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Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2004

 

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number: 0-26994

 


 

ADVENT SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware   94-2901952

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

 

301 Brannan Street, San Francisco, California 94107

(Address of principal executive offices and zip code)

 

(415) 543-7696

(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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)    Yes  x    No  ¨

 

The number of shares of the registrant’s Common Stock outstanding as of October 29, 2004 was 32,603,282.

 



Table of Contents

INDEX

 

      

PART I. FINANCIAL INFORMATION

    
        Item 1.   

Financial Statements

    
            

Condensed Consolidated Balance Sheets

  

3

            

Condensed Consolidated Statements of Operations

  

4

            

Condensed Consolidated Statements of Cash Flows

  

5

            

Notes to Condensed Consolidated Financial Statements

  

6

        Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

16

        Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

  

37

        Item 4.   

Controls and Procedures

  

38

PART II. OTHER INFORMATION

    
        Item 1.   

Legal Proceedings

  

38

        Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

  

38

        Item 3.   

Defaults Upon Senior Securities

  

39

        Item 4.   

Submission of Matters to a Vote of Security Holders

  

39

        Item 5.   

Other Information

  

39

        Item 6.   

Exhibits

  

39

Signatures

   40

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     September 30
2004


    December 31
2003


 

ASSETS

                

Current assets:

                

Cash and cash equivalents

   $ 67,768     $ 83,334  

Marketable securities

     90,237       76,738  

Accounts receivable, net

     28,701       17,448  

Prepaid expenses and other

     10,129       11,526  

Income taxes receivable

     —         1,639  
    


 


Total current assets

     196,835       190,685  

Property and equipment, net

     19,288       23,381  

Goodwill

     94,687       86,504  

Other intangibles, net

     18,937       30,495  

Other assets, net

     13,696       15,438  
    


 


Total assets

   $ 343,443     $ 346,503  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Current liabilities:

                

Accounts payable

   $ 2,377     $ 1,320  

Accrued liabilities

     20,269       17,245  

Deferred revenues

     51,487       36,123  

Income taxes payable

     8,748       8,206  
    


 


Total current liabilities

     82,881       62,894  

Deferred income taxes

     3,125       2,812  

Other long-term liabilities

     1,940       2,338  
    


 


Total liabilities

     87,946       68,044  
    


 


Stockholders’ equity:

                

Common stock

     325       329  

Additional paid-in capital

     337,077       340,394  

Accumulated deficit

     (89,987 )     (71,093 )

Accumulated other comprehensive income

     8,082       8,829  
    


 


Total stockholders’ equity

     255,497       278,459  
    


 


Total liabilities and stockholders’ equity

   $ 343,443     $ 346,503  
    


 


 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 
     2004

    2003

    2004

    2003

 

Net revenues:

                                

License and development fees

   $ 8,798     $ 7,119     $ 25,525     $ 20,331  

Maintenance and other recurring

     24,167       21,847       70,367       64,141  

Professional services and other

     5,651       5,518       16,563       15,814  
    


 


 


 


Total net revenues

     38,616       34,484       112,455       100,286  

Cost of revenues:

                                

License and development fees

     598       669       1,618       1,926  

Maintenance and other recurring

     6,754       7,087       20,954       22,128  

Professional services and other

     5,034       4,429       14,807       12,976  

Amortization and impairment of developed technology

     2,379       2,324       5,071       5,195  
    


 


 


 


Total cost of revenues

     14,765       14,509       42,450       42,225  
    


 


 


 


Gross margin

     23,851       19,975       70,005       58,061  

Operating expenses:

                                

Sales and marketing

     9,705       11,403       27,774       34,121  

Product development

     7,967       8,006       24,320       27,065  

General and administrative

     6,365       6,860       18,553       18,774  

Amortization and impairment of other intangibles

     4,414       1,964       8,498       5,855  

Restructuring charges (benefit)

     (1 )     394       4,996       6,554  
    


 


 


 


Total operating expenses

     28,450       28,627       84,141       92,369  
    


 


 


 


Loss from operations

     (4,599 )     (8,652 )     (14,136 )     (34,308 )

Interest income and other expense, net

     641       520       625       689  
    


 


 


 


Loss before income taxes

     (3,958 )     (8,132 )     (13,511 )     (33,619 )

Provision for (benefit from) income taxes

     1,211       (2,683 )     1,190       (11,094 )
    


 


 


 


Net loss

   $ (5,169 )   $ (5,449 )   $ (14,701 )   $ (22,525 )
    


 


 


 


Basic and diluted net loss per share

   $ (0.16 )   $ (0.17 )   $ (0.44 )   $ (0.70 )
    


 


 


 


Weighted average shares used to compute basic and diluted net loss per share

     32,894       32,571       33,046       32,360  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine Months Ended
September 30


 
     2004

    2003

 

Cash flows from operating activities:

             .  

Net loss

   $ (14,701 )   $ (22,525 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

                

Non-cash stock based compensation

     21       299  

Depreciation and amortization

     16,717       16,746  

Non-cash restructuring charges

     —         502  

Impairment of intangible assets

     3,370       887  

Loss on dispositions of fixed assets

     388       —    

Reduction of doubtful accounts

     (89 )     (502 )

Other than temporary loss on investments

     —         1,998  

(Gain) loss on investments

     298       (8 )

Deferred income taxes

     (26 )     (9,398 )

Other

     (335 )     54  

Changes in operating assets and liabilities, net of effect of acquisitions:

                

Accounts receivable

     5,680       3,941  

Prepaid and other assets

     4,366       3,713  

Income taxes receivable

     1,639       4,650  

Accounts payable

     (52 )     (1,879 )

Accrued liabilities

     1,219       (281 )

Deferred revenues

     (847 )     163  

Income taxes payable

     541       1,462  
    


 


Net cash provided by (used in) operating activities

     18,189       (178 )

Cash flows from investing activities:

                

Net cash used in acquisitions

     (8,513 )     (9,877 )

Purchases of property and equipment

     (2,723 )     (5,595 )

Purchases of marketable securities

     (108,253 )     (134,944 )

Sales and maturities of marketable securities

     93,290       153,022  
    


 


Net cash provided by (used in) investing activities

     (26,199 )     2,606  

Cash flows from financing activities:

                

Proceeds from issuance of common stock

     4,372       8,126  

Repurchase of common stock

     (11,899 )     (14,308 )

Repayment of capital leases

     —         (143 )
    


 


Net cash used in financing activities

     (7,527 )     (6,325 )

Effect of exchange rate changes on cash and cash equivalents

     (29 )     557  
    


 


Net change in cash and cash equivalents

     (15,566 )     (3,340 )

Cash and cash equivalents at beginning of period

     83,334       78,906  
    


 


Cash and cash equivalents at end of period

   $ 67,768     $ 75,566  
    


 


 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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ADVENT SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1—Basis of Presentation

 

The condensed consolidated financial statements include the accounts of Advent Software, Inc. (“Advent” or the “Company”) and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated.

 

Advent has prepared these condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Certain information and footnote disclosures included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in these interim statements pursuant to such SEC rules and regulations. These interim financial statements should be read in conjunction with the audited financial statements and related notes included in Advent’s 2003 Annual Report on Form 10-K, as amended on Form 10-K/A filed with the SEC. Interim results are not necessarily indicative of the results to be expected for the full year, and no representation is made thereto.

 

These condensed consolidated financial statements include all adjustments necessary to present fairly the financial position and results of operations for each interim period shown. All such adjustments occur in the ordinary course of business and are of a normal, recurring nature. Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications do not affect net revenues, net loss or stockholders’ equity. See “Reclassifications” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.

 

Note 2—Recent Accounting Pronouncements

 

In June 2004, the Financial Accounting Standards Board (“FASB”) issued Emerging Issues Task Force Issue No. 02-14 (“EITF 02-14”), “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock.” EITF 02-14 addresses whether the equity method of accounting applies when an investor does not have an investment in voting common stock of an investee but exercises significant influence through other means. EITF 02-14 states that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee. The accounting provisions of EITF 02-14 are effective for reporting periods beginning after September 15, 2004. Advent does not expect the adoption of EITF 02-14 to have a material impact on its condensed consolidated financial position, results of operations or cash flows.

 

In March 2004, the FASB issued EITF issue No. 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, as amended, which provides new guidance assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however the disclosure requirements remain effective for annual periods ending after June 15, 2004. Advent will evaluate the impact of EITF 03-1 once final guidance is issued.

 

In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition”, which supercedes Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superceded as a result of the issuance of Emerging Issues Task Force 00-21 (“EITF 00-21”), “Accounting for Revenue Arrangements with Multiple Deliverables.” SAB 104 also incorporated certain sections of the SEC’s “Revenue Recognition in Financial Statements—Frequently Asked Questions and Answers” document. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on Advent’s condensed consolidated financial position, results of operations or cash flows.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities”, which was amended by FIN 46R in December 2003 (collectively “FIN 46”). FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes in which either (a) the equity investors in the entity do not have the characteristics of a controlling financial interest or (b) the equity investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both (primary beneficiary).

 

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Advent adopted the provisions of FIN 46 in the first quarter of 2004. In conjunction with the adoption of FIN 46, it was determined that Advent’s independent European distributor, Advent Europe Holding BV (“Advent Europe”) was a variable interest entity, but that Advent was not the primary beneficiary. In accordance with FIN 46, Advent was not required to consolidate this distributor. Advent established a relationship with Advent Europe in 1998. Advent Europe and its subsidiaries have had the exclusive right to sell Advent’s software products, excluding Geneva, in certain locations in Europe and the Middle East. From 2001 through 2003, Advent purchased five of Advent Europe’s subsidiaries. As discussed in Note 11, “Acquisitions”, Advent purchased on May 3, 2004 the remaining independent distributor businesses of Advent Europe in the United Kingdom and Switzerland, as well as certain assets of Advent Europe, for consideration of $6.0 million and additional potential consideration of approximately $3.6 million, of which $1.8 million was earned during the second quarter of 2004 and recorded as additional goodwill. Advent currently has no other exposure to loss as a result of involvement with Advent Europe.

 

Note 3—Stock-Based Compensation

 

Advent uses the intrinsic value-based method as prescribed in the Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) to account for all stock-based employee compensation plans and has adopted the disclosure-only alternative of SFAS No. 123 “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. Advent is required to disclose the pro forma effects on operating results as if Advent had elected to use the fair value approach to account for all stock-based employee compensation plans. Stock-based compensation for non-employees is based on the fair value of the related stock or options.

 

If compensation had been determined based on the fair value at the grant date for awards in the three and nine months ended September 30, 2004 and 2003, consistent with the provisions of SFAS No. 123, net loss and net loss per share would have been as follows (in thousands, except per-share data):

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 
     2004

    2003

    2004

    2003

 

Net loss - as reported

   $ (5,169 )   $ (5,449 )   $ (14,701 )   $ (22,525 )

Stock-based employee compensation expense included in reported net loss, net of tax (1)

     3       85       21       260  

Total stock based employee compensation expense determined under fair value based method for all options, net of tax (1)

     (2,247 )     (1,731 )     (7,307 )     (5,683 )
    


 


 


 


Net loss - pro forma

   $ (7,413 )   $ (7,095 )   $ (21,987 )   $ (27,948 )
    


 


 


 


Net loss per share:

                                

Basic and diluted - as reported

   $ (0.16 )   $ (0.17 )   $ (0.44 )   $ (0.70 )
    


 


 


 


Basic and diluted - pro forma

   $ (0.23 )   $ (0.22 )   $ (0.67 )   $ (0.86 )
    


 


 


 



(1) Assumes an effective tax rate of 0% for the three and nine months ended September 30, 2004 due to the full valuation allowance established against the Company’s deferred tax assets during the fourth quarter of 2003 and a rate of 33% for the three and nine months ended September 30, 2003, respectively.

 

The weighted-average grant-date fair value of options granted was $9.33 per option for the three months ended September 30, 2003, and $10.79 and $10.38 per option for the nine months ended September 30, 2004 and 2003, respectively. The Company did not grant options during the three months ended September 30, 2004. The weighted-average fair values of the Employee Stock Purchase Plan (“ESPP”) rights were $4.47 per share for the three and nine months ended September 30, 2004 and $4.35 per share for the three and nine months ended September 30, 2003.

