benefit Entitlement. Executive will not be entitled to benefits under this Agreement in any one or more of the following circumstances:

(i) Executive’s employment terminates or is terminated for any reason other than a Covered Termination.

(ii) Executive does not confirm in writing that he or she shall be subject to the Company’s Confidential Information and Invention Assignment Agreement (the “Confidentiality Agreement”).

(iii) Executive has failed to timely execute or has revoked the Release described in Section 3(a).

(iv) Executive has failed to return all Company Property. For this purpose, “Company Property” means all paper and electronic Company documents (and all copies thereof) created and/or received by Executive during his or her period of employment with the Company (or any Affiliate) and other Company (or Affiliate) materials and property which Executive has in his or her possession or control, including, but not limited to, files, notes, drawings records, plans, forecasts, reports, studies, analyses, proposals, agreements, financial information, research and development information, sales and marketing information, operational and personnel information, specifications, code, software, databases, computer-recorded information, tangible property and equipment (including, but not limited to, leased vehicles, computers, computer equipment, software programs, facsimile machines, mobile telephones, servers), credit and calling cards, entry cards, identification badges and keys; and any materials of any kind which contain or embody any

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Financial Engines, Inc.

Form Change of Executive Severance and Change in Control Agreement

 

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proprietary or confidential information of the Company or any Affiliate (and all reproductions thereof in whole or in part). As a condition to receiving benefits under this Agreement, Executive must not make or retain copies, reproductions or summaries of any such documents, materials or property. However, Executive is not required to return his or her personal copies of documents evidencing Executive’s hire, termination, compensation, benefits, equity awards and stock options and any other documentation received as a shareholder of the Company.

(v) Executive has failed to tender his or her resignation from each officer or director position held at the Company and/or its Affiliates upon request of the Company made on or after the Covered Termination.

(vi) Executive has failed to enter into a nondisparagement agreement in a form approved by the Company, which agreement may be incorporated into the Release.

 

(c) Termination and Forfeiture of Benefits. Executive’s right to receive unpaid benefits provided under this Agreement shall terminate immediately and Executive shall be obligated to return any benefits already received under this Agreement within 20 business days if, without the prior written approval of the Company, Executive:

(i) willfully breaches a material provision of the Confidentiality Agreement at any time;

(ii) induces any of the Company’s (or Affiliate’s) then current clients, customers, suppliers, vendors, distributors, licensors, licensees or other third party to terminate their existing business relationship with the Company (or Affiliate) or interferes in any other manner with any existing business relationship between the Company (or Affiliate) and any then current client, customer, supplier, vendor, distributor, licensor, licensee or other third party at any time prior to or during the period Executive is otherwise receiving benefits under this Agreement;

(iii) fails to reasonably cooperate (including, but not limited to, meeting with the Company’s counsel to prepare for any discovery, mediation, arbitration, trial, administrative hearing or other proceeding or to act as a witness) with the Company in the investigation, defense or prosecution of any claims or actions against or on behalf of the Company or any of its Affiliates at any time prior to or during the period Executive is otherwise receiving benefits under this Agreement, except in the case of a third party proceeding in which Executive is a named party and has not yet entered into a joint defense agreement with the Company (or Affiliate), provided that the Company must reimburse Executive for reasonable out-of-pocket expenses Executive may incur in connection with any such cooperation (excluding foregone wages, salary, or other compensation); or

(iv) willfully breaches the Release described in Section 3(a) at any time.

 

In the event of Executive’s Covered Termination (including a Change in Control Termination) on or after the Effective Date, Executive shall be entitled to receive the benefits provided by this Section 2.

(a) Cash Severance Benefits.  Subsequent to the effectiveness of the Release described in Section 3(a), the following cash severance payments shall be paid in accordance with Section 4.

(i) In the case of a Covered Termination that does not qualify as a Change in Control Termination, the Company shall make continuing severance payments equal to Executive’s monthly base pay (excluding incentive pay, premium pay, commissions, overtime, bonuses, other forms of variable compensation and any fringe benefits) in effect immediately prior to the Covered Termination (or in the event of a Good Reason resignation pursuant to Section 5(j)(ii), the monthly base pay in effect immediately prior to the reduction in salary referenced therein) for [12 months/6 months]¹ in accordance with the Company’s ordinary payroll procedures then in effect; provided, however that the Company, in its sole discretion, may

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Financial Engines, Inc.

Form Change of Executive Severance and Change in Control Agreement

 

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instead accelerate such continuing severance to a single lump sum payment equal to [12 months/6 months]² of the Executive’s monthly base pay as described in this section to the extent that such acceleration would not violate Section 409A of the Code.

(ii) In the case of a Covered Termination that qualifies as a Change in Control Termination, the Company shall:

(A) make a lump sum payment equal to the product of [18 /12]³ multiplied by Executive’s monthly base pay (as defined in Section 2(a)(i)), less any amounts previously paid in installments pursuant to Section 2(a)(i) as a result of the Executive’s termination occurring within two months prior to the Change in Control; provided, however that if the specific Change in Control transaction that causes Executive’s Termination to qualify as a Change in Control Termination does not qualify as a “change in control event” in the meaning of Treasury Regulation § 1.409A-3(i)(5), then instead of being paid in a lump sum, the foregoing amount will be paid ratably over [18/12] months in accordance with the Company’s ordinary payroll procedures then in effect; and

(B) make a lump sum payment to Executive equal to the product of [150%/100%]⁴ multiplied by Executive’s target bonus amount under the Company’s annual bonus plan generally applicable to its Exchange Act Section 16 officers (expressly excluding any sales compensation plan or program) as in effect immediately prior to the Change in Control; provided, however that if Executive’s bonus plan or a portion of Executive’s bonus plan in effect on the date of the Change in Control Termination provides for specific treatment of the bonus plan or portion of the bonus plan in connection with a Change in Control (or words of like import), whether or not a termination of employment is also required, then instead of the preceding bonus severance amount, Executive’s rights with respect to such bonus plan or portion of such bonus plan shall be determined under the bonus plan terms in connection with the Change in Control.

(b) Health Continuation Coverage.

(i) In the case of a Covered Termination that that does not qualify as a Change in Control Termination, if Executive elects continuation coverage under the Company’s medical, dental, and vision plans pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), then the Company shall pay the corresponding COBRA premiums for the medical, dental, and vision coverages that Executive and his or her dependents received immediately prior to the date of the Covered Termination for [12/6]⁵ months following the date of the Covered Termination.

(ii) In the case of a Covered Termination that qualifies as a Change in Control Termination, if Executive elects COBRA continuation coverage under the Company’s medical, dental, and vision plans, then the Company shall pay the corresponding COBRA premiums for the medical, dental, and vision coverages that Executive and his or her dependents received immediately prior to the date of the Covered Termination for 12 months following the date of the Covered Termination.

(iii) Notwithstanding Section 2(b)(i)-(ii), to the extent that the Company’s reimbursement of such premiums is reasonably expected to result in the imposition of penalties or other adverse tax consequences under the Patient Protection and Affordable Care Act of 2010 and the related regulations and guidance promulgated thereunder, the Company may instead provide Executive with payments during the relevant period that are equivalent in value to the premium payments otherwise payable hereunder (or such lesser amount that is reasonably determined by the Company to constitute the greatest benefit that may be made available to Executive without resulting in any penalties or other adverse tax consequences under the

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Financial Engines, Inc.

Form Change of Executive Severance and Change in Control Agreement

 

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Patient Protection and Affordable Care Act of 2010) but without regard as to whether Executive continues health insurance coverage under the Company’s group health plan.

(iv) Payments described in Section 2(b)(i)-(ii) shall be made only at the Company’s discretion following Executive’s death or the effective date of Executive’s coverage by a medical, dental, or vision insurance plan of a subsequent employer. Executive shall be required to notify the Company immediately if Executive becomes covered by a medical, dental, or vision insurance plan of a subsequent employer. Executive is solely responsible for filing any necessary paperwork to elect COBRA coverage. Upon the conclusion of the Company-paid benefits period described in Section 2(b)(i) or (ii), Executive will be responsible for the entire payment of premiums required under COBRA for the remaining COBRA period.

(v) For purposes of this Section 2(b), (i) any references to COBRA shall be deemed to refer also to analogous provisions of state law, and (ii)  applicable insurance premiums that are paid by the Company shall not include any amounts payable by Executive under a Code Section 125 health care reimbursement plan, which amounts, if any, are the sole responsibility of Executive.

(c) Outplacement Benefits.  In the case of any Covered Termination (whether or not qualifying as a Change in Control Termination), the Company will offer Executive career transition services provided by a third-party vendor selected by the Company, to be paid for by the Company for 12 months following the date of the Covered Termination.  

(d) Other Employee Benefits. All other benefits (such as life insurance, disability coverage, and 401(k) plan coverage) shall terminate as of Executive’s termination date (except to the extent that a conversion privilege may be available thereunder).

(e) Additional Benefits. Notwithstanding the foregoing, the Committee may, in its sole discretion, provide benefits in addition to those set forth in this Section 2 to Executive.

 

(a) Release. In order to be eligible to receive benefits under this Agreement, Executive must execute and return to the Company a general waiver and release in substantially the form attached hereto as Exhibit A, Exhibit B, or Exhibit C (the “Release”) within the post-termination deadline specified in the Release (which shall be no more than 45 calendar days after Executive’s termination of employment), and such Release must become effective in accordance with its terms; provided, however, no such Release shall require Executive to forego any unpaid salary, any accrued but unpaid vacation pay or any benefits payable pursuant to this Agreement.  Unless a Change in Control has occurred, the Company, in its sole discretion, may modify the form of the required Release to comply with applicable law and shall determine the form of the required Release, which may be incorporated into a separation agreement or other agreement with Executive.

(b) Certain Reductions. The Company, in its sole discretion, shall have the authority to reduce Executive’s severance benefits, in whole or in part, by any other severance benefits, pay in lieu of notice, or other similar benefits payable to Executive by the Company (or any Affiliate) that become payable in connection with Executive’s termination of employment pursuant to (i) any applicable legal requirement, including, without limitation, the Worker Adjustment and Retraining Notification Act or comparable state law or (ii) a written employment or severance agreement with the Company (or Affiliate).  The benefits provided under this Agreement are intended to satisfy, in whole or in part, any and all statutory obligations and other contractual obligations of the Company (or any Affiliate), including benefits provided by offer letter or employment agreements, that may arise out of Executive’s termination of employment, and the Company shall so construe and implement the terms of this Agreement.  In the Company’s sole discretion, such reductions may be applied on a retroactive basis, with severance benefits previously paid being re-characterized as payments pursuant to the Company’s (or Affiliate’s) statutory or other contractual obligations.