 

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The fair value of each option grant and ESPP rights were estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:

 

     Three Months Ended
September 30


   Nine Months Ended
September 30


     2004

   2003

   2004

   2003

Stock Options                    

Risk-free interest rate

   *    3.0%    2.9%    2.6%

Volatility

   *    69.8%    67.0%    71.7%

Expected life

   *    5 years    5 years    5 years

Expected dividends

   *    None    None    None
Employee Stock Purchase Plan **                    

Risk-free interest rate

   *    *    1.4%    1.1%

Volatility

   *    *    35.8%    74.5%

Expected life

   *    *    6 months    6 months

Expected dividends

   *    *    None    None

* There were no stock option grants or employee stock purchase plan rights during these respective periods.
** The ESPP periods begin every six months in the second and fourth quarter of each year.

 

In the second quarter of 2003, in connection with the Company’s voluntary stock option exchange program initiated in the fourth quarter of 2002, Advent granted options to purchase 1,770,786 shares of common stock to employees at an exercise price equal to the fair market value of the stock on the date of grant, which was $18.88 per share.

 

Note 4—Net Loss Per Share

 

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding plus the effect of outstanding stock options using the “treasury stock” method. Due to Advent’s net losses in the periods presented, options to purchase 5.5 million and 5.4 million common shares as of September 30, 2004 and 2003, respectively, were excluded from the computation of diluted net loss per share, as the effect would have been anti-dilutive.

 

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per-share data):

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 
     2004

    2003

    2004

    2003

 

Net loss

   $ (5,169 )   $ (5,449 )   $ (14,701 )   $ (22,525 )
    


 


 


 


Weighted average shares used to compute basic and diluted net loss per share

     32,894       32,571       33,046       32,360  
    


 


 


 


Basic and diluted net loss per share

   $ (0.16 )   $ (0.17 )   $ (0.44 )   $ (0.70 )
    


 


 


 


 

Note 5—Goodwill

 

The changes in the carrying value of goodwill during the nine months ended September 30, 2004 were as follows (in thousands):

 

     Goodwill

 

Balance at December 31, 2003

   $ 86,504  

Additions

     8,734  

Translation adjustments

     (551 )
    


Balance at September 30, 2004

   $ 94,687  
    


 

Additions to goodwill during the nine months ended September 30, 2004 consisted of $2,895,000 for the achievement of certain earn-out provisions of the Advent Outsource Data Management acquisition agreement, consideration of $261,000 paid to the former shareholders of Techfi Corporation which had been held in escrow for protection against undisclosed liabilities and $5,578,000 for the acquisition of Advent United Kingdom and Advent Switzerland.

 

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In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” Advent reviews goodwill for impairment annually during the fourth quarter of the fiscal year and more frequently if an event or circumstance indicates that an impairment loss has occurred. During the fourth quarter of 2003, Advent completed the annual impairment test which indicated that there was no impairment. There were no events or changes in circumstances during the nine months ended September 30, 2004 which triggered an impairment review.

 

Note 6—Other Intangibles

 

The following is a summary of other intangibles as of September 30, 2004 (in thousands):

 

     Average
Amortization
Period
(Years)


   Other
Intangibles,
Gross


   Accumulated
Amortization


    Other
Intangibles,
Net


Purchased technologies

   4.3    $ 19,238    $ (14,842 )   $ 4,396

Customer relationships

   4.9      32,451      (18,185 )     14,266

Other intangibles

   2.8      907      (632 )     275
         

  


 

Balance at September 30, 2004

        $ 52,596    $ (33,659 )   $ 18,937
         

  


 

 

The following is a summary of other intangibles as of December 31, 2003 (in thousands):

 

     Average
Amortization
Period
(Years)


   Other
Intangibles,
Gross


   Accumulated
Amortization


    Other
Intangibles,
Net


Purchased technologies

   4.2    $ 19,784    $ (11,024 )   $ 8,760

Customer relationships

   4.9      31,444      (12,840 )     18,604

Other intangibles

   5.0      6,405      (3,274 )     3,131
         

  


 

Balance at December 31, 2003

        $ 57,633    $ (27,138 )   $ 30,495
         

  


 

 

The changes in the carrying value of other intangibles during the nine months ended September 30, 2004 were as follows (in thousands):

 

     Other
Intangibles,
Gross


    Accumulated
Amortization


    Other
Intangibles,
Net


 

Balance at December 31, 2003

   $ 57,633     $ (27,138 )   $ 30,495  

Additions

     2,181       —         2,181  

Amortization

     —         (10,199 )     (10,199 )

Impairment

     (6,978 )     3,608       (3,370 )

Translation adjustments

     (240 )     70       (170 )
    


 


 


Balance at September 30, 2004

   $ 52,596     $ (33,659 )   $ 18,937  
    


 


 


 

Amortization of developed technology totaled $1.4 million for the three months ended September 30, 2004 and 2003, and $4.0 million and $4.3 million for the nine months ended September 30, 2004 and 2003, respectively. Amortization of non-technology related intangibles totaled $2.0 million for the three months ended September 30, 2004 and 2003, respectively, and $6.2 million and $5.9 million for the nine months ended September 30, 2004 and 2003, respectively.

 

In the third quarter of 2004, Advent recorded a non-cash impairment charge of $3.4 million to write off the carrying value of intangible assets related to the Techfi product line. Of this amount, $1.0 million was included in amortization and impairment of developed technology within cost of revenues as it relates to existing and core technology and the remaining

 

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$2.4 million was included in operating expenses. In September 2004, the Company decided to discontinue certain products within the Techfi product line, which was acquired in July 2002, as demand for the Techfi product line has been significantly lower than expected. As a result, the Company began a review of the recoverability of its Techfi-related intangible assets. Recoverability was measured by a comparison of the assets’ carrying amount to their expected future undiscounted net cash flows. The Company determined that these intangible assets had no remaining value and wrote off the remaining carrying value in the third quarter of 2004.

 

In the third quarter of 2003, Advent recorded a non-cash impairment charge of $890,000, included in cost of revenues, to write off intangible assets acquired as part of the acquisition of ManagerLink in November 2001. When Advent acquired Kinexus in February of 2002, some redundancy existed between the technology acquired from ManagerLink and the technology acquired from Kinexus. The Company transitioned business operations off the ManagerLink platform and abandoned the technology as of September 30, 2003. As a result, the remaining net book value of the ManagerLink intangible assets was written off.

 

Based on the carrying amount of other intangibles as of September 30, 2004, the estimated future amortization is as follows (in thousands):

 

    

Three

Months Ended
December 31

2004


   Year Ended December 31

   Thereafter

   Total

        2005

   2006

   2007

   2008

     

Estimated future amortization of developed technology intangibles

   $ 1,149    $ 2,689    $ 480    $ 78    $ —      $ —      $ 4,396

Estimated future amortization of non-technology related intangibles

     1,915      4,742      4,146      2,124      1,173      441      14,541
    

  

  

  

  

  

  

     $ 3,064    $ 7,431    $ 4,626    $ 2,202    $ 1,173    $ 441    $ 18,937
    

  

  

  

  

  

  

 

Note 7—Balance Sheet Detail

 

Effective April 1, 2004, Advent changed its methodology for recording accounts receivable and deferred revenues. In prior periods, Advent netted down amounts in deferred revenues that were still outstanding as a receivable. Beginning on April 1, 2004, accounts receivable and deferred revenues (except for future maintenance and contract deliverables not yet earned) are presented gross instead of net, as no offset entry is made. This has the effect of increasing accounts receivable and deferred revenues by equal amounts. There is no impact on the condensed consolidated statements of operations.

 

Supplemental comparative disclosures, as if the change had been retroactively applied, are presented below (in thousands):

 

     December 31
2003


Accounts receivable, net

   $ 32,752
    

Deferred revenues

   $ 51,427
    

 

The following is a summary of other assets, net (in thousands):

 

     September 30
2004


   December 31
2003


Long-term investments

   $ 8,616    $ 8,903

Long-term prepaids

     3,684      5,096

Other

     1,396      1,439
    

  

Total other assets, net

   $ 13,696    $ 15,438
    

  

 

Long-term investments include equity investments in several privately held companies, most of which can still be considered in the start-up or development stages. In 2002, Advent acquired approximately 16% of the outstanding voting stock of LatentZero Limited (“LatentZero”), a privately-held company located in the United Kingdom, for $7.0 million. This investment is accounted for under the equity method of accounting as Advent’s Chief Executive Officer is a member of LatentZero’s board of directors.

 

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Table of Contents

During the three and nine months ended September 30, 2003, Advent recorded write-downs of $266,000 and $2.0 million, respectively, on various long-term equity investments, as a result of other-than-temporary declines in the estimated fair value of such investments. No write-downs were recorded during the three and nine months ended September 30, 2004. Advent recorded income of $322,000 and a loss of $284,000 in the three and nine months ended September 30, 2004, respectively, and losses of $88,000 and $115,000 during the three and nine months ended September 30, 2003, respectively, as a result of Advent’s pro rata share of net income or losses on its equity method investment. These amounts are included in interest income and other expense, net on Advent’s condensed consolidated statements of operations.

 

The following is a summary of accrued liabilities (in thousands):

 

     September 30
2004


   December 31
2003


Salaries and benefits payable

   $ 5,934    $ 7,479

Accrued restructuring

     5,980      2,345

Other

     8,355      7,421
    

  

Total accrued liabilities

   $ 20,269    $ 17,245
    

  

 

Accrued restructuring charges are discussed further in Note 9, “Restructuring Charges”. Other accrued liabilities include accruals for royalties, sales and business taxes, acquisition related costs, and other miscellaneous items.

 

The following is a summary of other long-term liabilities (in thousands):

 

     September 30
2004


   December 31
2003


Deferred rent

   $ 1,707    $ 2,156

Other

     233      182
    

  

Total other long-term liabilities

   $ 1,940    $ 2,338
    

  

 

Note 8—Comprehensive Income (Loss)

 

The components of comprehensive loss were as follows for the periods presented (in thousands):

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 
     2004

    2003

    2004

    2003

 

Net loss

   $ (5,169 )   $ (5,449 )   $ (14,701 )   $ (22,525 )

Unrealized gain (loss) on marketable securities, net of tax

     407       (158 )     (149 )     (64 )

Foreign currency translation adjustment

     778       755       (598 )     3,054  
    


 


 


 


Comprehensive loss

   $ (3,984 )   $ (4,852 )   $ (15,448 )   $ (19,535 )
    


 


 


 


 

The components of accumulated other comprehensive income were as follows (in thousands):

 

     September 30
2004


    December 31
2003


 

Accumulated net unrealized loss on marketable securities, net of tax

   $ (216 )   $ (67 )

Accumulated foreign currency translation adjustments

     8,298       8,896  
    


 


Accumulated other comprehensive income

   $ 8,082     $ 8,829  
    


 


 

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Note 9—Restructuring Charges

 

In response to the downturn in the financial services industry, the decline in information technology spending and duplicative efforts in parts of the business as a result of various acquisitions, Advent implemented several phases of restructuring beginning in 2003. These plans were implemented to reduce costs and improve operating efficiencies by better aligning Advent’s resources to the Company’s near term revenue opportunities.

 

The restructuring charges (benefit) recorded for the three and nine months ended September 30, 2004 and 2003 were as follows (in thousands):

 

     Three Months Ended
September 30


   Nine Months Ended
September 30


     2004

    2003

   2004

   2003

Facility exit costs

   $ (1 )   $ 44    $ 4,864    $ 2,144

Severance and benefits

     —         350      132      4,000

Property and equipment abandoned

     —         —        —        410
    


 

  

  

Total

   $ (1 )   $ 394    $ 4,996    $ 6,554
    


 

  

  

 

During the nine months ended September 30, 2004, Advent recorded total restructuring charges of $5.0 million consisting of a benefit of $43,000 recorded in the first quarter of fiscal 2004 and a charge of approximately $5.0 million recorded in the second quarter of fiscal 2004. The benefit of $43,000 incurred in the first quarter of fiscal 2004 consisted of a $163,000 adjustment related to entering into a final sub-lease agreement on one of the vacated facilities in New York, New York and a $16,000 adjustment to non-cash severance. These adjustments were partially offset by a restructuring charge of $136,000 related to the termination of nine employees, located primarily in New York. The $5.0 million charge incurred in the second quarter of fiscal 2004 consisted of $4.9 million related to vacating a facility in San Francisco, California, $72,000 related to vacating a portion of a facility in Cambridge, Massachusetts and a $12,000 adjustment related to severance for terminated employees in the first quarter.

 

During the nine months ended September 30, 2003, Advent recorded total restructuring charges of $6.6 million consisting of charges of $3.5 million, $2.7 million and $0.4 million incurred in the first, second and third quarters, respectively, of fiscal 2003. The charge incurred in the first quarter of fiscal 2003 of $3.5 million consisted of $2.1 million related to closing and consolidating excess office space, primarily in New York and Australia, $979,000 related to the termination of 39 employees in the following functions: customer service (6 employees), general and administrative (4), sales and marketing (10), product development (15) and professional services (4) located primarily in New York and Australia and $410,000 relating to the abandonment and write-off of certain equipment, furniture and leasehold improvements. The charge incurred in the second quarter of fiscal 2003 of $2.7 million consisted primarily of severance and benefits related to the termination of approximately 75 employees in the following functions: customer service (13), general and administrative (10), sales and marketing (17), product development (20) and professional services (15). The charge incurred in the third quarter of fiscal 2003 of $394,000 consisted of $350,000 of severance and benefits related to the termination of 10 employees in the following functions: customer service (2), general and administrative (1), sales and marketing (5), product development (1) and professional services (1), and $44,000 related to consolidation of office space.

 

The following table sets forth an analysis of the components of the restructuring charges and the payments and non-cash charges made against the accrual during the nine months ended September 30, 2004 (in thousands):

 

     Facility Exit
Costs


    Severance and
Benefits


    Total

 

Balance of restructuring accrual at December 31, 2003

   $ 2,181     $ 164     $ 2,345  

Restructuring charges

     5,027       136       5,163  

Reversal of deferred rent related to facilities exited

     272       —         272  

Cash payments

     (1,444 )     (189 )     (1,633 )

Adjustment of prior restructuring costs

     (163 )     (4 )     (167 )
    


 


 


Balance of restructuring accrual at September 30, 2004

   $ 5,873     $ 107     $ 5,980  
    


 


 


 

As of September 30, 2004, the remaining excess facility costs are stated at estimated fair value, net of estimated sublease income of approximately $6.4 million. Advent expects to pay remaining obligations in connection with vacated facilities no later than over the remaining lease terms, which expire on various dates through 2012. Advent expects to pay the remaining severance and benefits in 2004.

 

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Table of Contents

As of September 30, 2004, cumulative restructuring charges incurred since inception of Advent’s restructuring program in 2003 were $14.1 million which consisted of $8.1 million, $5.1 million and $0.9 million relating to facility exit costs, severance and benefits, and property and equipment abandoned, respectively.

 

Note 10—Common Stock Repurchase Programs

 

Advent’s Board of Directors (the “Board”) has approved common stock repurchase programs authorizing management to repurchase shares of the Company’s common stock in the open market. The timing and actual number of shares subject to repurchase are at the discretion of Advent’s management and are contingent on a number of factors, including the price of Advent’s stock, general market conditions and alternative investment opportunities. The purchases are funded from available working capital.

 

During 2001 and 2002, the Board authorized the repurchase of up to 4.0 million shares of outstanding common stock. Through May 2004 when this program was terminated, Advent had repurchased and retired 3.8 million shares of common stock since inception of this stock repurchase program at a total cost of $78.8 million.

 

In May 2004, the Board authorized the repurchase of an additional 1.2 million shares of outstanding common stock. In September 2004, the Board authorized an extension of this stock repurchase program to cover the repurchase of an additional 800,000 shares of outstanding common stock. During the nine months ended September 30, 2004, 744,000 shares of common stock were repurchased under this program at a cost of $11.9 million.

 

Note 11—Acquisitions

 

On May 3, 2004, Advent acquired the remaining independent distributor businesses from its independent European distributor, Advent Europe, in the United Kingdom and Switzerland, as well as certain assets of Advent Europe. Advent made these acquisitions in order to gain direct control over all of its European operations, which it views as an increasingly important market. The consideration of $6.0 million consisted of $5.7 million in cash, $242,000 of assumed liabilities and $83,000 of closing costs. A total of $5.5 million of the cash consideration was paid at closing and the remaining $0.2 million was retained by the Company for possible breach of general representations and warranties. The Company will pay this amount to Advent Europe approximately one year after the closing date in the event no such breach of general representations or warranties exists. In addition, there is a potential earn-out distribution to the selling stockholders of approximately $3.6 million through December 31, 2004 under a formula based on revenue bookings. During the second quarter of 2004, approximately $1.8 million of the contingent consideration was earned and recorded as additional goodwill. This amount was paid to Advent Europe in the third quarter of 2004. During the third quarter of 2004, no contingent consideration was earned.

 

The acquisition has been accounted for using the purchase method of accounting and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets and liabilities acquired on the basis of their respective fair values on the acquisition date. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The results of operations of Advent United Kingdom and Advent Switzerland are included in the condensed consolidated statement of operations from the date of acquisition.

 

The following unaudited pro forma summary presents the consolidated results of operations as if the acquisitions had occurred at the beginning of the periods presented. This does not purport to be indicative of the results that would have been achieved had the acquisition been made as of those dates nor of the results which may occur in the future (in thousands, except per-share data):

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 
     2004

    2003

    2004

    2003

 

Net revenues

   $ 38,616     $ 34,960     $ 113,586     $ 101,640  

Net loss

   $ (5,169 )   $ (3,859 )   $ (15,633 )   $ (21,841 )

Net loss per share-basic and diluted

   $ (0.16 )   $ (0.12 )   $ (0.47 )   $ (0.67 )

 

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Table of Contents

The allocation of the purchase price for Advent United Kingdom, Advent Switzerland and certain assets of Advent Europe was as follows (in thousands, except estimated remaining useful life):

 

    

Estimated Remaining
Useful Life

(Years)


   Purchase Price
Allocation


 

Goodwill

        $ 5,578  

Customer relationships

   4      326  

Sub-licensing agreements

   4      913  

Employment agreements

   3      232  

Developed technology

   3      710  

Tangible assets

          2,754  

Current liabilities

          (2,387 )

Deferred tax liabilities

          (337 )
         


Total purchase price

        $ 7,789  
         


 

In May 2003, Advent purchased all of the common stock of Advent Netherlands BV from its independent European distributor for a total purchase price of $9.6 million, which includes repayment of a loan and is net of approximately $180,000 cash acquired. In addition, there was a potential earn-out distribution to the selling stockholders of up to $1.6 million through December 31, 2003 under a formula based on revenue results for the eight months ended December 31, 2003, plus 50% of any operating margins which exceed 20% for the year ending December 31, 2004. The right to receive this earn-out was effectively terminated with the purchase of certain assets of Advent Europe on May 3, 2004. Through this date, no additional consideration had been earned or paid.

 

The acquisition has been accounted for using the purchase method of accounting and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets and liabilities acquired on the basis of their respective fair values on the acquisition date. The amounts allocated to identifiable intangibles were determined based upon management’s estimates using established valuation techniques. The acquisition includes distribution rights in Belgium, the Netherlands and Luxembourg. The results of operations of Advent Netherlands BV were included in the consolidated financial statements beginning on the acquisition date. Advent has not presented the pro forma results of operations of Advent Netherlands BV as the results are not material to Advent’s results of operations. The allocation of the Advent Netherlands BV purchase price was as follows (in thousands, except estimated remaining useful life):

 

    

Estimated Remaining
Useful Life

(Years)


   Purchase Price
Allocation


 

Goodwill

        $ 8,908  

Customer relationships

   5      347  

Sub-licensing agreement

   5      1,875  

Non-compete agreements

   1      70  

Tangible assets

          1,809  

Current liabilities

          (2,600 )

Deferred tax liabilities

          (800 )
         


Total purchase price

        $ 9,609  
         


 

Note 12—Commitments and Contingencies

 

Advent leases office space and equipment under non-cancelable operating lease agreements, which expire at various dates through May 2012. As of September 30, 2004, Advent’s remaining operating lease commitments through 2012 were approximately $40 million. As of September 30, 2004, future minimum rental income to be received under non-cancelable sub-leases totaled $6.4 million.

 

Advent has contingent liabilities related to acquisitions of the remaining independent distributor businesses of Advent Europe in the United Kingdom and Switzerland, and Advent Outsource Data Management in the form of potential earn-out distributions. These earn-outs will be recorded as additional goodwill, if earned.

 

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Table of Contents

Under the terms of the purchase agreement with Advent Europe, an earn-out distribution of $3.6 million is due upon achievement of certain revenue goals in 2004. As of September 30, 2004, $1.8 million has been earned and recorded as additional goodwill and was paid in the third quarter of fiscal 2004. Additional amounts, if earned, will be paid in the first quarter of 2005.

 

Under the terms of the purchase agreement of Advent Outsource Data Management, there is an earn-out provision of up to $5.0 million under a formula based on revenue results through December 31, 2004. Through September 30, 2004, $2.9 million has been earned and recorded as additional goodwill under this provision, of which approximately $1.8 million was paid as of September 30, 2004 and the remaining $1.1 million will be paid in the fourth quarter of 2004. Additional consideration, if earned under this earn-out provision, will be paid in the first quarter of 2005.

 

From time to time, Advent is subject to various other legal proceedings, claims and litigation arising in the ordinary course of business. The ultimate costs to resolve these matters are not expected to have a material adverse effect on the condensed consolidated financial position, results of operations, or cash flows.

 

Note 13—Segment and Geographic Information

 

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim reports. It also established standards for related disclosures about products and services, geographic areas and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.

 

Advent’s chief operating decision maker is the Chief Executive Officer. Advent operates under a single reportable segment consisting of the development, marketing and sale of stand-alone and client/server software products, data interfaces and related maintenance and services that automate, integrate and support certain mission critical functions of investment management organizations.

 

Geographical information as of and for the periods presented is as follows (in thousands):

 

     September 30
2004


   December 31
2003


Long-lived assets (1):

             

United States

   $ 23,918    $ 29,635

Foreign

     449      282
    

  

Total

   $ 24,367    $ 29,917
    

  

 

     Three Months Ended
September 30


   Nine Months Ended
September 30


     2004

   2003

   2004

   2003

Geographic net sales (2):

                           

United States

   $ 34,589    $ 32,952    $ 102,796    $ 95,524

Foreign

     4,027      1,532      9,659      4,762
    

  

  

  

Total

   $ 38,616    $ 34,484    $ 112,455    $ 100,286
    

  

  

  


(1) Long-lived assets exclude intangible assets, financial instruments and deferred tax assets.
(2) Geographic net sales are based on the location to which the product is shipped.
.

 

No one customer accounted for more than 10% of net revenues for the three and nine months ended September 30, 2004 and 2003.

 

Note 14—Related Party Transactions

 

Stephanie DiMarco, Chief Executive Officer of the Company, is a director of LatentZero. When purchasing certain Advent products, customers have the option to purchase LatentZero products to provide additional functionality. Based on sales of the LatentZero products by the Company, Advent pays a royalty fee to LatentZero. Advent has made royalty payments to LatentZero of $0 and $324,000 during the three and nine months ended September 30, 2004, respectively, and $68,000 and $156,000 during the three and nine months ended September 30, 2003, respectively. The Company owed amounts to LatentZero totaling $200,000 and $270,000 as of September 30, 2004 and December 31, 2003, respectively.

 

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Table of Contents

During fiscal 2004, Advent entered into a sub-lease agreement with LatentZero on one of Advent’s facilities in New York, New York. Sub-lease income from LatentZero was $55,000 for the nine months ended September 30, 2004. Accounts receivable from LatentZero was $23,000 as of September 30, 2004.

 

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

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

You should read the following discussion in conjunction with our condensed consolidated financial statements and related notes. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, including, but not limited to statements referencing our expectations relating to future revenues and expenses. Forward-looking statements can be identified by the use of terminology such as “may”, “will”, “should”, “expect”, “plan” “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue” or other similar terms and the negative of such terms and include statements about our products and expected financial performance. Such forward-looking statements are based on our current plans and expectations and involve known and unknown risks and uncertainties which may cause our actual results or performance to be materially different from any results or performance expressed or implied by such forward-looking statements. Such factors include, but are not limited to, the “Risk Factors” set forth below as well as other risks identified from time to time in other SEC reports. You should not place undue reliance on our forward-looking statements, as they are not guarantees of future results, levels of activity or performance and represent our expectations only as of the date they are made.

 

Unless expressly stated or the context otherwise requires, the terms “we”, “our”, “us” and “Advent” refer to Advent Software, Inc. and its subsidiaries.

 

Overview and Strategy

 

Advent was founded and incorporated in 1983 in California and reincorporated in Delaware in November 1995. We offer integrated software solutions for automating and integrating data and work flows across the investment management organization, as well as the information flows between the investment management organization and external parties. Our products are intended to increase operational efficiency, improve the accuracy of client information and enable better decision-making. Each solution focuses on specific mission-critical functions of the investment management organization and is tailored to meet the needs of the particular client, as determined by size, assets under management and complexity of the investment environment.