(c) Parachute Payments. Except as otherwise provided in an agreement between Executive and the Company (or any Affiliate), if any payment or benefit Executive would receive in connection with a Change in Control from the

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Financial Engines, Inc.

Form Change of Executive Severance and Change in Control Agreement

 

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Company or otherwise (“Payment”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then such Payment shall be equal to the Reduced Amount. The “Reduced Amount” shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax, or (y) the largest portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in Executive’s receipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. The Company may consult with advisors to determine the Reduced Amount, and the Company’s determination shall be conclusive and binding upon Executive and the Company for all purposes.  For purposes of making the calculations required by this provision, the Company and its advisors may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code.  The Company shall bear all costs in connection with any calculations contemplated hereby.  In the event that the Reduced Amount is less than the Payment would be absent this provision, the reduction shall be applied first to any Payments that are not subject to Section 409A of the Code, and then shall be applied to benefits (if any) that are subject to Section 409A of the Code.

(d) Mitigation. Except as otherwise specifically provided herein, Executive shall not be required to mitigate damages or the amount of any payment provided under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as a result of employment by another employer or any retirement benefits received by Executive after the date of Executive’s termination of employment with the Company (or Affiliate), except for health continuation coverage provided pursuant to Section 2(b).

(e) Non-Duplication of Benefits. Except as otherwise specifically provided for herein, Executive is not eligible to receive benefits under this Agreement or pursuant to other contractual obligations more than one time. This Agreement is designed to provide certain severance pay and change in control benefits to Executive pursuant to the terms and conditions set forth in this Agreement. The payments pursuant to this Agreement are in addition to, and not in lieu of, any unpaid salary, bonuses, benefits or expense reimbursements (for expenses incurred and submitted consistent with the Company’s expense reimbursement policy) to which Executive may be entitled for the period ending with Executive’s Covered Termination.

(f) Effect of Reemployment. In the event of Executive’s reemployment by the Company (or any Affiliate) during the salary continuation payment period specified in Section 2(a), the Committee, in its sole and absolute discretion, may require Executive to forego, repay to the Company or relinquish the right to retain all or a portion of the severance benefits provided pursuant to this Agreement as a condition of reemployment.

 

(a) General Rules. For the avoidance of doubt, in no event shall payment of any benefit set forth in Section 2 be made prior to the effective date of the Release described in Section 3(a). Except as otherwise set forth in Section 4(b) or 4(d), the cash severance benefits under Section 2(a) of this Agreement, if any, shall commence with the payroll period next following the effective date of the Release.  If a Release has become effective prior to the effective date of a Change in Control, and additional benefits are to be provided under this Agreement pursuant to a Change in Control Termination, such additional benefits shall be paid by the later of (x) the ordinarily scheduled payment date pursuant to the immediately preceding sentence and (y) ten calendar days following the Change in Control.

(b) Application of Section 409A.

(i) For the avoidance of doubt, it is intended that all payments under this Agreement satisfy, to the greatest extent possible, the exemptions from the application of Section 409A provided under Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9) of the Treasury Regulations.

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Financial Engines, Inc.

Form Change of Executive Severance and Change in Control Agreement

 

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(ii) Notwithstanding anything to the contrary set forth herein, any payments and benefits provided under this Agreement that the Company reasonably determines constitute “deferred compensation” within the meaning of Section 409A of the Code and the Treasury Regulations and other guidance thereunder and any state law of similar effect (collectively, the “Deferred Severance Benefits”) shall not commence in connection with Executive’s termination of employment unless and until Executive has also incurred a “separation from service” (as such term is defined in Section 1.409A-1(h) of the Treasury Regulations), unless the Company reasonably determines that such amounts may be provided to Executive without causing Executive to incur the additional tax under Section 409A(a)(1)(B)(i)(II) of the Code. It is intended that each installment of any Deferred Severance Benefits is a separate “payment” for purposes of Section 1.409A-2(b)(2)(i) of the Treasury Regulations.

 

(iii) If the Company reasonably determines that the Executive is, on the termination of service, a “specified employee” of the Company (as such term is defined in Section 409A(a)(2)(B)(i) of the Code) then, solely to the extent necessary to avoid the incurrence of the adverse personal tax consequences under Section 409A of the Code, the timing of the Deferred Severance Benefit payments shall be delayed until the earlier to occur of: (i) the date that is six months and one calendar day after Executive’s “separation from service” (as such term is defined in Section 1.409A-1(h) of the Treasury Regulations), or (ii) the date of Executive’s death (such applicable date, the “Specified Employee Initial Payment Date”).  

 

(iv) In the event that the period during which Executive may review or revoke the Release extends across two calendar years, any Deferred Severance Benefits shall not be payable until the first day of the latter calendar year (the “Release Period Payment Date”).  In the event that any payments are delayed to a Specified Employee Initial Payment Date or a Release Period Payment Date, the Company shall (A) pay to Executive a lump sum amount equal to the sum of the Deferred Severance Benefits that Executive would otherwise have received through the Specified Employee Initial Payment Date or Release Period Payment Date, as applicable, if the commencement of the payment of the Deferred Severance Benefits had not been so delayed pursuant to Section 4(b)(iii)-(iv) and (B) immediately thereafter commence paying the balance of the Deferred Severance Benefits in accordance with the applicable payment schedules set forth in this Agreement.

(c) Withholding. All payments under this Agreement will be subject to all applicable withholding obligations of the Company (or any Affiliate), including, without limitation, obligations to withhold for federal, state and local income and employment taxes.

(d) Indebtedness of Executive. If Executive is indebted to the Company (or any Affiliate) on the effective date of his or her Covered Termination, the Company reserves the right to offset any severance payments under this Agreement by the amount of such indebtedness.

 

For purposes of this Agreement, except as set forth in Executive’s Participation Notice, the following terms are defined as follows:

(a) “Affiliate” means any Entity, if the Company and/or one or more other Affiliates own not less than 50% of such Entity.

(b) “Cause” means termination of Executive’s employment for any of the following reasons:

(i)  Executive’s breach of any fiduciary duty owed to the Company or any Affiliate or any restrictive covenant agreements (including confidentiality, non-competition and non-solicitation) with the Company or its Affiliates, and, Executive’s failure to cure such breach within 30 calendar days after written notice (except Executive is not entitled to any cure period if the Committee determines in good faith the breach is incurable and in no case may Executive be entitled to more than one right to cure with respect to this Section 5(b)(i) in any 12-month period);

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(ii)  Executive’s failure to use his or her best efforts to promote the interests of the Company or any of its Affiliates or to devote his or her full business time and efforts to the business and affairs of the Company and its Affiliates or Executive’s engagement in insubordination, and any such failure or insubordination is not cured by Executive within 10 calendar days after written notice to Executive by the Company or any of its Affiliates (except Executive is not entitled to any cure period if the Committee determines in good faith that such failure or insubordination is incurable and in no case may Executive be entitled to more than one right to cure with respect to this Section 5(b)(ii) in any 12-month period);

 

(iii) Executive’s gross negligence, willful misconduct, fraud, embezzlement or material act of dishonesty relating to the affairs of the Company or any of its Affiliates;

 

(iv) Executive’s engagement in any conduct or declaration (oral or written) of any statement which materially impairs, impugns, denigrates, disparages or negatively reflects upon the name, reputation or business interests of the Company or any of its Affiliates;

 

(v) Executive’s conviction of or plea of guilty or nolo contendere to (A) any misdemeanor relating to the affairs of the Company or any of its Affiliates or involving actions causing material damage to the Company’s or its Affiliates’ reputation or goodwill or (B) any felony;

 

(vi) Executive’s abuse of drugs or alcohol in a manner that impedes Executive’s work performance; or

 

(vii) Executive’s engagement in a willful violation of any federal or state securities laws, rules or regulations.

The determination that a termination of Executive’s employment is either for Cause or without Cause shall be made by the Company in its sole discretion.

(c) “Change in Control” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i) a change in the composition of the Board of Directors occurs, as a result of which fewer than one-half of the incumbent directors are directors who either: (A) had been directors of the Company as of the later of (1) the Effective Date of this Agreement or (2) the date 24 months prior to the date of the event that may constitute a Change in Control (the “Original Directors”); or (B) were elected, or nominated for election, to the Board of Directors with the affirmative votes of at least a majority of the aggregate of (1) the Original Directors who were still in office at the time of the election or nomination and (2) the directors whose election or nomination was previously so approved by Original Directors;

(ii) any Exchange Act Person who by the acquisition or aggregation of securities, is or becomes the Owner, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote at elections of directors (the “Base Capital Stock”); except that any change in the relative beneficial ownership of the Company’s securities by any Exchange Act Person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such Exchange Act Person’s ownership of securities, shall be disregarded until such Exchange Act Person increases in any manner, directly or indirectly, such Exchange Act Person’s Ownership of any securities of the Company;

 

(iii) the consummation of a merger or consolidation of the Company with or into another Entity or any other corporate reorganization, if Exchange Act Persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization Own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding

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Financial Engines, Inc.

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securities of each of (A) the continuing or surviving Entity and (B) any direct or indirect parent corporation of such continuing or surviving Entity; or

(iv) The sale, transfer or other disposition of all or substantially all of the Company’s assets.

For clarity, the term Change in Control shall not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company or to create a holding company that will be owned in substantially the same proportions by the Exchange Act Persons who held the Company’s securities immediately before such transaction.

(d) “Change in Control Termination” means a Covered Termination which occurs during the period beginning two months prior to a Change in Control and ending 12 months after a Change in Control.  A resignation by Executive for Good Reason will be deemed to have occurred on the date that Executive properly provided the corresponding written notice of Good Reason to the Company for purposes of determining whether Executive’s resignation occurred during the requisite timeframe to be a Change in Control Termination.

 

(e) “Code” means the Internal Revenue Code of 1986, as amended.

(f) “Covered Termination” means either an involuntary termination of Executive’s employment with the Company (or Affiliate) without Cause (other than involuntary termination due to the death or disability of Executive) or Executive’s resignation of employment with the Company (or Affiliate) for Good Reason.

(g) “Entity” means a corporation, partnership, limited liability company or other entity.

(h) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(i) “Exchange Act Person” means any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” shall not include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company.