 

We also have a wholly-owned subsidiary, Second Street Securities, which is an SEC-registered broker/dealer that provides independent research and brokerage services to institutional investors and registered investment advisors on a fully-disclosed basis. Second Street Securities offers our customers the ability to pay for Advent products and services through brokerage commissions and to “soft dollar” third-party products and services.

 

During the third quarter of 2004, we continued to focus on developing new products to serve our core clients and to expand into growing markets. We announced a new release of one of our major products, Moxy 5.0, in September which is currently running live as part of the beta process with 20 existing clients. Among the new features of Moxy are a real-time P&L view that allows traders to track their positions down to the tax-lot level; comprehensive security coverage enabling the trading of equities, fixed income, foreign securities and derivatives; an enhanced trader workflow, which offers increased flexibility to allow traders to customize their trading process; and trade settlement in any currency. Moxy 5.0 also includes a new rules manager, new customizable user-defined fields, integration with major data vendors, enhanced FIX connectivity, and integration with firms providing algorithmic trading strategies. Because of its ability to trade complex instruments, Moxy 5.0 can also be a trading solution for our Geneva clients and was designed to work specifically with Geneva, in addition to working with Axys.

 

We also released Advent Packager in the third quarter. Packager is a module that works with our Axys product to create period-end reporting workflow efficiencies for many investment management firms. Packager collates Axys reports and other third-party documents into a consolidated PDF file. It also saves client preferences and generates statements that can be highly personalized for individual clients.

 

Over the past several years, we have offered our entry-level product, Advent Office Essentials, on a term license model. In the future, we intend to expand the use of term licenses across all of our Advent license product lines to maximize long-term customer value and improve the predictability of our revenue streams.

 

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Table of Contents

This quarter, we signed term licenses with a total contract value of $4.5 million with an average term period of 3.7 years. On an annual basis, these contracts will contribute approximately $1.2 million to license and maintenance revenue. While revenue from term licenses has not been material to date as a proportion of total license revenue, we expect this proportion to increase in future periods as a result of our intention to expand the use of term licenses. If we are successful in this strategy, it will result in a greater portion of license revenue being deferred and could therefore impact the level and timing of our profitability.

 

We have also been seeking to align our cost structure with current revenue levels. Our total cost of revenues and operating expenses of $126.6 million in the nine months ended September 30, 2004 are down from $134.6 million in the same period last year. The current cost structure reflects the restructuring activities initiated in 2003 and continued cost-cutting initiatives.

 

In the second quarter of 2004, we purchased the remaining independent distributor businesses of Advent Europe Holding BV (“Advent Europe”) in the United Kingdom and Switzerland and certain assets of Advent Europe. We now control all of our European operations. Over the last nine months, we have added significant customers in Europe and Middle East (“EMEA”) regions and view this as an increasingly important market for us in the future. Our challenge will be to successfully integrate the new European entities and continue growth in those markets. Revenue from our EMEA businesses improved approximately 15% from the prior quarter, reflecting the first full quarter after our purchase of these businesses from Advent Europe.

 

Our goal is to return to profitability. Our ability to achieve this target will depend upon our ability to introduce new products, license software and sell services to new and existing customers and to renew maintenance contracts at similar levels to what we achieved during the first nine months of 2004. While recent experience indicates that our customers and prospects are willing to make capital investments, there is still uncertainty as to our ability to achieve the amount of revenue growth required for profitability. Our cost structure, excluding the impact of our acquisitions of the remaining distributor businesses of Advent Europe in the United Kingdom and Switzerland, must remain approximately flat with current levels of expenditure or decrease in order to reach profitability.

 

In addition, worldwide demand for large investment management software systems has decreased over the past several years. The global economic slowdown has resulted in many organizations reducing their information technology budgets and related expenditures on software and related services. This has not only limited sales of licenses to new and existing customers but has also resulted in longer customer evaluation and decision-making processes and deferral or delay of information technology projects.

 

We believe these macroeconomic trends have hindered the growth of our revenues. Despite these trends, our restructuring activities initiated in 2003 and our management of operating expenses have allowed us to decrease our net loss. We continue to focus on aggressively managing costs and are achieving positive cash flow from operations while investing in areas we deem appropriate, such as the recent expansion of our European operations.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation of long-lived assets, intangible assets and goodwill and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe our most critical accounting policies and estimates include the following:

 

  revenue recognition;

 

  income taxes;

 

  impairment of long-lived assets; and

 

  restructuring charges and related accruals.

 

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Table of Contents

Revenue recognition. We recognize revenue from software licenses, development fees, maintenance, other recurring revenues, professional services and other revenues. In addition, we earn commissions from customers who use our broker/dealer, Second Street Securities, to “soft dollar” the purchase of non-Advent products and services. “Soft dollaring” enables the customers to use the commissions earned on trades to pay all or part of the fees owed to us for non-Advent products or services, which were initially paid by Advent. The commission revenues earned from “soft dollaring” non-Advent products or services are recorded as other revenues in professional services and other revenues on our condensed consolidated statements of operations.

 

We offer a wide variety of products and services to a large number of financially sophisticated customers. While many of our lower priced license transactions, maintenance contracts, subscription-based transactions and professional services projects conform to a standard structure, many of our larger transactions are complex and may require significant review and judgment in our application of generally accepted accounting principles.

 

Software license and development fees. We recognize revenue from the licensing of software when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. We use a signed license agreement as evidence of an arrangement. Sales through our distributors are evidenced by a master agreement governing the relationship together with binding order forms and signed contracts from the distributor’s customers. Revenue is recognized upon shipment to the distributor’s customer and when all other revenue recognition criteria have been met. Delivery occurs when product is delivered to a common carrier F.O.B shipping point. While many of our arrangements generally do not include acceptance provisions, certain complex deals may involve acceptance criteria. If acceptance provisions are provided, delivery is deemed to occur upon acceptance. We assess whether the fee is fixed and determinable based on the payment terms associated with the transaction. We assess whether the collectibility of the resulting receivable is reasonably assured based on a number of factors, including the credit worthiness of the customer determined through review of credit reports, our transaction history with the customer, other available information and pertinent country risk if the customer is located outside the United States. Software licenses are sold with maintenance and, frequently, professional services. We allocate revenue to delivered components, normally the license component of the arrangement, using the residual value method, based on objective evidence of the fair value of the undelivered elements, which is specific to us. We offer term licenses as an alternative to perpetual licenses and generally recognize revenue for term licenses ratably over the period of the contract term. While revenue from term licenses has not been material in the past, we have begun a transition from selling mostly perpetual licenses to selling a mix of term and perpetual contracts, and we expect term license revenue to increase as a proportion of total license revenue in the future.

 

Development fees are derived from contracts that we have entered into with other companies, including customers and development partners. Agreements for which we receive development fees generally provide for the development of technologies and products that are expected to become part of our general product offerings in the future. Revenues for license development projects are recognized primarily using the percentage-of-completion method of accounting, based on costs incurred to date compared with the estimated cost of completion.

 

If a customer chooses to enter into a “soft dollar” arrangement through our in-house broker/dealer subsidiary, Second Street Securities, the “soft dollar” arrangement does not change or modify the original fixed or determinable fee in the written contract. The customer is required to pay the original fee within one year. If insufficient trading volume is generated to pay the entire original fee within one year, the customer is still required to render payment within one year. If the customer chooses to use a third-party broker/dealer, the original payment terms apply, regardless of the arrangement with the third-party broker/dealer. The option to “soft dollar” a transaction does not alter the underlying revenue recognition for the transaction; all the revenue recognition criteria listed in the “Software license” section above must be assessed in determining how the revenue will be recognized.

 

Our standard practice is to enforce our contract terms and not allow our customers to return software. We have, however, on limited occasions allowed customers to return software and have recorded sales returns reserves as offsets to revenue in the period the sales return becomes probable.

 

We do have three situations where we provide a contractual limited right of return to end-user customers only: in shrink-wrap license agreements for Advent products, our MicroEdge product and our NPO product. The shrink-wrap license agreement for Advent products provides for a right of return within seven days of delivery of the software. The MicroEdge software license agreement allows for a thirty-day money back guarantee. The NPO license agreement allows for a seven-day right of return. We recognize revenue on delivery since the fee is fixed and determinable, the buyer is obligated to pay, the risk of loss passes to the customer, and we have the ability to estimate returns. Our ability to estimate returns is based on a long history of experience with relatively homogenous transactions and the fact that the return period is short. We have recorded a sales returns reserve (contra revenue account) to account for these situations based on our historical experience.

 

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Maintenance and other recurring revenues. We offer annual maintenance programs that provide for technical support and updates to our software products. Maintenance fees are charged in the initial licensing year and for renewals of annual maintenance in subsequent years. We offer other recurring revenue services that are either subscription-based or transaction-based, and primarily include the provision of software interfaces to, and the capability to download securities information from, third party data providers. Fair value for maintenance is based upon renewal rates stated in the contracts or, in limited cases, separate sales of renewals to other customers. We recognize revenue for maintenance ratably over the contract term. We recognize revenue from recurring revenue transactions either ratably over the subscription period or as the transactions occur.

 

Subscription-based revenues and any related set-up fees are recognized ratably over the term of the agreement.

 

Professional services and other revenues. We offer a variety of professional services that include project management, implementation, data conversion, integration, custom report writing and training. Fair value for professional services is based upon separate sales of these services by us to other customers. Our professional services are generally billed based on hourly rates together with reimbursement for travel and accommodation expenses. Our professional services and other revenue also include revenue from our semi-annual user conferences. We generally recognize revenue as these professional services are performed. Certain professional services arrangements involve acceptance criteria. In these cases, revenue and related expenses are recognized upon acceptance.

 

Commission revenues received from “soft dollar” transactions for products and services not related to Advent products and services are recorded as other revenues. Revenues for these “soft dollar” transactions are recognized on a trade-date basis as securities transactions occur.

 

Income taxes. We account for income taxes under an asset and liability approach that requires the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities be recognized as deferred tax assets and liabilities. Generally accepted accounting principles require us to evaluate whether or not we will realize a benefit from net deferred tax assets on an ongoing basis. A valuation allowance is recorded to reduce the net deferred tax assets to an amount that will more likely than not be realized. Significant factors considered by management in assessing the need for a valuation allowance include the following:

 

  our historical operating results;

 

  the length of time over which the differences will be realized;

 

  tax planning opportunities; and

 

  expectations for future earnings.

 

In considering whether or not we will realize a benefit from net deferred tax assets, recent losses must be given substantially more weight than any projections of future profitability. In 2003, we determined that, under applicable accounting principles, based on our history of consecutive losses since the second quarter of 2002, it was more likely than not that we would not realize any value for our net deferred tax assets. Accordingly, we established a valuation allowance equal to 100% of the amount of these assets. Income tax expense recorded in the future will be reduced to the extent sufficient positive evidence materializes to support a reversal of, or decrease in, the valuation allowance.

 

Impairment of long-lived assets. We review our goodwill for impairment annually during the fourth quarter of our fiscal year and more frequently if an event or circumstance indicates that an impairment loss has occurred. We are required to test our goodwill for impairment at the reporting unit level. We have determined that we have only one reporting unit. The test for goodwill impairment is a two-step process:

 

The first step compares the fair value of our reporting unit with its carrying amount, including goodwill. If the fair value of our reporting unit exceeds its carrying amount, goodwill of our reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary.

 

The second step, used to measure the amount of impairment loss, compares the implied fair value of our reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of our reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

 

During the fourth quarter of 2003, we completed our annual impairment test which indicated there was no impairment. There were no events or changes in circumstances during the nine months ended September 30, 2004 which triggered an impairment review.

 

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We review our other long-lived assets including property and equipment and other intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

 

  significant underperformance relative to expected 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;

 

  significant negative market or economic trends;

 

  significant decline in our stock price for a sustained period; and

 

  our market capitalization relative to net book value.

 

Recoverability is measured by a comparison of the assets’ carrying amount to their expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment to be recognized is measured based on the amount by which the carrying amount of the asset exceeds its fair value.

 

We hold minority interests in several privately held companies having operations or technology in areas within our strategic focus. Most of these investments can be considered as early stage investment opportunities and are classified as other assets on our condensed consolidated balance sheets. One of these investments is accounted for under the equity method of accounting. We record an investment write-down when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. We estimate an investment’s carrying value based primarily on its revenue and implied valuation based on revenue multiples for similar public companies, supplemented by any recent valuation events, such as an equity financing.

 

During the third quarter of 2004, we recorded a non-cash impairment charge of $3.4 million to write-off the carrying value of certain intangible assets. This write-off was a result of our decision to sunset certain products within the Techfi product line as demand for our Techfi product line has been significantly lower than expected.

 

Restructuring charges and related accruals. Beginning in 2003, we developed and implemented formalized plans for restructuring our business to better align our resources to market conditions and recorded significant charges. In connection with these plans, we recorded estimated expenses for severance and benefits, lease cancellations, asset write-offs and other restructuring costs. Given the significance of and the timing of the execution of such activities, this process is complex and involves periodic reassessments of estimates made at the time the original decisions were made, including evaluating real estate market conditions for expected vacancy periods and sub-lease rents. We continually evaluate the adequacy of the remaining liabilities under our restructuring initiatives. Although we believe that these estimates accurately reflect the costs of our restructuring plans, actual results may differ, thereby requiring us to record additional provisions or reverse a portion of such provisions.

 

Recent Accounting Pronouncements

 

In June 2004, the Financial Accounting Standards Board (“FASB”) issued Emerging Issues Task Force Issue No. 02-14 (“EITF 02-14”), “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock.” EITF 02-14 addresses whether the equity method of accounting applies when an investor does not have an investment in voting common stock of an investee but exercises significant influence through other means. EITF 02-14 states that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee. The accounting provisions of EITF 02-14 are effective for reporting periods beginning after September 15, 2004. We do not expect the adoption of EITF 02-14 to have a material impact on our condensed consolidated financial position, results of operations or cash flows.

 

In March 2004, the FASB issued EITF issue No. 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, as amended, which provides new guidance assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however the disclosure requirements remain effective for annual periods ending after June 15, 2004. We will evaluate the impact of EITF 03-1 once final guidance is issued.

 

In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition”, which supercedes Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” The primary

 

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purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superceded as a result of the issuance of Emerging Issues Task Force 00-21 (“EITF 00-21”), “Accounting for Revenue Arrangements with Multiple Deliverables.” SAB 104 also incorporated certain sections of the SEC’s “Revenue Recognition in Financial Statements—Frequently Asked Questions and Answers” document. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on our condensed consolidated financial position, results of operations or cash flows.

 

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”, which was amended by FIN 46R in December 2003. FIN 46 expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes in which either (a) the equity investors in the entity do not have the characteristics of a controlling financial interest or (b) the equity investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both (primary beneficiary).

 

We adopted the provisions of FIN 46 in the first quarter of 2004. In conjunction with the adoption of FIN 46, we determined that our independent European distributor, Advent Europe, was a variable interest entity, but that we were not the primary beneficiary. In accordance with FIN 46, we were not required to consolidate this distributor. On May 3, 2004, we purchased the remaining independent distributor businesses of Advent Europe in the United Kingdom and Switzerland, as well as certain assets of Advent Europe, for consideration of $6.0 million and additional potential consideration of approximately $3.6 million, of which $1.8 million was earned and recorded as additional goodwill during the second quarter of 2004. We have no other exposure to loss as we do not have any involvement anymore with Advent Europe.

 

Reclassifications

 

Certain prior period amounts, as detailed below, have been reclassified to conform to the current period presentation to better reflect our view of the current business. These reclassifications do not affect total net revenues, net loss, cash flows, or stockholders’ equity.

 

Amortization and Impairment of Developed Technology. In the fourth quarter of 2003, we began presenting amortization of developed technology within cost of revenues. Through our various acquisitions, we have purchased technologies which are either licensed directly to our customers or used internally to provide services to our customers for which we derive revenue. As a result of our acquisitions from 2001 through the middle of 2004, the amortization related to purchased technology has increased. We believe that presenting this amortization within cost of revenues more accurately presents our total cost of revenues and gross margin. We have reclassified approximately $1.4 million and $4.3 million for the three and nine month periods ended September 30, 2003, which was previously included in amortization of other intangibles within operating expenses, to amortization and impairment of developed technology within cost of revenues.

 

In addition, we began presenting impairment of developed technology within cost of revenues in the fourth quarter of 2003. In the third quarter of 2003, we recorded an impairment charge of $0.9 million to write-off intangible assets acquired as part of our acquisition of ManagerLink in November 2001. When we acquired Kinexus in February 2002, some redundancy existed between the technology acquired from ManagerLink and the technology acquired from Kinexus. We transitioned business operations off the ManagerLink platform and abandoned the technology as of September 30, 2003. As a result, we wrote-off the remaining book value of the ManagerLink intangible assets. We believe that presenting this impairment within cost of revenues more accurately presents our total cost of revenues and gross margin. We have reclassified approximately $0.9 million for the three and nine month periods ended September 30, 2003, which was previously included in restructuring and impairment loss within operating expenses, to amortization and impairment of developed technology within cost of revenues.

 

Accounts Receivable and Deferred Revenues. In the first quarter of 2004, we discontinued netting down specific revenue reserves which were included in deferred revenues against their corresponding receivables. We have determined that for presentation purposes, the discontinuation of the net-down for the reserves gives more visibility to our receivables and deferred revenue accounts. We have reclassified $1.6 million for the fourth quarter of 2003 resulting in corresponding increases in both accounts receivable and deferred revenue.

 

In addition to the reclassifications described above, corresponding reclassifications were also made on our condensed consolidated balance sheets and statements of cash flows.

 

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In addition to discontinuing the specific reserve net down noted above in the first quarter of 2004, we also changed our methodology for recording accounts receivable and deferred revenues in the second quarter of 2004. In prior periods, we netted down amounts in deferred revenue that were still outstanding as a receivable. Beginning on April 1, 2004 accounts receivable and deferred revenues (except for future maintenance and contract deliverables not yet earned) are shown gross instead of net, as no offset entry is made. There is no impact on the condensed consolidated statements of operations.

 

Supplemental comparative disclosures, as if the change had been retroactively applied, are presented below (in thousands):

 

     December 31
2003


Accounts receivable, net

   $ 32,752
    

Deferred revenues

   $ 51,427
    

 

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

 

The following table sets forth, for the periods indicated, certain financial information as a percentage of total net revenues:

 

     Three Months Ended
September 30


    Nine Months Ended
September 30


 
     2004

    2003

    2004

    2003

 

Net revenues:

                        

License and development fees

   23 %   21 %   23 %   20 %

Maintenance and other recurring

   62     63     62     64  

Professional services and other

   15     16     15     16  
    

 

 

 

Total net revenues

   100     100     100     100  

Cost of revenues:

                        

License and development fees

   2     2     1     2  

Maintenance and other recurring

   17     20     19     22  

Professional services and other

   13     13     13     13  

Amortization and impairment of developed technology

   6     7     5     5  
    

 

 

 

Total cost of revenues

   38     42     38     42  
    

 

 

 

Gross margin

   62     58     62     58  
    

 

 

 

Operating expenses:

                        

Sales and marketing

   25     33     25     34  

Product development

   21     23     22     27  

General and administrative

   17     20     16     19  

Amortization and impairment of other intangibles

   11     6     8     6  

Restructuring charges (benefit)

   —       1     4     6  
    

 

 

 

Total operating expenses

   74     83     75     92  
    

 

 

 

Loss from operations

   (12 )   (25 )   (13 )   (34 )

Interest income and other expense, net

   2     1     1     —    
    

 

 

 

Loss before income taxes

   (10 )   (24 )   (12 )   (34 )

Provision for (benefit from) income taxes

   3     (8 )   1     (12 )
    

 

 

 

Net loss

   (13 )%   (16 )%   (13 )%   (22 )%
    

 

 

 

 

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NET REVENUES

 

     Three Months Ended
September 30


   Change

  

Nine Months Ended

September 30


   Change

     2004

   2003

      2004

   2003

  

Total net revenues (in thousands)

   $ 38,616    $ 34,484    $ 4,132    $ 112,455    $ 100,286    $ 12,169

 

Our net revenues are made up of three components: license and development fees; maintenance and other recurring; and professional services and other. License revenues are derived from the licensing of software products, while development fees are derived from development contracts that we have entered into with other companies, including customers and development partners. Maintenance and other recurring revenues are derived from maintenance fees charged in the initial licensing year, renewals of annual maintenance services in subsequent years and recurring revenues derived from our subscription-based and transaction-based services. Professional services and other revenues include fees for consulting, training services, “soft dollaring” of third-party products and services and our user conferences.

 

Each of the major revenue categories has historically varied as a percentage of net revenues and we expect this variability to continue in future periods. This variability is partially due to the timing of the introduction of new products, the relative size and timing of individual software licenses, as well as the size of the implementation, the resulting proportion of the maintenance and professional services components of these license transactions and the amount of client use of pricing and related data. We expect total net revenues to be in the range of $37.5 million to $39.5 million in the fourth quarter of 2004.

 

License and Development Fees

 

     Three Months Ended
September 30


    Change

   Nine Months Ended
September 30


    Change

     2004

    2003

       2004

    2003

   

License and development fees (in thousands)

   $ 8,798     $ 7,119     $ 1,679    $ 25,525     $ 20,331     $ 5,194

Percent of total net revenues

     23 %     21 %            23 %     20 %      

 

The increase in license revenue and development fees in the three and nine months September 30, 2004 reflected the continued focus on selling our core Advent Office and Geneva products. Revenues from Axys, Moxy and Partner comprised almost half of the license sales in the three and nine months ended September 30, 2004. Axys and Geneva revenues increased substantially in both the three and nine months ended September 30, 2004 as compared with the same periods in fiscal 2003. We also had significant growth in license revenues during the three and nine months ended September 30, 2004 from our European subsidiaries in the EMEA regions reflecting the first full quarter after our purchase of these businesses from Advent Europe in the second quarter of 2004, and from our Microedge/NPO subsidiaries. The volume of larger license contracts recognized during the three and nine months ended September 30, 2004 also increased. In addition, this was the first quarter where we had a significant amount of license business signed on a term model.

 

We typically license our products on a per server, per user basis with the price per customer varying based on the selection of the products licensed, the number of site installations and the number of authorized users. We earn development fees when we provide product solutions, which are not part of our standard product offering. For the three and nine months ended September 30, 2004 and 2003, revenue from development fees was less than 10% of total license and development fees revenue. For the three and nine months ended September 30, 2004 and 2003, soft dollar revenues generated from Advent related licenses paid for through soft dollar transactions represented less than 5% of total license and development revenues.

 

We expect license and development fee revenue to remain relatively flat in the fourth quarter of fiscal 2004.

 

Maintenance and Other Recurring Revenues

 

     Three Months Ended
September 30


    Change

   Nine Months Ended
September 30


    Change

     2004

    2003

       2004

    2003

   

Maintenance and other recurring revenues (in thousands)

   $ 24,167     $ 21,847     $ 2,320    $ 70,367     $ 64,141     $ 6,226

Percent of total net revenues

     62 %     63 %            62 %     64 %      

 

The increase in maintenance and other recurring revenues in the three and nine months ended September 30, 2004 reflected an increase in new maintenance support contracts as a result of an increase in the number of new license deals, continuing maintenance revenues from our established customer base and an increase in wealth subscription services. We disclose our maintenance renewal rate one quarter in arrears. The renewal rate for maintenance contracts renewed in the second quarter of 2004 is calculated by dividing cash collected from these contracts as of September 30, 2004 by the total maintenance billings for the second quarter. The maintenance renewal rate for the second quarter of 2004 was 80%, which was slightly lower than our average for the previous four quarters, primarily due to a cancellation by a single large customer.

 

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Maintenance revenue has remained relatively flat as a proportion of total maintenance and recurring revenues at approximately 69% during the three and nine months ended September 30, 2004 and 2003. We expect maintenance and recurring revenues to remain relatively flat in the fourth quarter of 2004.

 

Professional Services and Other Revenues

 

     Three Months Ended
September 30


    Change

   Nine Months Ended
September 30


    Change

     2004

    2003

       2004

    2003

   

Professional services and other revenues (in thousands)

   $ 5,651     $ 5,518     $ 133    $ 16,563     $ 15,814     $ 749

Percent of total net revenues

     15 %     16 %            15 %     16 %      

 

Professional services and other revenues include consulting, project management, custom integration, custom work, training and “soft dollar” transactions for products and services not related to Advent products and services. Professional services related to Advent Office products generally can be completed and accepted in a relatively short time period while services related to Geneva products may require a six to nine month implementation period. Therefore, the revenues associated with professional services reflect a mix of services related to current quarter license revenue as well as transactions from prior quarters. Generally, our consulting revenues lag our license revenues by one or two quarters, but can also be affected by specific project milestone completions.

 

For the three months ended September 30, 2004, professional services and other revenues increased slightly from the same period in fiscal 2003 and were up sequentially from the second quarter of 2004, reflecting the completion of a significant project phase at a large customer. For the nine months ended September 30, 2004, the increase in professional services and other revenues reflected increased implementation services related to our Geneva product and increased third party soft dollar revenues. We expect that revenues from professional services will increase in the fourth quarter of 2004 due to the recognition of a milestone payment from a large implementation.