(j) “Good Reason” means, without Executive’s express written consent, the occurrence of any of the following events:

(i) a material diminution of Executive’s authority, duties, position or responsibilities relative to the Executive’s authority, duties, position or responsibilities in effect immediately prior to such reduction;

 

(ii) a material reduction in Executive’s base salary, other than in connection with an across-the-board reduction applicable to all Exchange Act Section 16 executive officers of the Company;

 

(iii) a material change in Executive’s principal work location, provided that in no event will a relocation of less than fifty (50) miles be material for this purpose; or

 

(iv) a material breach of this Agreement by the Company or its successor (or one of their respective Affiliates).

To the extent the Change in Control results in the Company (or a successor to the Company by merger, consolidation or the like), continuing in existence as a direct or indirect subsidiary of an acquirer, Executive’s authority, duties, position and responsibilities will not be deemed to be materially diminished under Section 5(j)(i) if, following a Change in Control, Executive retains substantially the same authority, duties and responsibilities with

8

Financial Engines, Inc.

Form Change of Executive Severance and Change in Control Agreement

 

---

 

respect to the Company’s operations in effect prior to the Change in Control, it being understood that a change in Executive’s job title shall not by itself be a basis for termination for Good Reason.

Notwithstanding the foregoing, Executive shall have “Good Reason” for his or her resignation only if: (a)  Executive notifies the Company in writing, within 30 calendar days after the occurrence of one of the foregoing event(s), specifying the event(s) constituting Good Reason; (b) the Company does not cure such condition within 30 calendar days following its receipt of such notice or states unequivocally in writing that it does not intend to attempt to cure such condition; and (c) Executive resigns from employment within 60 calendar days following the end of the period within which the Company was entitled to remedy the condition constituting Good Reason but failed to do so.

 

(k) “Own,” “Owned,” “Owner,” “Ownership” A person or Entity shall be deemed to “Own,” to have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.

(l) “Subsidiary” means, with respect to the Company, (i) any corporation of which more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital) of more than 50%.

(m) “Treasury Regulations” means the Department of Treasury Regulations.

   

(a) Exclusive Discretion. The Committee shall have the exclusive discretion and authority to establish rules, forms, and procedures for the administration of this Agreement, and to construe and interpret this Agreement and to decide any and all questions of fact, interpretation, definition, computation or administration arising in connection with the operation of this Agreement, including, but not limited to, (i) whether a Covered Termination has occurred, (ii) whether a Change in Control has occurred and (iii) the amount of benefits paid under this Agreement. The rules, interpretations, computations and other actions of the Committee shall be binding and conclusive on Executive.

 

(b) Amendment or Termination. The Company reserves the right to unilaterally amend or terminate this Agreement at any time; provided, however, that no such amendment or termination that adversely affects Executive shall occur following a Change in Control or a Covered Termination unless Executive consents in writing to such amendment or termination.  Any action amending or terminating this Agreement shall be in writing and executed by a duly authorized officer of the Company.

 

This Agreement constitutes the entire agreement of the parties hereto with respect to the payment of severance benefits in connection with termination of Executive’s employment and it supersedes in their entirety all prior representations, understandings, undertakings or agreements with respect thereto, [including but not limited to the Executive’s Offer letter dated December 21, 2000]⁶; provided, however, that this Agreement does not supersede the terms of any prior equity incentive agreements between Company and Executive, including but not limited to the 2013-2017 Long-Term Incentive Program and agreements thereunder.  In addition, this Agreement shall supersede any generally applicable severance or change in control plan, policy, or practice, whether written or unwritten, that otherwise applies or becomes applicable to Executive.  

 

9

Financial Engines, Inc.

Form Change of Executive Severance and Change in Control Agreement

 

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This Agreement shall not be deemed (a) to give any employee or other person any right to be retained in the employ of the Company (or any Affiliate), or (b) to interfere with the right of the Company (or any Affiliate) to discharge any employee or other person at any time, with or without cause, and with or without advance notice, which right is hereby reserved.

 

(a)  Construction.  This Agreement is intended to be governed by and shall be construed in accordance with the laws of the State of California.  

(b) Arbitration.  Except as prohibited by law, any legal dispute between Executive and the Company (or between the Executive and any of the Company’s Affiliates, directors, officer, employees, shareholders, agents, predecessors, successors or assigns, each of whom is hereby designated a third party beneficiary of this Agreement regarding arbitration) arising out of the Executive’s employment or this Agreement (“Disputes”) shall be resolved through final and binding arbitration in Santa Clara, California under the Federal Arbitration Act and, to the extent not inconsistent with or preempted by the Federal Arbitration Act, the Arbitration Rules set forth in California Code of Civil Procedure Section 1280 et seq.  Nothing in this arbitration provision is intended to limit any right Executive may have to file a charge or claim with (or, to the extent not barred by the Release, to obtain relief from) the National Labor Relations Board, or other federal or state agencies.  The parties agree that such arbitration shall be conducted on an individual basis only, not a class, representative or collective basis, and hereby waive any right to bring classwide, collective or representative claims before any arbitrator or in any forum.  This arbitration provision is not intended to modify or limit substantive rights or the remedies available to the parties, including the right to seek interim relief, such as injunction or attachment, through judicial process, which shall not be deemed a waiver of the right to demand and obtain arbitration.

(c) Venue.  With respect to any Disputes that are not arbitrated pursuant to Section 9(b), the Company and Executive consent to the exclusive jurisdiction of, and venue in, the state courts in Santa Clara County in the State of California (or in the event of exclusive federal jurisdiction, the courts of the Northern District of California).  The Company and Executive hereby irrevocably waive, to the fullest extent permitted by law, any objection which they may now or hereafter have to the venue of any dispute arising out of or relating to this Agreement or the transactions contemplated hereby being brought in such court or any defense of inconvenient forum for the maintenance of such dispute or proceeding.  The Company and Executive agree that a judgment in any such dispute may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Each of the Company and Executive irrevocably and unconditionally waives, to the fullest extent permitted by law, any right it may have to a trial by jury in respect of any litigation as between the parties directly or indirectly arising out of, under or in connection with this Agreement or the transactions contemplated hereby or disputes relating hereto.    

  

(a) Notices. Any notice, demand or request required or permitted to be given by either the Company or Executive pursuant to the terms of this Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties, in the case of the Company, at its corporate headquarters to the attention of the Company’s then General Counsel, and, in the case of Executive, at the address as set forth in the Company’s employment file maintained for Executive as previously furnished by Executive or such other address as a party may request by notifying the other in writing.

(b) Transfer and Assignment. The rights and obligations of Executive under this Agreement may not be transferred or assigned without the prior written consent of the Company. This Agreement shall be binding upon any surviving entity resulting from a Change in Control and upon any other person who is a successor by merger, acquisition, consolidation or otherwise to the business formerly carried on by the Company without regard to whether or not such person or entity actively assumes the obligations hereunder. If Executive shall die while any amounts are payable to Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive’s estate.

10

Financial Engines, Inc.

Form Change of Executive Severance and Change in Control Agreement

 

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(c) Unfunded Benefits.  The benefits described in this Agreement shall be unfunded, and all benefits hereunder shall be paid only from the general assets of the Company.  This Agreement is intended not to be subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).

(d) Advice.  Executive acknowledges that he or she has been advised to obtain tax and financial advice regarding the consequences of entering into this Agreement.

(e) Waiver. Any party’s failure to enforce any provision or provisions of this Agreement shall not in any way be construed as a waiver of any such provision or provisions, nor prevent any party from thereafter enforcing each and every other provision of this Agreement. The rights granted the parties herein are cumulative and shall not constitute a waiver of any party’s right to assert all other legal remedies available to it under the circumstances.

 

(f) Severability. Should any provision of this Agreement be declared or determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired.

(g) Section Headings. Section headings in this Agreement are included for convenience of reference only and shall not be considered part of this Agreement for any other purpose.

 

[Signatures on following page]

 

 

 

11

Financial Engines, Inc.

Form Change of Executive Severance and Change in Control Agreement

 

---

 

 

IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized director or officer, as of the day and year first set forth above.

 

 

 

 

[Signature page of Executive Severance and Change in Control Agreement]

 

---

For Employees Age 40 or Older

Individual Termination

 

EXHIBIT A

RELEASE AGREEMENT

I understand and agree completely to the terms set forth in the Executive Severance and Change in Control Agreement entered into on [●], 2016 (the “Agreement”) between myself and Financial Engines, Inc. (the “Company”) and in this Release Agreement between myself and the Company (the “Release”).

I understand that this Release, together with the Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated therein. This Release may only be modified by a writing signed by both me and a duly authorized officer of the Company. Certain capitalized terms used in this Release are defined in the Agreement.

I hereby confirm my obligations under the Confidentiality Agreement.

In exchange for the consideration to be provided to me under the Agreement to which I am not otherwise entitled, I hereby release and forever discharge the Company and its owners, agents, officers, shareholders, employees, directors, attorneys, subscribers, subsidiaries, affiliates, successors and assigns (collectively “Releasees”) from any and all causes of action, obligations, costs, expenses, damages, penalties, actions, liabilities, and benefits (including attorneys’ fees and costs actually incurred), of whatever character, in law or in equity, known or unknown, suspected or unsuspected, statutory and non-statutory, matured or un-matured, of any and every kind whatsoever, based on any act, omission, event, occurrence, or non-occurrence from the beginning of time to the date I execute this Release (“Released Claims”).

The Release includes, but is not limited to, release of any and all claims arising out of my employment with the Company or Company-affiliates and the termination of that employment.  This includes a release of any rights or claims I may have under the Age Discrimination in Employment in Employment Act, as amended by the Older Workers' Benefit Protection Act, Title VII of the Civil Rights Act of 1964, the Equal Pay Act, the Americans with Disabilities Act, the Employee Retirement Income Security Act, the Family Medical Leave Act, the Fair Labor Standards Act, the Pregnancy Discrimination in Employment Act, the Civil Rights Act of 1991, the Fair Credit Reporting Act, the Rehabilitation Act, the United States and [California Constitutions, the California Fair Employment and Housing Act, the California Family Rights Act, the California Private Attorney General Act, any other provision of the California Labor, Government and Civil Codes], or any other federal, state or local laws or regulations relating to terms and conditions of employment.  The Release also includes any claims for wages, accrued vacation, expenses, overtime, commissions, bonuses, stock options, penalties, and/or other compensation, failure to maintain records of hours worked, failure to provide itemized wage statements, of failure to produce requested personnel or wage related information.  The Release also includes claims for wrongful discharge, breach of express or implied contract, promissory estoppel, retaliation, fraud, misrepresentation, intentional and negligent infliction of emotional distress, defamation, slander, libel, discrimination, harassment, and any claims that the Company or any Company-affiliate has dealt with me unfairly or in bad faith.  The Release also includes any claims related to my ownership of or interest in any stock, options or other Company equities including claims under the Securities Act of 1933, the Securities Exchange Act of 1934, [the California Corporations Code] or any other federal, state or local laws or regulations relating to the ownership, sale or regulation of securities.

Nothing in this Release is to be construed to interfere with my ability to file a charge with, or assist/participate in an investigation conducted by the Equal Employment Opportunity Commission or any other agency pursuant to any law that expressly prohibits waiver of such rights.  However, I acknowledge that I have waived any ability to collect, directly or indirectly, any monetary or nonmonetary award based on any Released Claims.  

I have not given or sold any claim discussed in this Release to anyone and I have not filed a lawsuit, claim, or charge with any court or government agency asserting any Released Claims.  I will not bring or participate in any class action, derivative action, representative action or collective action against the Company which asserts, in whole or in part, any claim(s) which arose prior to the date I sign this Release whether or not such claims are covered by the Release.

A-1

 

---

For Employees Age 40 or Older

Individual Termination

 

By signing below, I expressly waive any benefits of Section 1542 of the Civil Code of the State of California, which provides as follows:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

I do not intend to release any rights or claims for indemnification I may have pursuant to any written indemnification agreement with the Company to which I am a party, the charter, bylaws, or operating agreements of the Company, or any claims that I may not release as a matter of law, including but not limited to claims for indemnity, or any claims for enforcement of the Agreement.  To the fullest extent permitted by law, any dispute regarding the scope of this general release shall be determined by an arbitrator under the procedures set forth in the arbitration clause in the Agreement.

 

I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA. I also acknowledge that the consideration given for the Released Claims is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (a) the Released Claims do not apply to any rights or claims that arise after the date I sign this Release; (b) I should consult with an attorney prior to signing this Release (although I may choose voluntarily not to do so); (c) I have 21 calendar days to consider this Release (although I may choose to voluntarily to sign it sooner); (d) I have seven calendar days following the date I sign this Release to revoke the Release by providing written notice to an officer of the Company; and (e) the Release will not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth calendar day after I sign this Release (“Effective Date”).

I agree that I will not disparage Releasees or their products or services with any written or oral statement.  The Company agrees that it will instruct its current executive officers to not disparage me with any written or oral statement.  Nothing in this Release shall prohibit me or the Company from providing truthful information in response to a subpoena or other legal process, prohibit or impair me or the Company from complying with all applicable laws, or obligate either party to commit (or aid or abet in the commission of) any unlawful act.

I hereby represent that I have been paid all compensation owed and for all hours worked, I have received all the leave and leave benefits and protections for which I am eligible, and I have not suffered any on-the-job injury for which I have not already filed a workers’ compensation claim.  With regard to equity compensation, I acknowledge that I have reviewed the attached Equity Summary, which details the terms of my grants, and I agree to the accuracy of the information contained therein.  I acknowledge and agree that I have no right to acquire equity of Company other than as specified in Equity Summary.  

I acknowledge that to become effective, I must sign and return this Release to the Company so that it is received not later than 21 calendar days following the date it is provided to me, and I must not revoke it during the seven calendar day revocation period referenced above.

 

 

Attachments:

 

Equity Summary

Confidentiality Agreement

Important Information Regarding FNGN Transactions

 

A-2

 

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For Employees Age 40 or Older

Group Termination

 

EXHIBIT B

RELEASE AGREEMENT

I understand and agree completely to the terms set forth in the Executive Severance and Change in Control Agreement entered into on [●], 2016 (the “Agreement”) between myself and Financial Engines, Inc. (the “Company”) and in this Release Agreement between myself and the Company (the “Release”).

I understand that this Release, together with the Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated therein. This Release may only be modified by a writing signed by both me and a duly authorized officer of the Company. Certain capitalized terms used in this Release are defined in the Agreement.

I hereby confirm my obligations under the Confidentiality Agreement.

In exchange for the consideration to be provided to me under the Agreement to which I am not otherwise entitled, I hereby release and forever discharge the Company and its owners, agents, officers, shareholders, employees, directors, attorneys, subscribers, subsidiaries, affiliates, successors and assigns (collectively “Releasees”) from any and all causes of action, obligations, costs, expenses, damages, penalties, actions, liabilities, and benefits (including attorneys’ fees and costs actually incurred), of whatever character, in law or in equity, known or unknown, suspected or unsuspected, statutory and non-statutory, matured or un-matured, of any and every kind whatsoever, based on any act, omission, event, occurrence, or non-occurrence from the beginning of time to the date I execute this Release (“Released Claims”).

The Release includes, but is not limited to, release of any and all claims arising out of my employment with the Company or Company-affiliates and the termination of that employment.  This includes a release of any rights or claims I may have under the Age Discrimination in Employment in Employment Act, as amended by the Older Workers' Benefit Protection Act, Title VII of the Civil Rights Act of 1964, the Equal Pay Act, the Americans with Disabilities Act, the Employee Retirement Income Security Act, the Family Medical Leave Act, the Fair Labor Standards Act, the Pregnancy Discrimination in Employment Act, the Civil Rights Act of 1991, the Fair Credit Reporting Act, the Rehabilitation Act, the United States and [California Constitutions, the California Fair Employment and Housing Act, the California Family Rights Act, the California Private Attorney General Act, any other provision of the California Labor, Government and Civil Codes], or any other federal, state or local laws or regulations relating to terms and conditions of employment.  The Release also includes any claims for wages, accrued vacation, expenses, overtime, commissions, bonuses, stock options, penalties, and/or other compensation, failure to maintain records of hours worked, failure to provide itemized wage statements, of failure to produce requested personnel or wage related information.  The Release also includes claims for wrongful discharge, breach of express or implied contract, promissory estoppel, retaliation, fraud, misrepresentation, intentional and negligent infliction of emotional distress, defamation, slander, libel, discrimination, harassment, and any claims that the Company or any Company-affiliate has dealt with me unfairly or in bad faith.  The Release also includes any claims related to my ownership of or interest in any stock, options or other Company equities including claims under the Securities Act of 1933, the Securities Exchange Act of 1934, [the California Corporations Code] or any other federal, state or local laws or regulations relating to the ownership, sale or regulation of securities.

Nothing in this Release is to be construed to interfere with my ability to file a charge with, or assist/participate in an investigation conducted by the Equal Employment Opportunity Commission or any other agency pursuant to any law that expressly prohibits waiver of such rights.  However, I acknowledge that I have waived any ability to collect, directly or indirectly, any monetary or nonmonetary award based on any Released Claims.  

I have not given or sold any claim discussed in this Release to anyone and I have not filed a lawsuit, claim, or charge with any court or government agency asserting any Released Claims.  I will not bring or participate in any class action, derivative action, representative action or collective action against the Company which asserts, in whole or in

B-1

 

 

 

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For Employees Age 40 or Older

Group Termination

 

part, any claim(s) which arose prior to the date I sign this Release whether or not such claims are covered by the Release.

By signing below, I expressly waive any benefits of Section 1542 of the Civil Code of the State of California, which provides as follows:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

I do not intend to release any rights or claims for indemnification I may have pursuant to any written indemnification agreement with the Company to which I am a party, the charter, bylaws, or operating agreements of the Company, or any claims that I may not release as a matter of law, including but not limited to claims for indemnity, or any claims for enforcement of the Agreement.  To the fullest extent permitted by law, any dispute regarding the scope of this general release shall be determined by an arbitrator under the procedures set forth in the arbitration clause in the Agreement.

I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA. I also acknowledge that the consideration given for the Released Claims is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (a) the Released Claims do not apply to any rights or claims that arise after the date I sign this Release; (b) I should consult with an attorney prior to signing this Release (although I may choose voluntarily not to do so); (c) I have 45 calendar days to consider this Release (although I may choose to voluntarily to sign it sooner); (d) I have seven calendar days following the date I sign this Release to revoke the Release by providing written notice to an officer of the Company; and (e) the Release will not be effective until the date upon which the revocation period has expired unexercised, which will be the eighth calendar day after I sign this Release (“Effective Date”).

I further acknowledge that I have received the disclosure required by 29 U.S.C. § 626 (f)(1)(H), which is attached hereto as Appendix I.

I agree that I will not disparage Releasees or their products or services with any written or oral statement.  The Company agrees that it will instruct its current executive officers to not disparage me with any written or oral statement.  Nothing in this Release shall prohibit me or the Company from providing truthful information in response to a subpoena or other legal process, prohibit or impair me or the Company from complying with all applicable laws, or obligate either party to commit (or aid or abet in the commission of) any unlawful act.

I hereby represent that I have been paid all compensation owed and for all hours worked, I have received all the leave and leave benefits and protections for which I am eligible, and I have not suffered any on-the-job injury for which I have not already filed a workers’ compensation claim.  I hereby represent that I have been paid all compensation owed and for all hours worked, I have received all the leave and leave benefits and protections for which I am eligible, and I have not suffered any on-the-job injury for which I have not already filed a workers’ compensation claim.  With regard to equity compensation, I acknowledge that I have reviewed the attached Equity Summary, which details the terms of my grants, and I agree to the accuracy of the information contained therein.  I acknowledge and agree that I have no right to acquire equity of Company other than as specified in Equity Summary.  

B-2

 

 

 

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For Employees Age 40 or Older

Group Termination

 

I acknowledge that to become effective, I must sign and return this Release to the Company so that it is received not later than 45 calendar days following the date it is provided to me, and I must not revoke it during the seven calendar day revocation period referenced above.

 

 

Attachments:

 

Equity Summary

Confidentiality Agreement

Important Information Regarding FNGN Transactions

Appendix I : Disclosure Under Title 29 U.S. Code Section 626(F)(1)(H)

 

B-3

 

 

 

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For Employees Age 40 or Older

Group Termination

 

APPENDIX I

DISCLOSURE UNDER TITLE 29 U.S. CODE SECTION 626(F)(1)(H)

 

[Job classifications/positions] informed on [date] of the termination of their employment are eligible to participate in the severance package program. The factors considered in selecting employees for employment termination on [                    ] were: [                    ]. A selected employee age 40 or more years will have up to forty-five (45) calendar days to review the terms and conditions of the severance package and release agreement.

 

 

 

 

B-4

 

 

 

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For Employees Under Age 40

Individual and Group Termination

 

EXHIBIT C

RELEASE AGREEMENT

I understand and agree completely to the terms set forth in the Executive Severance and Change in Control Agreement entered into on [●], 2016 (the “Agreement”) between myself and Financial Engines, Inc. (the “Company”) and in this Release Agreement between myself and the Company (the “Release”).