 

COST OF REVENUES

 

     Three Months Ended
September 30


    Change

   Nine Months Ended
September 30


    Change

     2004

    2003

       2004

    2003

   

Total cost of revenues (in thousands)

   $ 14,765     $ 14,509     $ 256    $ 42,450     $ 42,225     $ 225

Percent of total net revenues

     38 %     42 %            38 %     42 %      

 

Our cost of revenues is made up of four components: cost of license and development fees; cost of maintenance and other recurring; cost of professional services and other; and amortization and impairment of developed technology.

 

Cost of License and Development Fees

 

     Three Months Ended
September 30


    Change

    Nine Months Ended
September 30


    Change

 
     2004

    2003

      2004

    2003

   

Cost of license and development fees (in thousands)

   $ 598     $ 669     $ (71 )   $ 1,618     $ 1,926     $ (308 )

Percent of total license revenues

     7 %     9 %             6 %     9 %        

 

Cost of license and development fees consists primarily of royalties and other fees paid to third parties, the fixed direct labor involved in producing and distributing our software, labor costs associated with generating development fees and cost of product media including duplication, manuals and packaging materials. The decrease in the three and nine months ended September 30, 2004 primarily reflects a decrease in third party implementation fees associated with the implementation of our software at a European client as well as a decrease in royalties paid to a third party vendor related to products sold, which included their technology. We expect cost of license and development fees to remain relatively flat in the fourth quarter of 2004.

 

Cost of Maintenance and Other Recurring

 

     Three Months Ended
September 30


    Change

    Nine Months Ended
September 30


    Change

 
     2004

    2003

      2004

    2003

   

Cost of maintenance and other recurring (in thousands)

   $ 6,754     $ 7,087     $ (333 )   $ 20,954     $ 22,128     $ (1,174 )

Percent of total maintenance revenue

     28 %     32 %             30 %     34 %        

 

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Cost of maintenance and other recurring revenues is primarily comprised of the direct costs of providing technical support and other services for recurring revenues and royalties paid to third party subscription-based and transaction-based vendors. The decrease in the three and nine months ended September 30, 2004 was due primarily to the reduction in personnel and related costs associated with restructuring activities implemented during 2003. The decrease was partially offset by increases in royalties related to the increase in our data subscription revenues of $158,000 and $738,000 during the three and nine months ended September 30, 2004. We expect cost of maintenance and other recurring revenues to be relatively flat in the fourth quarter of 2004.

 

Cost of Professional Services and Other

 

     Three Months Ended
September 30


    Change

   Nine Months Ended
September 30


    Change

     2004

    2003

       2004

    2003

   

Cost of professional services and other (in thousands)

   $ 5,034     $ 4,429     $ 605    $ 14,807     $ 12,976     $ 1,831

Percent of total professional services revenues

     89 %     80 %            89 %     82 %      

 

Cost of professional services and other revenue consists primarily of personnel related costs associated with the client services and support organization in providing consulting, custom report writing and conversions of data from clients’ previous systems. Also included are direct costs associated with third-party consultants, travel expenses and soft dollar transactions for third party products. The increase in the three and nine months ended September 30, 2004 was primarily due to an increase in employee bonus programs. We expect cost of professional services and other revenues to increase slightly in the fourth quarter of 2004 due to the recognition of costs associated with a milestone payment from a large implementation.

 

Amortization and Impairment of Developed Technology

 

     Three Months Ended
September 30


    Change

   Nine Months Ended
September 30


    Change

 
     2004

    2003

       2004

    2003

   

Amortization and impairment of developed technology (in thousands)

   $ 2,379     $ 2,324     $ 55    $ 5,071     $ 5,195     $ (124 )

Percent of total net revenues

     6 %     7 %            5 %     5 %        

 

Amortization and impairment of developed technology represents amortization and impairment of acquisition-related intangible assets. Amortization of developed technology decreased slightly reflecting technology related intangible assets from prior acquisitions becoming fully amortized during fiscal 2004 partially offset by amortization of technology related intangible assets associated with our acquisitions in the United Kingdom and Switzerland. During the third quarter of 2004, we recorded a non-cash impairment charge of $1.0 million to write-off our Techfi core and existing technology which was a result of our decision to sunset certain products within our Techfi product line. During the third quarter of 2003, we recorded a non-cash impairment charge of $0.9 million to write off ManagerLink acquired technology as a result of our decision to abandon the ManagerLink technology platform. We expect amortization of developed technology to be approximately $1.2 million in the fourth quarter of 2004.

 

OPERATING EXPENSES

 

Sales and Marketing

 

     Three Months Ended
September 30


    Change

    Nine Months Ended
September 30


    Change

 
     2004

    2003

      2004

    2003

   

Sales and marketing (in thousands)

   $ 9,705     $ 11,403     $ (1,698 )   $ 27,774     $ 34,121     $ (6,347 )

Percent of total net revenues

     25 %     33 %             25 %     34 %        

 

Sales and marketing expenses consist primarily of the costs of personnel involved in the sales and marketing process, sales commissions, advertising and promotional materials, sales facilities expense, trade shows, and seminars. The decrease in expense for both the three and nine month periods was primarily due to a decrease in personnel and related costs related to restructuring activities implemented during 2003 and a decrease in program marketing expenses. We expect sales and marketing expenses to increase in the fourth quarter of 2004 as a result of our annual client conference and increased commissions related to higher revenue.

 

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Table of Contents

Product Development

 

     Three Months Ended
September 30


    Change

    Nine Months Ended
September 30


    Change

 
     2004

    2003

      2004

    2003

   

Product development (in thousands)

   $ 7,967     $ 8,006     $ (39 )   $ 24,320     $ 27,065     $ (2,745 )

Percent of total net revenues

     21 %     23 %             22 %     27 %        

 

Product development expenses consist primarily of salary and benefits for our development staff as well as contractors’ fees and other costs associated with the enhancements of existing products and services and development of new products and services. The decrease in expenses for the three and nine month periods was due to a reduction in personnel and related costs associated with restructuring activities implemented during 2003 and reductions in the utilization of outside contractors and services. We expect product development expenses to be relatively flat in the fourth quarter of 2004.

 

Rapid technological advances in hardware and software development, evolving standards in computer hardware and software technology, changing customer needs and frequent new product introductions and enhancements characterize the software markets in which we compete. We plan on continuing to dedicate a significant amount of resources to research and development efforts to maintain and improve our competitive position in these markets.

 

General and Administrative

 

     Three Months Ended
September 30


    Change

    Nine Months Ended
September 30


    Change

 
     2004

    2003

      2004

    2003

   

General and administrative (in thousands)

   $ 6,365     $ 6,860     $ (495 )   $ 18,553     $ 18,774     $ (221 )

Percent of total net revenues

     17 %     20 %             16 %     19 %        

 

General and administrative expenses consist primarily of personnel costs for finance, administration, operations and general management, as well as legal and accounting expenses. The decrease in expenses for the three months ended September 30, 2004 was due to a reduction in personnel and related costs associated with restructuring activities implemented during 2003, partially offset by accounting and compliance costs associated with the Sarbanes-Oxley Act of 2002 of $0.4 million. The decrease in expenses for the nine months ended September 30, 2004 was due to a $1.3 million litigation settlement and related legal expenses incurred in the second quarter of fiscal 2003 related to a claim filed by a former employee and a reduction in personnel and related costs associated with restructuring activities implemented during 2003, partially offset by accounting and compliance costs associated with the Sarbanes-Oxley Act of 2002 of $1.1 million. We expect general and administrative expenses to increase in the fourth quarter of 2004.

 

Amortization and Impairment of Other Intangibles

 

     Three Months Ended
September 30


    Change

   Nine Months Ended
September 30


    Change

     2004

    2003

       2004

    2003

   

Amortization and impairment of other intangibles (in thousands)

   $ 4,414     $ 1,964     $ 2,450    $ 8,498     $ 5,855     $ 2,643

Percent of total net revenues

     11 %     6 %            8 %     6 %      

 

Amortization and impairment of other intangibles represents amortization and impairment of non-technology related intangible assets. Amortization of other intangibles increased slightly as a result of our acquisitions in the United Kingdom and Switzerland. During the third quarter of 2004, we recorded a non-cash impairment charge of $2.4 million to write off the carrying value of our Techfi non-compete agreements and maintenance contracts resulting from our decision to sunset certain products within our Techfi product line. We expect amortization of other intangibles to be approximately $1.9 million in the fourth quarter of 2004.

 

Restructuring Charges (Benefit)

 

     Three Months Ended
September 30


   

Change


    Nine Months Ended
September 30


    Change

 
     2004

    2003

      2004

    2003

   

Restructuring charges (benefit) (in thousands)

   $ (1 )   $ 394     $ (395 )   $ 4,996     $ 6,554     $ (1,558 )

Percent of total net revenues

     0 %     1 %             4 %     6 %        

 

In response to the downturn in the financial services industry, the decline in information technology spending and duplicative efforts in parts of our business as a result of our acquisitions, we implemented several phases of restructuring that commenced in 2003. These plans were implemented to reduce costs and improve operating efficiencies by better aligning our resources to our near-term revenue opportunities.

 

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For the nine months ended September 30, 2004, we recorded total restructuring charges of $5.0 million consisting of a benefit of $43,000 recorded in the first quarter of fiscal 2004 and charge of approximately $5.0 million recorded in the second quarter of fiscal 2004. The benefit of $43,000 incurred in the first quarter of fiscal 2004 consisted of a $163,000 adjustment related to entering into a final sub-lease agreement on one of the vacated facilities in New York, New York and a $16,000 adjustment to non-cash severance. These adjustments were partially offset by a restructuring charge of $136,000 related to the termination of nine employees, located primarily in New York. The $5.0 million charge incurred in the second quarter of fiscal 2004 consisted of $4.9 million related to vacating a facility in San Francisco, California, $72,000 related to vacating a portion of a facility in Cambridge, Massachusetts and a $12,000 adjustment related to severance for terminated employees in the first quarter.

 

For the nine months ended September 30, 2003, we recorded total restructuring charges of $6.6 million consisting of charges of $3.5 million, $2.7 million and $0.4 million incurred in the first, second and third quarters, respectively, of fiscal 2003. The charge incurred in the first quarter of fiscal 2003 of $3.5 million consisted of $2.1 million related to closing and consolidating excess office space, primarily in New York and Australia, $979,000 related to the termination of 39 employees in the following functions: customer service (6 employees), general and administrative (4), sales and marketing (10), product development (15) and professional services (4) located primarily in New York and Australia and $410,000 relating to the abandonment and write-off of certain equipment, furniture and leasehold improvements. The charge incurred in the second quarter of fiscal 2003 of $2.7 million consisted primarily of severance and benefits related to the termination of approximately 75 employees in the following functions: customer service (13), general and administrative (10), sales and marketing (17), product development (20) and professional services (15). The charge incurred in the third quarter of fiscal 2003 of $394,000 consisted of $350,000 of severance and benefits related to the termination of 10 employees in the following functions: customer service (2), general and administrative (1), sales and marketing (5), product development (1) and professional services (1), and $44,000 related to consolidation of office space.

 

The following table sets forth an analysis of the components of the restructuring charges and the payments and non-cash charges made against the accrual during the nine months ended September 30, 2004 (in thousands):

 

     Facility Exit
Costs


    Severance and
Benefits


    Total

 

Balance of restructuring accrual at December 31, 2003

   $ 2,181     $ 164     $ 2,345  

Restructuring charges

     5,027       136       5,163  

Reversal of deferred rent related to facilities exited

     272       —         272  

Cash payments

     (1,444 )     (189 )     (1,633 )

Adjustment of prior restructuring costs

     (163 )     (4 )     (167 )
    


 


 


Balance of restructuring accrual at September 30, 2004

   $ 5,873     $ 107     $ 5,980  
    


 


 


 

As of September 30, 2004, the remaining excess facility costs are stated at estimated fair value, net of estimated sublease income of approximately $6.4 million. We expect to pay remaining obligations in connection with vacated facilities no later than over the remaining lease terms, which expire on various dates through 2008. We expect to pay the remaining severance and benefits in 2004.

 

As of September 30, 2004, cumulative restructuring charges incurred since inception of Advent’s restructuring program in 2003 were $14.1 million which consisted of $8.1 million, $5.1 million and $0.9 million relating to facility exit costs, severance and benefits, and property and equipment abandoned, respectively. As a result of our restructuring activities implemented to date, we have reduced our total expenses by approximately $15 million on an annual basis.