I understand that this Release, together with the Agreement, constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated therein. This Release may only be modified by a writing signed by both me and a duly authorized officer of the Company. Certain capitalized terms used in this Release are defined in the Agreement.

I hereby confirm my obligations under the Confidentiality Agreement.

In exchange for the consideration to be provided to me under the Agreement to which I am not otherwise entitled, I hereby release and forever discharge the Company and its owners, agents, officers, shareholders, employees, directors, attorneys, subscribers, subsidiaries, affiliates, successors and assigns (collectively “Releasees”) from any and all causes of action, obligations, costs, expenses, damages, penalties, actions, liabilities, and benefits (including attorneys’ fees and costs actually incurred), of whatever character, in law or in equity, known or unknown, suspected or unsuspected, statutory and non-statutory, matured or un-matured, of any and every kind whatsoever, based on any act, omission, event, occurrence, or non-occurrence from the beginning of time to the date I execute this Release (“Released Claims”).

The Release includes, but is not limited to, release of any and all claims arising out of my employment with the Company or Company-affiliates and the termination of that employment.  This includes a release of any rights or claims I may have under the Age Discrimination in Employment in Employment Act, as amended by the Older Workers' Benefit Protection Act, Title VII of the Civil Rights Act of 1964, the Equal Pay Act, the Americans with Disabilities Act, the Employee Retirement Income Security Act, the Family Medical Leave Act, the Fair Labor Standards Act, the Pregnancy Discrimination in Employment Act, the Civil Rights Act of 1991, the Fair Credit Reporting Act, the Rehabilitation Act, the United States and [California Constitutions, the California Fair Employment and Housing Act, the California Family Rights Act, the California Private Attorney General Act, any other provision of the California Labor, Government and Civil Codes], or any other federal, state or local laws or regulations relating to terms and conditions of employment.  The Release also includes any claims for wages, accrued vacation, expenses, overtime, commissions, bonuses, stock options, penalties, and/or other compensation, failure to maintain records of hours worked, failure to provide itemized wage statements, of failure to produce requested personnel or wage related information.  The Release also includes claims for wrongful discharge, breach of express or implied contract, promissory estoppel, retaliation, fraud, misrepresentation, intentional and negligent infliction of emotional distress, defamation, slander, libel, discrimination, harassment, and any claims that the Company or any Company-affiliate has dealt with me unfairly or in bad faith.  The Release also includes any claims related to my ownership of or interest in any stock, options or other Company equities including claims under the Securities Act of 1933, the Securities Exchange Act of 1934, [the California Corporations Code] or any other federal, state or local laws or regulations relating to the ownership, sale or regulation of securities.

Nothing in this Release is to be construed to interfere with my ability to file a charge with, or assist/participate in an investigation conducted by the Equal Employment Opportunity Commission or any other agency pursuant to any law that expressly prohibits waiver of such rights.  However, I acknowledge that I have waived any ability to collect, directly or indirectly, any monetary or nonmonetary award based on any Released Claims.  

I have not given or sold any claim discussed in this Release to anyone and I have not filed a lawsuit, claim, or charge with any court or government agency asserting any Released Claims.  I will not bring or participate in any class action, derivative action, representative action or collective action against the Company which asserts, in whole or in part, any claim(s) which arose prior to the date I sign this Release whether or not such claims are covered by the Release.

C-1

 

---

For Employees Under Age 40

Individual and Group Termination

 

By signing below, I expressly waive any benefits of Section 1542 of the Civil Code of the State of California, which provides as follows:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

I do not intend to release any rights or claims for indemnification I may have pursuant to any written indemnification agreement with the Company to which I am a party, the charter, bylaws, or operating agreements of the Company, or any claims that I may not release as a matter of law, including but not limited to claims for indemnity, or any claims for enforcement of the Agreement.  To the fullest extent permitted by law, any dispute regarding the scope of this general release shall be determined by an arbitrator under the procedures set forth in the arbitration clause in the Agreement. 

I agree that I will not disparage Releasees or their products or services with any written or oral statement.  The Company agrees that it will instruct its current executive officers to not disparage me with any written or oral statement.  Nothing in this Release shall prohibit me or the Company from providing truthful information in response to a subpoena or other legal process, prohibit or impair me or the Company from complying with all applicable laws, or obligate either party to commit (or aid or abet in the commission of) any unlawful act.

I hereby represent that I have been paid all compensation owed and for all hours worked, I have received all the leave and leave benefits and protections for which I am eligible, and I have not suffered any on-the-job injury for which I have not already filed a workers’ compensation claim.  I hereby represent that I have been paid all compensation owed and for all hours worked, I have received all the leave and leave benefits and protections for which I am eligible, and I have not suffered any on-the-job injury for which I have not already filed a workers’ compensation claim.  With regard to equity compensation, I acknowledge that I have reviewed the attached Equity Summary, which details the terms of my grants, and I agree to the accuracy of the information contained therein.  I acknowledge and agree that I have no right to acquire equity of Company other than as specified in Equity Summary.  

I acknowledge that to become effective, I must sign and return this Release to the Company so that it is received not later than 21 calendar days following the date it is provided to me.

 

 

Attachments:

 

Equity Summary

Confidentiality Agreement

Important Information Regarding FNGN Transactions

 

C-2

 

 

Exhibit 10.2

 

FINANCIAL ENGINES, INC.

AMENDED AND RESTATED

2009 STOCK INCENTIVE PLAN

EXECUTIVE OFFICER NOTICE OF STOCK OPTION GRANT

 

You have been granted the following Option to purchase Common Stock of FINANCIAL ENGINES, INC. (the “Company”) under the Company’s Amended and Restated 2009 Stock Incentive Plan (the “Plan”):

By your acceptance of this Stock Option Grant, you agree that this Option is granted under and governed by the terms and conditions of the Plan and the Stock Option Agreement (the “Agreement”), which are attached to and made a part of this document.

By accepting this Stock Option Grant you further agree that the Company may deliver by e-mail all documents relating to the Plan or this Award (including without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including without limitation, annual reports and proxy statements).  You also agree that the Company may deliver these documents by posting them on a website maintained by the Company or by a third party external administrator (“External Administrator”) under contract with the Company. If the Company posts these documents on a website, it will notify you by e-mail.

Financial Engines, Inc.
2016 Form exec officer Notice of Stock Option Grant and Agreement

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Financial Engines, Inc.
2016 Form exec officer Notice of Stock Option Grant and Agreement

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FINANCIAL ENGINES, INC.

AMENDED AND RESTATED

2009 STOCK INCENTIVE PLAN

EXECUTIVE OFFICER STOCK OPTION AGREEMENT

 

Financial Engines, Inc.
2016 Form of Exec Officer Stock Option Agreement

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Financial Engines, Inc.
2016 Form of Exec Officer Stock Option Agreement

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Financial Engines, Inc.
2016 Form of Exec Officer Stock Option Agreement

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Financial Engines, Inc.
2016 Form of Exec Officer Stock Option Agreement

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Financial Engines, Inc.
2016 Form of Exec Officer Stock Option Agreement

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BY ACCEPTING THIS AGREEMENT,

YOU AGREE TO ALL OF THE TERMS AND CONDITIONS

DESCRIBED ABOVE AND IN THE PLAN.

 

Financial Engines, Inc.
2016 Form of Exec Officer Stock Option Agreement

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Exhibit 10.3

 

FINANCIAL ENGINES, INC.

AMENDED AND RESTATED

2009 STOCK INCENTIVE PLAN

EXECUTIVE OFFICER NOTICE OF RSU AWARD

 

     You have been granted the following Restricted Stock Units (“RSUs”) representing Common Stock of FINANCIAL ENGINES, INC. (the “Company”) under the Company’s Amended and Restated 2009 Stock Incentive Plan (the “Plan”).

     

By your acceptance and the signature of the Company’s representative below, you and the Company agree that these RSUs are granted under and governed by the term and conditions of the Plan and the RSU Agreement (the “Agreement”), both of which are attached to and made a part of this document.

 

     By accepting this notice and agreement you further agree that the Company may deliver by e-mail all documents relating to the Plan or this Award (including without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that the Company is required to deliver to its security holders (including without limitation, annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a website maintained by the Company or by a third party external administrator (“External Administrator”) under contract with the Company. If the Company posts these documents on a website, it will notify you by e-mail.

 

 

Financial Engines, Inc.

2016 Form of Notice of Exec Officer RSU Award and Agreement

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FINANCIAL ENGINES, INC.

AMENDED AND RESTATED

2009 STOCK INCENTIVE PLAN

EXECUTIVE OFFICER RSU AGREEMENT

Financial Engines, Inc.

2016 Form of Notice of Exec Officer RSU Award and Agreement

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Financial Engines, Inc.

2016 Form of Notice of Exec Officer RSU Award and Agreement

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Financial Engines, Inc.

2016 Form of Notice of Exec Officer RSU Award and Agreement

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Financial Engines, Inc.

2016 Form of Notice of Exec Officer RSU Award and Agreement

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By ACCEPTING this Agreement,

you agree to all of the terms and conditions

described above and in the Plan.

 

 

Financial Engines, Inc.

2016 Form of Notice of Exec Officer RSU Award and Agreement

Exhibit 10.4

FINANCIAL ENGINES, INC.

AMENDED AND RESTATED

2009 STOCK INCENTIVE PLAN

(Approved by Stockholders on May 17, 2016)

 

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Table of Contents

 

Financial Engines, Inc.

Amended and Restated 2009 Stock Incentive Plan

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Financial Engines, Inc.

Amended and Restated 2009 Stock Incentive Plan

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Financial Engines, Inc.

Amended and Restated 2009 Stock Incentive Plan

- iii -

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Financial Engines, Inc.

Amended and Restated 2009 Stock Incentive Plan

- iv -

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Financial Engines, Inc.

Amended and Restated 2009 Stock Incentive Plan

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FINANCIAL ENGINES, INC.

AMENDED AND RESTATED

2009 STOCK INCENTIVE PLAN

The Plan was adopted by the Board of Directors on November 18, 2009, and became effective on March 16, 2010, immediately prior to the closing of the initial offering of Stock to the public pursuant to a registration statement filed by the Company with the Securities and Exchange Commission (the “Effective Date”). The Plan was amended and restated effective December 31, 2010 to amend the vesting provisions for grants to Outside Directors under Section 4(b), effective December 8, 2011 to further amend the provisions for grants to Outside Directors under Section 4(b), and effective February 14, 2013 to qualify awards under the Plan for the performance-based compensation exemption under Section 162(m) of the Code, and in certain other respects.  The Plan was further amended and restated effective March 18, 2014 to increase the authorized Share limit under the Plan, to amend certain automatic grants to Outside Directors as well as to amend the ratio at which Shares previously subject to Stock Units or Restricted Share Awards again become available for future grants under the Plan.  The Plan was most recently amended and restated effective March 21, 2016 (“Restatement Effective Date”) subject to stockholder approval in order to, among other changes, increase the authorized Share limit under the Plan and impose a limit on grants to Outside Directors.

The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Employees, Outside Directors and Consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of restricted shares, stock units, options (which may constitute incentive stock options or nonstatutory stock options) or stock appreciation rights.

(a)“Affiliate” shall mean any entity other than a Subsidiary, if the Company and/or one or more Subsidiaries own not less than 50% of such entity.

(b)“Award” shall mean any award of an Option, a SAR, a Restricted Share or a Stock Unit under the Plan.

(c)“Award Agreement” shall mean the agreement between the Company and the recipient of an Award which contains the terms, conditions and restrictions pertaining to such Award.

(d)“Board of Directors” shall mean the Board of Directors of the Company, as constituted from time to time.

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(e)“Cash-Based Award” shall mean an Award that entitles the Participant to receive a cash-denominated payment. 

(f)“Change in Control” shall mean the occurrence of any of the following events:

For purposes of subsection (d)(i) above, the term “look-back” date shall mean the later of (1) the Effective Date or (2) the date 24 months prior to the date of the event that may constitute a Change in Control.

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For purposes of subsection (d)(ii) above, the term “person” shall have the same meaning as when used in Sections 13(d) and 14(d) of the Exchange Act but shall exclude (1) a trustee or other fiduciary holding securities under an employee benefit plan maintained by the Company or a Parent or Subsidiary and (2) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the Stock.

Any other provision of this Section 2(d) notwithstanding, a transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Company’s incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction, and a Change in Control shall not be deemed to occur if the Company files a registration statement with the United States Securities and Exchange Commission for the initial offering of Stock to the public.

(g)“Code” shall mean the Internal Revenue Code of 1986, as amended.

(h)“Committee” shall mean the Compensation Committee as designated by the Board of Directors, which is authorized to administer the Plan, as described in Section 3 hereof.

(i)“Company” shall mean Financial Engines, Inc., a Delaware corporation.

(j)“Consultant” shall mean a consultant or advisor who provides bona fide services to the Company, a Parent, a Subsidiary or an Affiliate as an independent contractor (not including service as a member of the Board of Directors) or a member of the board of directors of a Parent or a Subsidiary, in each case who is not an Employee.

(k)“Employee” shall mean any individual who is a common-law employee of the Company, a Parent, a Subsidiary or an Affiliate.

(l)“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(m)“Exercise Price” shall mean, in the case of an Option, the amount for which one Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. “Exercise Price,” in the case of a SAR, shall mean an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Share in determining the amount payable upon exercise of such SAR.

(n)“Fair Market Value” with respect to a Share, shall mean the market price of one Share, determined by the Committee as follows:

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In all cases, the determination of Fair Market Value by the Committee shall be conclusive and binding on all persons.

(o)“ISO” shall mean an employee incentive stock option described in Section 422 of the Code.

(p)“Nonstatutory Option” or “NSO” shall mean an employee stock option that is not an ISO.

(q)“Option” shall mean an ISO or Nonstatutory Option granted under the Plan and entitling the holder to purchase Shares.

(r)“Outside Director” shall mean a member of the Board of Directors who is not a common-law employee of, or paid consultant to, the Company, a Parent or a Subsidiary.

(s)“Parent” shall mean any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be a Parent commencing as of such date.

(t)“Participant” shall mean a person who holds an Award.

(u)“Performance Based Award” shall mean any Restricted Share Award, Stock Unit Award or Cash-Based Award granted to a Participant that is intended to qualify as “performance-based compensation” under Section 162(m) of the Code.

(v)“Plan” shall mean this 2009 Stock Incentive Plan of Financial Engines, Inc., as amended from time to time.

(w)“Purchase Price” shall mean the consideration for which one Share may be acquired under the Plan (other than upon exercise of an Option), as specified by the Committee.

(x)“Restricted Share” shall mean a Share awarded under the Plan.

(y)“SAR” shall mean a stock appreciation right granted under the Plan.

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(z)“Service” shall mean service as an Employee, Consultant or Outside Director, subject to such further limitations as may be set forth in the Plan or the applicable Award Agreement.  Service does not terminate when an Employee goes on a bona fide leave of absence, that was approved by the Company in writing, if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. However, for purposes of determining whether an Option is entitled to ISO status, an Employee’s employment will be treated as terminating three months after such Employee went on leave, unless such Employee’s right to return to active work is guaranteed by law or by a contract. Service terminates in any event when the approved leave ends, unless such Employee immediately returns to active work. The Company determines which leaves of absence count toward Service, and when Service terminates for all purposes under the Plan.  

(aa)“Share” shall mean one share of Stock, as adjusted in accordance with Section 12 (if applicable).

(bb)“Stock” shall mean the Common Stock of the Company.

(cc)“Stock Unit” shall mean a bookkeeping entry representing the Company’s obligation to deliver one Share (or distribute cash) on a future date in accordance with the provisions of a Stock Unit Award Agreement.

(dd)“Stock Unit Agreement” shall mean the agreement between the Company and the recipient of a Stock Unit which contains the terms, conditions and restrictions pertaining to such Stock Unit.

(ee)“Subsidiary” shall mean any corporation, if the Company and/or one or more other Subsidiaries own not less than 50% of the total combined voting power of all classes of outstanding stock of such corporation. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.

(ff)“Total and Permanent Disability” shall mean any permanent and total disability as defined by Section 22(e)(3) of the Code.

(a)Committee Composition. The Plan shall be administered by the Board or a Committee appointed by the Board. The Committee shall consist of two or more directors of the Company. In addition, to the extent required by the Board, the composition of the Committee shall satisfy (i) such requirements as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act; and (ii) such requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under Section 162(m)(4)(C) of the Code.

(b)Committee for Non-Officer Grants. The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not satisfy the requirements of Section 3(a), who may administer the Plan with respect to Employees who are not considered officers or directors of the Company under Section 16 of the

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Exchange Act, may grant Awards under the Plan to such Employees and may determine all terms of such grants. Within the limitations of the preceding sentence, any reference in the Plan to the Committee shall include such committee or committees appointed pursuant to the preceding sentence. To the extent permitted by applicable laws, the Board of Directors may also authorize one or more officers of the Company to designate Employees, other than officers under Section 16 of the Exchange Act, to receive Awards and/or to determine the number of such Awards to be received by such persons; provided, however, that the Board of Directors shall specify the total number of Awards that such officers may so award.  

(c)Committee Procedures. The Board of Directors shall designate one of the members of the Committee as chairman. The Committee may hold meetings at such times and places as it shall determine. The acts of a majority of the Committee members present at meetings at which a quorum exists, or acts reduced to or approved in writing (including via email) by all Committee members, shall be valid acts of the Committee.

(d)Committee Responsibilities. Subject to the provisions of the Plan, the Committee shall have full authority and discretion to take the following actions:

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Subject to the requirements of applicable law, the Committee may designate persons other than members of the Committee to carry out its responsibilities and may prescribe such conditions and limitations as it may deem appropriate, except that the Committee may not delegate its authority with regard to the selection for participation of or the granting of Awards or other rights under the Plan to persons subject to Section 16 of the Exchange Act. All decisions, interpretations and other actions of the Committee shall be final and binding on all Participants and all persons deriving their rights from a Participant. No member of the Committee shall be liable for any action that he has taken or has failed to take in good faith with respect to the Plan or any Award under the Plan.

(e)Cancellation and Re-grant of Stock Awards. Notwithstanding any contrary provision of the Plan, neither the Board nor any Committee, nor their designees, shall have the authority to: (i) amend the terms of outstanding Options or SARs to reduce the Exercise Price thereof, or (ii) cancel outstanding Options or SARs with an Exercise Price above the current Fair Market Value per Share in exchange for another Option, SAR or other Award or for cash, unless the stockholders of the Company have previously approved such an action or such action relates to an adjustment pursuant to Section 12.

(a)General Rule. Only common-law employees of the Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs. Only Employees, Consultants and Outside Directors shall be eligible for the grant of Restricted Shares, Stock Units, Nonstatutory Options or SARs.

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(b)Automatic Grants to Outside Directors.  

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(c)Ten-Percent Stockholders. An Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, a Parent or Subsidiary shall not be eligible for the grant of an ISO unless such grant satisfies the requirements of Section 422(c)(5) of the Code.

(d)Attribution Rules. For purposes of Section 4(c) above, in determining stock ownership, an Employee shall be deemed to own the stock owned, directly or indirectly, by or for such Employee’s brothers, sisters, spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be deemed to be owned proportionately by or for its stockholders, partners or beneficiaries.

(e)Outstanding Stock. For purposes of Section 4(c) above, “outstanding stock” shall include all stock actually issued and outstanding immediately after the grant. “Outstanding stock” shall not include shares authorized for issuance under outstanding options held by the Employee or by any other person.

(a)Basic Limitation. Shares offered under the Plan shall be authorized but unissued Shares or treasury Shares. The aggregate number of Shares authorized for issuance as Awards under the Plan shall not exceed 13,500,000 Shares, plus (x) any Shares subject to outstanding options under the Company’s 1998 Stock Plan (the “Predecessor Plan”) on the effective date of this Plan that are subsequently forfeited or terminated for any reason before being exercised, such number of additional Shares not to exceed an aggregate of 2,000,000 Shares, and (y) an annual increase on the first day of each fiscal year beginning in 2010 and continuing only through the fiscal year beginning in 2013, in an amount equal to the lesser of (i) 2,000,000 Shares, (ii) 4% of the outstanding Shares on the last day of the immediately preceding year or (iii) an amount determined by the Board (the “Absolute Share Limit”). Any Shares granted in connection with Options and SARs shall be counted against the Absolute Share Limit as one (1)

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Share for every one (1) Option or SAR awarded. Any Shares granted in connection with Stock Unit or Restricted Share Awards granted on or after February 14, 2013 but before March 18, 2014 shall be counted against this limit as 1.72 Shares for every one (1) Share granted in connection with such Award.  Any Shares granted in connection with Stock Unit or Restricted Share Awards granted on or after March 18, 2014 but before the Restatement Effective Date shall be counted against this limit as 1.8 Shares for every one (1) Share granted in connection with such Award.  Any Shares granted in connection with Stock Unit or Restricted Share Awards granted on or after the Restatement Effective Date shall be counted against this limit as 1.9 Shares for every one (1) Share granted in connection with such Award.  The limitations of this Section 5(a) shall be subject to adjustment pursuant to Section 12. The number of Shares that are subject to Awards outstanding at any time under the Plan shall not exceed the number of Shares which then remain available for issuance under the Plan. The Company, during the term of the Plan, shall at all times reserve and keep available sufficient Shares to satisfy the requirements of the Plan.  