 

Interest Income and Other Expense, Net

 

     Three Months Ended
September 30


    Change

   Nine Months Ended
September 30


    Change

 
     2004

    2003

       2004

    2003

   

Interest income and other expense, net (in thousands)

   $ 641     $ 520     $ 121    $ 625     $ 689     $ (64 )

Percent of total net revenues

     2 %     1 %            1 %     0 %        

 

Interest income and other expense, net consists of interest income, realized gains and losses on short-term investments, our pro rata share of net income or loss on our equity method investment and foreign currency gains and losses. The increase in interest income and other expense, net for the three months ended September 30, 2004 was primarily due to an increase in net interest income of $371,000 which was due to higher interest rates during the period relative to the corresponding period of fiscal 2003. Also, during the three months ended September 30, 2004, we recorded our pro-rata share of net income on our equity

 

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method investment of $322,000 and a loss on sale of investments of $232,000, compared to a loss of $88,000 on equity method investments and write-downs of $266,000 on long-term equity investments during the three months ended September 30, 2003. The remaining components of interest income and other expense, net fluctuate primarily due to foreign currency gains and losses.

 

Provision for (Benefit from) Income Taxes

 

     Three Months Ended
September 30


    Change

   Nine Months Ended
September 30


    Change

     2004

    2003

       2004

    2003

   

Provision for (benefit from) income taxes (in thousands)

   $ 1,211     $ (2,683 )   $ 3,894    $ 1,190     $ (11,094 )   $ 12,284

Percent of total net revenues

     3 %     (8 )%            1 %     (12 )%      

 

For the three and nine months ended September 30, 2004, we recorded a provision for income taxes of $1.2 million, compared to a benefit from income taxes of $2.7 million and $11.1 million recorded in the three and nine months ended September 30, 2003, respectively. We account for income taxes under an asset and liability approach that requires the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities to be recognized as deferred tax assets and liabilities. During the fourth quarter of 2003, we established a full valuation allowance against our deferred tax assets in the United States because we determined it is more likely than not that these deferred tax assets will not be realized in the foreseeable future. Therefore our tax provision will typically reflect only small state and foreign tax charges or benefits. In the three and nine months ended September 30, 2004, we increased our provision for certain state income taxes in the U.S., and recorded a true-up to reflect a federal income tax refund received, which was lower than originally anticipated.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our aggregate cash, cash equivalents and marketable securities at September 30, 2004 were $158.0 million, compared with $160.1 million at December 31, 2003. Cash equivalents are comprised of highly liquid investments purchased with an original or remaining maturity of 90 days or less.

 

The table below, for the periods indicated, provides selected condensed consolidated cash flow information (in thousands):

 

     Nine Months Ended
September 30


 
     2004

    2003

 

Net cash provided by (used in) operating activities

   $ 18,189     $ (178 )

Net cash provided by (used in) investing activities

   $ (26,199 )   $ 2,606  

Net cash used in financing activities

   $ (7,527 )   $ (6,325 )

 

Cash Flows from Operating Activities

 

Our cash flows from operating activities represent the most significant source of funding for our operations. Operating activities provided $18.2 million for the nine months ended September 30, 2004 while $0.2 million was used for operating activities during the corresponding period in fiscal 2003. Our cash provided by (used in) operating activities generally follows the trend in our net revenues and operating results. Our net losses during the nine months ended September 30, 2004 were more than offset by non-cash charges including depreciation, amortization and impairment, loss on disposition of fixed assets, and loss on investments.

 

Other sources of cash during the nine months ended September 30, 2004 included decreases in accounts receivable, prepaid and other assets, income taxes receivable and an increase in accrued liabilities. The decrease in accounts receivable reflected strong collections during the period. The decrease in prepaid and other assets reflected prepaid expense amortization and collection of a receivable for a litigation settlement recorded in the fourth quarter of 2003. The decrease in income taxes receivable reflected the receipt of a federal income tax refund. The increase in accrued liabilities was primarily due to additional accrued restructuring charges during the period. Uses of cash included a decrease in deferred revenues which reflects revenue recognized in the second quarter of 2004 related to license contracts signed in the prior year.

 

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors including fluctuations in our net revenues and operating results, amount of revenue deferred, collection of accounts receivable, and timing of payments.

 

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Cash Flows from Investing Activities

 

Net cash used for investing activities of $26.2 million for the nine months ended September 30, 2004, consisted primarily of net purchases of marketable securities of $15.0 million, cash used for acquisitions of $8.5 million and capital expenditures of $2.7 million. Net cash provided by investing activities of $2.6 million for the nine months ended September 30, 2003 consisted of net sales and maturities of marketable securities of $18.1 million offset by cash used in acquisitions and capital expenditures of $9.9 million and $5.6 million, respectively.

 

On May 3, 2004, we purchased the remaining independent distributor businesses from our independent European distributor, Advent Europe, in the United Kingdom and Switzerland, as well as certain assets of Advent Europe, for consideration of $6.0 million and additional potential consideration of approximately $3.6 million, of which $1.8 million was earned during the second quarter of 2004 and recorded as additional goodwill and was paid during the third quarter of 2004. Over the last year, we have added significant customers in the EMEA region and view this as an increasingly important market for us in the future. See Note 11, “Acquisitions” to the condensed consolidated financial statements for additional information regarding the acquisition. Going forward, we may consider acquiring additional businesses from time to time. We expect our expenditures for property and equipment in 2004 to decrease as compared to 2003.

 

Cash Flows from Financing Activities

 

Net cash used for financing activities for the nine months ended September 30, 2004 of $7.5 million primarily reflected the repurchase of 744,000 shares of common stock for $11.9 million partially offset by proceeds of $4.4 million from the issuance of common stock related to employee stock options and our employee stock purchase plan. Net cash used in financing activities for the nine months ended September 30, 2003 of $6.3 million primarily reflected the repurchase of 1.0 million shares of our common stock for $14.3 million, partially offset by proceeds from common stock issuances through employee stock purchase and stock option plans of $8.1 million.

 

Our liquidity, capital resources and results of operations in any period could be affected by the exercise of outstanding stock options and issuance of common stock under our employee stock purchase plan. The resulting increase in the number of outstanding shares could also affect our per share results of operations. However, we cannot predict the timing or amount of proceeds from the exercise of these securities, or whether they will be exercised at all. Furthermore, we intend to continue our common stock repurchase activity under the share repurchase program approved by the Board of Directors and publicly announced in May 2004.

 

At September 30, 2004, we had $114.0 million in working capital. We currently have no significant capital commitments other than commitments under our operating leases, which declined from $46.2 million at December 31, 2003 to $40 million at September 30, 2004.

 

The following table summarizes our contractual cash obligations as of September 30, 2004 (in thousands):

 

    

Three
Months Ended
December 31

2004


   Year Ended December 31

   Thereafter

   Total

        2005

   2006

   2007

   2008

     

Operating lease obligations

   $ 2,189    $ 8,920    $ 8,265    $ 6,633    $ 6,252    $ 7,836    $ 40,095
    

  

  

  

  

  

  

 

At September 30, 2004 and December 31, 2003, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

 

We have taken numerous actions over the last year to strengthen our cash position and balance sheet and to improve our ability to generate positive cash flow from operating activities. Many of these actions were taken in the last half of 2003 in order to offset the negative impacts on our net revenues resulting from the downturn in the financial services industry and decreased information technology spending.

 

We expect that for the foreseeable future, our operating expenses will continue to constitute a significant use of our cash balances. In addition, we may use cash to fund acquisitions or invest in other businesses. Based upon our past performance and

 

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current expectations, we believe that our cash and cash equivalents, marketable securities and cash generated from operations will be sufficient to satisfy our working capital needs, capital expenditures, investment requirements, stock repurchases, commitments and financing activities for at least the next 12 months.

 

Off-Balance Sheet Arrangements and Contractual Obligations

 

Our off-balance sheet arrangements as of September 30, 2004 consist of obligations under operating leases. See Note 12, “Commitments and Contingencies” to the condensed consolidated financial statements and the Liquidity and Capital Resources section above for further discussion and a tabular presentation of our contractual obligations.

 

RISK FACTORS

 

Investors should carefully consider the risks described below before making an investment decision. These risks are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks. In assessing these risks, investors should also refer to the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission, including our condensed consolidated financial statements and related notes thereto.

 

Our Operating Results May Fluctuate Significantly.

 

Licenses into multi-user networked environments have varied both in individual size and number, and the timing and size of individual license transactions are important factors in quarterly operating results. The sales and contracting cycles for these transactions are often lengthy and unpredictable. We may not be successful in closing large license transactions such as these on a timely basis or at all. Accordingly, because revenues from large licenses may vary as a portion of our net revenues, the timing of such licenses causes additional variability in our quarterly operating results. Software product backlog at the beginning of any quarter may not represent a material portion of that quarter’s revenues. Our backlog is primarily comprised of deferred revenues from our maintenance and term contracts, professional services not yet delivered, and certain software license orders that have not met all requirements for revenue recognition. While revenue from term licenses has not been material to date as a proportion of total license revenue, we expect this proportion to increase in future periods. If we are successful in our strategy to increase the proportion of our business signed on term license contracts, it will result in a greater portion of license revenue being deferred and could therefore impact the level and timing of our profitability. Our expense levels are based in significant part on our expectations of future revenues and therefore are relatively fixed in the short term. Due to the fixed nature of these expenses, combined with the relatively high gross margin historically achieved on our products, an unanticipated decline in net revenues in any particular quarter may adversely affect our operating results. We have often recognized a substantial portion of each quarter’s license revenues in the last month, weeks or even days of the quarter. As a result, the magnitude of quarterly fluctuations in revenue or earnings may not be evident until late in or after the close of a particular quarter and a disruption late in the quarter may have a disproportionately large negative impact on our quarterly results. These factors have impacted and may continue to impact our results.

 

In addition, we experience seasonality in our license revenue. The fourth quarter of the year typically has the highest license revenue, followed by lower revenue in the first quarter of the succeeding year. We believe that this seasonality results primarily from customer budgeting cycles. We expect this seasonality to continue in the future.

 

Because of the above factors, we believe that period-to-period comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance.

 

Our Sales Cycle is Long and We Have Limited Ability to Forecast the Timing and Amount of Specific Sales.

 

The purchase of our software products often requires prospective customers to provide significant executive-level sponsorship and to make major systems architecture decisions. As a result, we must generally engage in a relatively lengthy sales and contracting effort. Sales transactions may therefore be delayed during the customer decision process because we must provide a significant level of education to prospective customers regarding the use and benefit of our products. This has been exacerbated by the adverse and uncertain economic conditions that have caused existing and potential clients to reduce or cancel expenditures and delay decisions related to acquisition of software and related services. While we have seen somewhat improved economic conditions recently, customers are still very cautious about capital and information technology expenditures. As a result, the sales cycle associated with the purchase of our solutions is typically between two and twelve months depending upon the size of the client, and is subject to a number of significant risks over which we have little or no control, including customers’ budgeting constraints, internal selection procedures, and changes in customer personnel, among others. As a result of a lengthy and unpredictable sales cycle, we have limited ability to forecast the timing and amount of specific license sales. The timing of large

 

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individual license sales is especially difficult to forecast, and we may not be successful in closing large license transactions on a timely basis or at all. In addition, customers may postpone their purchases of our existing products or product enhancements in advance of the anticipated introduction of new products or product enhancements by us or our competitors. Because our expenses are relatively fixed in the near term, any shortfall from anticipated revenues could result in a significant variation in our operating results from quarter to quarter.

 

We Depend upon Financial Markets.

 

The target clients for our products include a range of financial services organizations that manage investment portfolios, including asset managers, investment advisors, brokerage firms, banks, family offices, hedge funds and others. In addition, we target corporations, public funds, universities and non-profit organizations, which also manage investment portfolios and have many of the same needs. The success of many of our clients is intrinsically linked to the health of the financial markets. We believe that demand for our solutions has been, and could continue to be, disproportionately affected by fluctuations, disruptions, instability or downturns in the financial services industry which may cause clients and potential clients to exit the industry or delay, cancel or reduce any planned expenditures for investment management systems and software products. Also, recent investigative efforts into various mutual fund and other financial industry practices could impact our business if the industry experiences a decline in business. In addition, a slowdown in the formation of new investment firms or a decline in the growth of assets under management would cause a decline in demand for our solutions. We believe that the downturn in the financial services industry and the decline in information technology spending continued to negatively impact the demand for our products in the past two years, and that continuing uncertainty about financial markets and the financial services sector could have a material adverse effect on our business and results of operations.

 

We Depend Heavily on Our Product, Axys.