(b)Section 162(m) Award Limitation. Notwithstanding any contrary provisions of the Plan, and subject to the provisions of Section 12, no Participant may receive Options or SARs under the Plan in any calendar year that relate to an aggregate of more than 500,000 Shares, and no more than two times this amount in the first year of employment.

(c)Additional Shares. If Restricted Shares or Shares issued upon the exercise of Options are forfeited, then such Shares shall again become available for Awards under the Plan. If Stock Units, Options or SARs are forfeited or terminate for any reason before being exercised or settled, or an Award is settled in cash without the delivery of Shares to the holder, then any Shares subject to the Award shall again become available for Awards under the Plan.  Any Shares that again become available for future grants pursuant to this Section 5(c) shall be added back as one (1) Share if such Shares were subject to Options or SARs, and as either 1.72 Shares if such Shares were subject to other Stock Unit or Restricted Share Awards granted on or after February 14, 2013 but before March 18, 2014, or as 1.8 Shares if such Shares were subject to other Stock Unit or Restricted Share Awards granted on or after March 18, 2014 but before the Restatement Effective Date, or as 1.9 Shares if such Shares were subject to other Stock Unit or Restricted Share Awards granted on or after the Restatement Effective Date. Notwithstanding anything to the contrary contained herein, Shares subject to an Award under the Plan shall not again be made available for issuance or delivery under the Plan if such Shares are (a) Shares tendered or withheld by the Company in payment of the Exercise Price of an Option, or (b) Shares delivered or withheld by the Company to satisfy any tax withholding obligation, and the full number of SARs granted that are to be settled by the issuance of Shares shall be counted against the number of Shares available for award under the Plan, regardless of the number of Shares actually issued upon settlement of such SAR.  Notwithstanding the foregoing. the number of Shares that may be delivered in the aggregate pursuant to the exercise of ISOs granted under the Plan shall not exceed the Absolute Share Limit plus, to the extent allowable under Section 422 of the Code and the Treasury Regulations promulgated thereunder, any Shares that become available for issuance under the Plan pursuant to this Section 5(c).

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(a)Restricted Share Award Agreement. Each grant of Restricted Shares under the Plan shall be evidenced by a Restricted Share Award Agreement between the Participant and the Company. Such Restricted Shares shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Restricted Share Award Agreements entered into under the Plan need not be identical.

(b)Payment for Awards. Restricted Shares may be sold or awarded under the Plan for such consideration as the Committee may determine, including (without limitation) cash, cash equivalents, full-recourse promissory notes, past services and future services.

(c)Vesting. Each Award of Restricted Shares may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Restricted Share Award Agreement. A Restricted Share Award Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events. The Committee may determine, at the time of granting Restricted Shares or thereafter, that all or part of such Restricted Shares shall become vested in the event that a Change in Control occurs with respect to the Company.

(d)Voting and Dividend Rights. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company’s other stockholders. A Restricted Share Award Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid.

(e)Restrictions on Transfer of Shares. Restricted Shares shall be subject to such rights of repurchase, rights of first refusal or other restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Restricted Share Award Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares.

(a)Stock Option Award Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Award Agreement between the Participant and the Company. Such Option shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee deems appropriate for inclusion in a Stock Option Award Agreement. The Stock Option Award Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Award Agreements entered into under the Plan need not be identical.

(b)Number of Shares. Each Stock Option Award Agreement shall specify the number of Shares that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 12.

(c)Exercise Price. Each Stock Option Award Agreement shall specify the Exercise Price. The Exercise Price of an ISO shall not be less than 100% of the Fair Market Value of a

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Share on the date of grant, except as otherwise provided in 4(c), and the Exercise Price of an NSO shall not be less 100% of the Fair Market Value of a Share on the date of grant.  Notwithstanding the foregoing, Options may be granted with an Exercise Price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code.  Subject to the foregoing in this Section 7(c), the Exercise Price under any Option shall be determined by the Committee in its sole discretion. The Exercise Price shall be payable in one of the forms described in Section 8.  

(d)Withholding Taxes. As a condition to the exercise of an Option, the Participant shall make such arrangements as the Committee may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such exercise. The Participant shall also make such arrangements as the Committee may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with the disposition of Shares acquired by exercising an Option.

(e)Exercisability and Term. Each Stock Option Award Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Award Agreement shall also specify the term of the Option; provided that the term of an Option shall in no event exceed 10 years from the date of grant (five years for ISOs granted to Employees described in Section 4(c)). A Stock Option Award Agreement may provide for accelerated exercisability in the event of the Participant’s death, disability, or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Participant’s Service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. Subject to the foregoing in this Section 7(e), the Committee at its sole discretion shall determine when all or any installment of an Option is to become exercisable and when an Option is to expire.

(f)Exercise of Options. Each Stock Option Award Agreement shall set forth the extent to which the Participant shall have the right to exercise the Option following termination of the Participant’s Service with the Company and its Subsidiaries, and the right to exercise the Option of any executors or administrators of the Participant’s estate or any person who has acquired such Option(s) directly from the Participant by bequest or inheritance. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.

(g)Effect of Change in Control. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become exercisable as to all or part of the Shares subject to such Option in the event that a Change in Control occurs with respect to the Company.

(h)No Stockholder or Dividend Rights. A Participant, or a transferee of a Participant, shall have no rights as a stockholder (including dividend rights) with respect to any Shares covered by his Option until the date of the issuance of such Shares. No adjustments shall be made, except as provided in Section 12. No dividend equivalents shall be payable with respect to Options.

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(i)Modification, Extension and Renewal of Options. Within the limitations of the Plan, including Section 3(e) (which limits the cancellation and re-grant of stock awards without stockholder approval), the Committee may modify, extend or renew outstanding options. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Participant, materially impair his or her rights or obligations under such Option.  

(j)Restrictions on Transfer of Shares. Any Shares issued upon exercise of an Option shall be subject to such special forfeiture conditions, rights of repurchase, rights of first refusal and other transfer restrictions as the Committee may determine. Such restrictions shall be set forth in the applicable Stock Option Award Agreement and shall apply in addition to any general restrictions that may apply to all holders of Shares.

(k)Buyout Provisions. Subject to Section 3(e), the Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Option previously granted or (b) authorize a Participant to elect to cash out an Option previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish.

(a)General Rule. The entire Exercise Price or Purchase Price of Shares issued under the Plan shall be payable in lawful money of the United States of America at the time when such Shares are purchased, except as provided in Section 8(b) through Section 8(h) below.

(b)Surrender of Stock. To the extent that a Stock Option Award Agreement so provides, payment may be made all or in part by surrendering, or attesting to the ownership of, Shares which have already been owned by the Participant or his representative. Such Shares shall be valued at their Fair Market Value on the date when the new Shares are purchased under the Plan. The Participant shall not surrender, or attest to the ownership of, Shares in payment of the Exercise Price if such action would cause the Company to recognize compensation expense (or additional compensation expense) with respect to the Option for financial reporting purposes.

(c)Services Rendered. At the discretion of the Committee, Shares may be awarded under the Plan in consideration of services rendered to the Company or a Subsidiary. If Shares are awarded without the payment of a Purchase Price in cash, the Committee shall make a determination (at the time of the Award) of the value of the services rendered by the Participant and the sufficiency of the consideration to meet the requirements of Section 6(b).

(d)Cashless Exercise. To the extent that a Stock Option Award Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price.

(e)Exercise/Pledge. To the extent that a Stock Option Award Agreement so provides, payment may be made all or in part by delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker or lender to pledge Shares, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of the aggregate Exercise Price.

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(f)Net Exercise. To the extent that a Stock Option Award Agreement so provides, by a “net exercise” arrangement pursuant to which the number of Shares issuable upon exercise of the Option shall be reduced by the largest whole number of Shares having an aggregate Fair Market Value that does not exceed the aggregate exercise price (plus tax withholdings, if applicable) and any remaining balance of the aggregate exercise price (and/or applicable tax withholdings) not satisfied by such reduction in the number of whole Shares to be issued shall be paid by the Participant in cash other form of payment permitted under the Stock Option Award Agreement. 

(g)Promissory Note. To the extent that a Stock Option Award Agreement or Restricted Share Award Agreement so provides, payment may be made all or in part by delivering (on a form prescribed by the Company) a full-recourse promissory note.

(h)Other Forms of Payment. To the extent that a Stock Option Award Agreement or Restricted Share Award Agreement so provides, payment may be made in any other form that is consistent with applicable laws, regulations and rules.

(i)Limitations under Applicable Law. Notwithstanding anything herein or in a Stock Option Award Agreement or Restricted Share Award Agreement to the contrary, payment may not be made in any form that is unlawful, as determined by the Committee in its sole discretion.

(a)SAR Award Agreement. Each grant of a SAR under the Plan shall be evidenced by a SAR Award Agreement between the Participant and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Award Agreements entered into under the Plan need not be identical.

(b)Number of Shares. Each SAR Award Agreement shall specify the number of Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Section 12.

(c)Exercise Price. Each SAR Award Agreement shall specify the Exercise Price. The Exercise Price of a SAR shall not be less than 100% of the Fair Market Value of a Share on the date of grant.  Notwithstanding the foregoing, SARs may be granted with an Exercise Price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code.  Subject to the foregoing in this Section 9(c), the Exercise Price under any SAR shall be determined by the Committee in its sole discretion.

(d)Exercisability and Term. Each SAR Award Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Award Agreement shall also specify the term of the SAR; provided that the term of a SAR shall in no event exceed 10 years from the date of grant. A SAR Award Agreement may provide for accelerated exercisability in the event of the Participant’s death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Participant’s service. SARs may be awarded in combination with Options, and such an Award

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may provide that the SARs will not be exercisable unless the related Options are forfeited. A SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. A SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control.  

(e)Effect of Change in Control. The Committee may determine, at the time of granting a SAR or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such SAR in the event that a Change in Control occurs with respect to the Company.

(f)Exercise of SARs. Upon exercise of a SAR, the Participant (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Shares, (b) cash or (c) a combination of Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Shares subject to the SARs exceeds the Exercise Price.

(g)Modification or Assumption of SARs. Within the limitations of the Plan, including Section 3(e), the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of a SAR shall, without the consent of the holder, materially impair his or her rights or obligations under such SAR.

(h)Voting and Dividend Rights. The holders of SARs shall have no rights as a stockholder (including dividend rights) with respect to any Shares covered by his SAR unless and until the date of the issuance of Shares in settlement of such SAR. No adjustments shall be made, except as provided in Section 12. No dividend equivalents shall be payable with respect to SARs.

(a)Stock Unit Award Agreement. Each grant of Stock Units under the Plan shall be evidenced by a Stock Unit Award Agreement between the Participant and the Company. Such Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various Stock Unit Award Agreements entered into under the Plan need not be identical.

(b)Payment for Awards. To the extent that an Award is granted in the form of Stock Units, no cash consideration shall be required of the Award recipients.

(c)Vesting Conditions. Each Award of Stock Units may or may not be subject to vesting. Vesting shall occur, in full or in installments, upon satisfaction of the conditions specified in the Stock Unit Award Agreement. A Stock Unit Award Agreement may provide for accelerated vesting in the event of the Participant’s death, disability or retirement or other events. The Committee may determine, at the time of granting Stock Units or thereafter, that all or part

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of such Stock Units shall become vested in the event that a Change in Control occurs with respect to the Company.  

(d)Voting and Dividend Rights. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee’s discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions (including without limitation, any forfeiture conditions) as the Stock Units to which they attach.

(e)Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Shares or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Shares over a series of trading days. A Stock Unit Award Agreement may provide that vested Stock Units may be settled in a lump sum or in installments. A Stock Unit Award Agreement may provide that the distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date, subject to compliance with Section 409A of the Code. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Section 12.

(f)Death of Participant. Any Stock Units Award that becomes payable after the Participant’s death shall be distributed to the Participant’s beneficiary or beneficiaries. Each Participant of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Participant’s death. If no beneficiary was designated or if no designated beneficiary survives the Participant, then any Stock Unit Award that becomes payable after the Participant’s death shall be distributed to the Participant’s estate.

(g)Creditors’ Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Unit Award Agreement.

The Committee may, in its sole discretion, grant Cash-Based Awards to any Participant in such number or amount and upon such terms, and subject to such conditions, as the Committee shall determine at the time of grant and specify in an applicable Award Agreement.  The Committee shall determine the maximum duration of the Cash-Based Award, the amount of

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cash which may be payable pursuant to the Cash-Based Award, the conditions upon which the Cash-Based Award shall become vested or payable, and such other provisions as the Committee shall determine.  Each Cash-Based Award shall specify a cash-denominated payment amount, formula or payment ranges as determined by the Committee.  Payment, if any, with respect to a Cash-Based Award shall be made in accordance with the terms of the Award and may be made in cash or in shares of Stock, as the Committee determines.

(a)Adjustments. In the event of a subdivision of the outstanding Stock, a declaration of a dividend payable in Shares, a declaration of a dividend payable in a form other than Shares in an amount that has a material effect on the price of Shares, a combination or consolidation of the outstanding Stock (by reclassification or otherwise) into a lesser number of Shares, a recapitalization, a spin-off or a similar occurrence, the Committee shall make appropriate and equitable adjustments in:

(b)Dissolution or Liquidation. To the extent not previously exercised or settled, Options, SARs and Stock Units shall terminate immediately prior to the dissolution or liquidation of the Company.

(c)Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Awards shall be subject to the agreement of merger or reorganization. Subject to compliance with Section 409A of the Code, such agreement shall provide for:

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Any acceleration of payment of an amount that is subject to Section 409A of the Code will be delayed, if necessary, until the earliest time that such payment would be permissible under Section 409A without triggering any additional taxes applicable under Section 409A.

(d)Reservation of Rights. Except as provided in this Section 12, a Participant shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend or any other increase or decrease in the number of shares of stock of any class. Any issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Award. The grant of an Award pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. In the event of any change affecting the Shares or the Exercise Price of Shares subject to an Award, including a merger or other reorganization, for reasons of administrative convenience, the Company in its sole discretion may refuse to permit the exercise of any Award during a period of up to thirty (30) days prior to the occurrence of such event.

(a)Committee Powers. Subject to compliance with Section 409A of the Code, the Committee (in its sole discretion) may permit or require a Participant to:

(b)General Rules. A deferred compensation account established under this Section 13 may be credited with interest or other forms of investment return, as determined by the Committee. A Participant for whom such an account is established shall have no rights other than those of a general creditor of the Company. Such an account shall represent an unfunded and unsecured obligation of the Company and shall be subject to the terms and conditions of the

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applicable agreement between such Participant and the Company. If the deferral or conversion of Awards is permitted or required, the Committee (in its sole discretion) may establish rules, procedures and forms pertaining to such Awards, including (without limitation) the settlement of deferred compensation accounts established under this Section 13.  

The Company may grant awards under other plans or programs. Such awards may be settled in the form of Shares issued under this Plan. Such Shares shall be treated for all purposes under the Plan like Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Shares available under Section 5.

(a)Effective Date. No provision of this Section 15 shall be effective unless and until the Board has determined to implement such provision.

(b)Elections to Receive Awards. An Outside Director may elect to receive his or her annual retainer payments and/or meeting fees from the Company in the form of cash, NSOs, SARs, Restricted Shares or Stock Units, or a combination thereof, as determined by the Board. Such Awards shall be issued under the Plan. An election under this Section 15 shall be filed with the Company on the prescribed form.

(c)Number and Terms of Awards. The number of NSOs, SARs, Restricted Shares or Stock Units to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the Board. The terms of such Awards shall also be determined by the Board.

Shares shall not be issued under the Plan unless the issuance and delivery of such Shares complies with (or is exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations and the regulations of any stock exchange on which the Company’s securities may then be listed, and the Company has obtained the approval or favorable ruling from any governmental agency which the Company determines is necessary or advisable. The Company shall not be liable to a Participant or other persons as to: (a) the non-issuance or sale of Shares as to which the Company has not obtained from any regulatory body having jurisdiction the authority deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares under the Plan; and (b) any tax consequences expected, but not realized, by any Participant or other person due to the receipt, exercise or settlement of any Award granted under the Plan.

(a)Withholding Taxes. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the

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Plan. The Company shall not be required to issue any Shares or make any cash payment under the Plan until such obligations are satisfied.  

(b)Share Withholding. The Committee may permit a Participant to satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Shares that otherwise would be issued to him or her or by surrendering all or a portion of any Shares that he or she previously acquired. Such Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. In no event may a Participant have Shares withheld that would otherwise be issued to him or her in excess of the number necessary to satisfy the minimum legally required tax withholding, except to the extent such additional withholding does not result in adverse accounting treatment to the Company.

(c)Section 409A. Each Award that provides for “nonqualified deferred compensation” within the meaning of Section 409A of the Code shall be subject to such additional rules and requirements as specified by the Committee from time to time in order to comply with Section 409A.  If any amount under such an Award is payable upon a “separation from service” (within the meaning of Section 409A) to a Participant who is then considered a “specified employee” (within the meaning of Section 409A), then no such payment shall be made prior to the date that is the earlier of (i) six months and one day after the Participant’s separation from service, or (ii) the Participant’s death, but only to the extent such delay is necessary to prevent such payment from being subject to interest, penalties and/or additional tax imposed pursuant to Section 409A.  In addition, the settlement of any such Award may not be accelerated except to the extent permitted by Section 409A.

(a)Transferability. Unless the agreement evidencing an Award (or an amendment thereto authorized by the Committee) expressly provides otherwise, no Award granted under this Plan, nor any interest in such Award, may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise 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; provided, however, that an ISO may be transferred or assigned only to the extent consistent with Section 422 of the Code. Any purported assignment, transfer or encumbrance in violation of this Section 18(a) shall be void and unenforceable against the Company.

(b)Substitution and Assumption of Awards. The Committee may make Awards under the Plan by assumption, substitution or replacement of stock options, stock appreciation rights, stock units or similar awards granted by another entity (including a Parent or Subsidiary), if such assumption, substitution or replacement is in connection with an asset acquisition, stock acquisition, merger, consolidation or similar transaction involving the Company (and/or its Parent or Subsidiary) and such other entity (and/or its affiliate).  Notwithstanding any provision of the Plan (other than the maximum number of Shares that may be issued under the Plan), the terms of such assumed, substituted or replaced Awards shall be as the Committee, in its discretion, determines is appropriate.

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(c)Qualifying Performance Criteria. The number of Shares or other benefits granted, issued, retainable and/or vested under an Award may be made subject to the attainment of performance goals.  The Committee may utilize any performance criteria selected by it in its sole discretion to establish performance goals; provided, however, that in the case of any Performance Based Award, the following conditions shall apply: 

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(d)Recoupment. Notwithstanding any other provision of the Plan or any Award granted under the Plan, any recoupment or “clawback” policies adopted by the Committee pursuant to Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law shall apply to Awards granted under the Plan and any Shares that may be issued pursuant to such Awards to the extent the Compensation Committee provides at the time the policy is adopted.

No provision of the Plan, nor any Award granted under the Plan, shall be construed to give any person any right to become, to be treated as, or to remain an Employee or Consultant. The Company and its Subsidiaries reserve the right to terminate any person’s Service at any time and for any reason, with or without notice.

(a)Term of the Plan. The Plan, as set forth herein, shall terminate automatically on March 20, 2026, and may be terminated on any earlier date pursuant to Subsection (b) below.

(b)Right to Amend or Terminate the Plan. The Board of Directors may amend or terminate the Plan at any time and from time to time. Rights and obligations under any Award granted before amendment of the Plan shall not be materially impaired by such amendment, except with consent of the Participant. An amendment of the Plan shall be subject to the approval of the Company’s stockholders only to the extent required by applicable laws, regulations or rules.

(c)Effect of Termination. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan shall not affect Awards previously granted under the Plan.

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To record the adoption of the Amended and Restated Plan by the Board of Directors, the Company has caused its authorized officer to execute the same.

 

 

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Exhibit 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Lawrence M. Raffone, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Financial Engines, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Date: August 3, 2016

 

 

 

 

Exhibit 31.2

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Raymond J. Sims, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Financial Engines, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Date: August 3, 2016

 

 

 

 

Exhibit 32.1

I, Lawrence M. Raffone, the president and chief executive officer of Financial Engines, Inc. (the “Company”), certify for the purposes of section 1350 of chapter 63 of title 18 of the United States Code that, to my knowledge:

Date: August 3, 2016

 

 

 

 

Exhibit 32.2

I, Raymond J. Sims, the chief financial officer of Financial Engines, Inc. (the “Company”), certify for the purposes of section 1350 of chapter 63 of title 18 of the United States Code that, to my knowledge:

Date: August 3, 2016