 

Historically, we have derived a majority of our net revenues from the licensing of Axys, and related ancillary products and services. In addition, many of our other applications, such as Partner, Moxy, Qube and various data interfaces were designed to operate with Axys to provide an integrated solution. As a result, we believe that for the foreseeable future a majority of our net revenues will depend upon continued market acceptance of Axys, enhancements or upgrades to Axys and related products and services. As our clients include a range of organizations, including asset managers, investment advisors, brokerage firms, banks, family offices, hedge funds and others, the degree of continued market acceptance also will depend on the number of firms within each type of organization and the degree to which Axys previously penetrated those firms.

 

Uncertain Economic Conditions May Continue to Affect our Revenues.

 

We believe that the market for large investment management software systems may be negatively impacted by a number of factors, including reductions in capital expenditures by large customers, poor performance of major financial markets, and increasing competition. Those factors may, in turn, give rise to a number of market trends which we have experienced in the past two years that have slowed revenue growth across the financial services industry, including longer sales and contracting cycles, deferral or delay of information technology projects and generally reduced expenditures for software and related services. If the downturn in the financial services industry and information technology spending continues, the presence of these factors in the market for large investment management solutions will likely materially adversely affect our business and results of operations.

 

We Face Intense Competition.

 

The market for investment management software is intensely competitive and highly fragmented, is subject to rapid change and is sensitive to new product introductions and marketing efforts by industry participants. Our largest single source of competition is from proprietary systems used by existing and potential clients, many of whom develop their own software for their particular needs and therefore may be reluctant to license software products offered by independent vendors like Advent. Other competitors include providers of software and related services as well as providers of outsourced services, and include some of the following vendors: Beauchamp, Charles River Development, CheckFree Corporation, divisions of SunGard, Eagle, a subsidiary of Mellon Financial Corporation, Eze Castle Software, Financial Models Company, Inc., Financial Interactive Data, Indata, LatentZero, Integrated Decision Systems, Linedata, Macgregor Financial Technologies, Schwab Performance Technologies, SS&C Technologies, Inc., and the Portia division of Thomson Financial.

 

Our competitors vary in size, scope of services offered and platforms supported. Many of our competitors have longer operating histories and greater financial, technical, sales and marketing resources than we do. In addition, we also face competition from potential new entrants into our market that may develop innovative technologies or business models. We cannot guarantee that we will be able to compete successfully against current and future competitors or that competitive pressures will not result in price reductions, reduced operating margins or loss of market share, any one of which could seriously harm our business.

 

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We Must Continue to Introduce New Products and Product Enhancements.

 

The market for our products is characterized by rapid technological change, changes in customer demands and evolving industry standards. New products based on new technologies or new industry standards can render existing products obsolete and unmarketable. As a result, our future success will continue to depend upon our ability to develop new products or product enhancements that address the future needs of our target markets and to respond to these changing standards and practices. We may not be successful in developing, introducing and marketing new products or product enhancements on a timely and cost effective basis, or at all, and our new products and product enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. Delays in the commencement of commercial shipments of new products or enhancements may result in client dissatisfaction and delay or loss of product revenues. If we are unable, for technological or other reasons, to develop and introduce new products or enhancements of existing products in a timely manner in response to changing market conditions or client requirements, or if new products or new versions of existing products do not achieve market acceptance, our business would be seriously harmed. In addition, our ability to develop new products and product enhancements is dependent upon the products of other software vendors, including certain system software vendors, such as Microsoft Corporation, Sun Microsystems, database vendors and development tool vendors. If the products of such vendors have design defects or flaws, are unexpectedly delayed in their introduction, or are unavailable on acceptable terms, our business could be seriously harmed. Our software products are complex and may contain undetected defects or errors when first introduced or as new versions are released. Although we have not experienced adverse effects resulting from any software errors, we cannot be sure that, despite testing by us and our clients, defects or errors will not be found in new products after commencement of commercial shipments, resulting in loss of or delay in market acceptance, which could seriously harm our business.

 

We Must Retain Key Employees and Recruit Qualified Technical and Sales Personnel.

 

We believe that our future success is dependent on the continued employment of our senior management and our ability to identify, attract, motivate and retain qualified technical, sales and other personnel. We need technical resources such as our product development engineers to develop new products and enhance existing products and we rely upon sales personnel to sell our products and services and maintain healthy business relationships. We therefore need to identify, attract, motivate and retain such employees with the requisite education, backgrounds and industry experience. If we are unable to do so, our business could be harmed. In addition, we must attract and retain financial and accounting personnel to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.

 

We may also choose to create additional performance and retention incentives in order to retain our employees, including the granting of additional stock options to employees at current prices or issuing incentive cash bonuses. Such incentives may either dilute our existing stockholder base or result in unforeseen operating expenses, which may cause our stock price to fall.

 

Difficulties in Integrating Our Acquisitions Have Impacted and Could Continue to Adversely Impact Our Business and We Face Risks Associated With Potential Acquisitions, Investments or Divestitures.

 

From 2001 through the middle of 2003, our strategy focused on growth through the acquisition of additional complementary businesses. During those years, we made five major acquisitions and also acquired all of the common stock of five of our European distributor’s subsidiaries. In addition, in May of 2004, we purchased our distributors in the United Kingdom and Switzerland.

 

The complex process of integrating our acquisitions has required and will continue to require significant resources, particularly in light of our relative inexperience in integrating acquisitions. Integrating these acquisitions has been and will continue to be time-consuming, expensive and disruptive to our business. This integration process has in the past, and could continue to strain our managerial resources and result in the diversion of these resources from our core business objectives. Failure to achieve the anticipated benefits of these acquisitions or to successfully integrate the operations of these entities has harmed and could continue to harm our business, results of operations and cash flows. For example, in the first quarter of 2003, we closed our Australian subsidiary because it failed to perform at a satisfactory profit level. We may not realize the benefits we anticipate from these acquisitions because of the following significant challenges:

 

  expected synergy benefits from these acquisitions, such as lower costs or increased revenues, may not be realized or may be realized more slowly than anticipated, particularly with regard to costs associated with reductions in headcount and facilities;

 

  potentially incompatible cultural differences between the companies;

 

  incorporating these companies’ technologies and products into our current and future product lines;

 

  geographic dispersion of operations and the complexities of international operations;

 

  integrating the technical teams of these companies with our engineering organizations;

 

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  generating market demand for an expanded product line;

 

  integrating the products of these companies with our business, because we do not have distribution, manufacturing, marketing or support experience for these products;

 

  the difficulty of leveraging our combined technologies and capabilities across all product lines and customer bases; and

 

  our inability to retain significant customers or key employees of these entities.

 

We have incurred and expect to continue to incur significant costs and commit significant management time in integrating the operations, technology, development programs, products, administrative and information systems, customers and personnel of these acquisitions. These costs have been and will likely continue to be substantial and include costs for:

 

  integrating and reorganizing operations, including combining teams, facilities and processes in various functional areas;

 

  identifying duplicative or redundant resources and facilities, developing plans for resource consolidation and implementing those plans;

 

  fees and expenses of professionals and consultants involved in completing the integration process;

 

  settling existing liabilities of these companies;

 

  uncovering through our audit process new issues reflected on the companies’ financial statements;

 

  vacating, subleasing and closing facilities;

 

  employee relocation, redeployment or severance costs;

 

  discontinuing certain products and services;

 

  integrating technology and products; and

 

  other transaction costs associated with the acquisition, including financial advisor, attorney, accountant and exchange agent fees.

 

We may make additional acquisitions of complementary companies, products or technologies in the future. In addition, we continually evaluate the performance of all our products and product lines and may sell or discontinue current products or product lines. Failure to achieve the anticipated benefits of any future acquisition or divestiture could also harm our business, results of operations and cash flows. Furthermore, we may have to incur debt, write-off investments, infrastructure costs or other assets, incur severance liabilities, write-off impaired goodwill or other intangible assets or issue equity securities to pay for any future acquisitions. The issuance of equity securities could dilute our existing stockholders’ ownership. Finally, we may not identify suitable businesses to acquire or negotiate acceptable terms for acquisitions.

 

Difficulties We May Encounter Managing Changes in the Size of Our Business Could Adversely Affect Our Operating Results.

 

Our business has experienced years of rapid growth in 2000 and 2001 through both internal expansion and acquisitions, followed by reduced revenues in 2002 and 2003, and significant downsizing during 2003. These changes have caused and may continue to cause a significant strain on our infrastructure, internal systems and managerial resources. Beginning in 2003, we took steps to better align our resources with our operating requirements in order to increase our efficiency. Through these steps, we reduced our headcount, closed selected offices and incurred charges for employee severance and excess facilities capacity. While we believe that these steps help us achieve greater operating efficiency, we have limited history with such measures and the results of these measures are less than predictable. Additional restructuring efforts may be required. To manage our business effectively, we must continue to streamline our infrastructure, including operating and administrative systems and controls; and continue managing headcount, capital and processes in an efficient manner. We believe workforce reductions, management changes and facility consolidation create anxiety and uncertainty and may adversely affect employee morale. These measures could adversely affect our employees that we wish to retain and may also adversely affect our ability to hire new personnel. In addition, our revenues may not grow in alignment with our headcount.

 

We Face Risks Related to Our New Business Areas.

 

During 2001 and 2002 we expanded into a number of new business areas, for example international operations, strategic alliances, acquisitions such as Advent Wealth Service, Techfi and Advent BackOffice and offerings such as Wealthline. These areas are still relatively new to our product development and sales personnel. Some of these new business areas have required significant management time and resources without generating significant revenues, and have diverted and may continue to divert management from our core business. While our traditional offerings are marketed to investment managers and advisors, Advent Wealth Service and Wealthline are also targeted for use by our clients’ customers. We have had difficulty and may continue to have difficulty creating demand from our client’s customers as we market to them indirectly, through our clients. Revenue growth has suffered and may continue to suffer if we cannot create demand for these newer business areas. For example, demand for our Techfi product line has been significantly lower than expected and thus we have decided to discontinue certain products within our Techfi product line in September 2004. As a result, we recorded a non-cash impairment charge of $3.4 million in the third quarter of 2004 to write-off the carrying value of certain Techfi-related intangible assets.

 

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We Face Challenges in Expanding Our International Operations.

 

We market and sell our products in the United States and, to a lesser extent, internationally. In 1999, we entered into a distributor relationship with Advent Europe, an independent distributor of our products in selected European markets. In November 2001, we acquired the Norwegian, Swedish, and Danish companies of this independent distributor. In September 2002, we purchased their Greek subsidiary; in May 2003, we purchased their Dutch subsidiary; and in May 2004, we purchased their remaining subsidiaries in the United Kingdom and Switzerland and certain assets of Advent Europe. To further expand our international operations, we would need to establish additional locations, acquire other businesses or enter into additional distribution relationships in other parts of the world. Any further expansion of our existing international operations and entry into new international markets could require significant management attention and financial resources. We cannot be certain that establishing businesses in other countries will produce the desired levels of revenues. We currently have limited experience in developing localized versions of our products and marketing and distributing our products internationally. In addition, international operations are subject to other inherent risks, including:

 

  the impact of recessions in economies outside the United States;

 

  greater difficulty in accounts receivable collection and longer collection periods;

 

  unexpected changes in regulatory requirements;

 

  difficulties in successfully adapting our products to the language, regulatory and technology standards of other countries;

 

  difficulties and costs of staffing and managing foreign operations;

 

  reduced protection for intellectual property rights in some countries;

 

  potentially adverse tax consequences; and

 

  political and economic instability.

 

The revenues, expenses, assets and liabilities of our international subsidiaries are primarily denominated in local currencies. We have not historically undertaken foreign exchange hedging transactions to cover potential foreign currency exposure. Future fluctuations in currency exchange rates may adversely affect revenues and accounts receivable from international sales and the U.S. dollar value of our foreign subsidiaries’ revenues, expenses, assets and liabilities. Our international revenues from our distributors are generally denominated in local foreign currencies with the exception of our Geneva license transactions.

 

Writing Off Investments Could Harm Our Results of Operations.

 

We have made investments in privately held companies, which we classify as other assets on our condensed consolidated balance sheets. The value of these investments is influenced by many factors, including the operating effectiveness of these companies, the overall health of these companies’ industries, the strength of the private equity markets and general market conditions. Due to these and other factors, we have previously determined, and may in the future determine, that the value of these investments is impaired, which has caused and would cause us to write down the carrying value of these investments, such as the write downs of our investments of $2.0 million, $13.5 million and $2.0 million in 2003, 2002 and 2001, respectively. Furthermore, we cannot be sure that future investment, license, fixed asset or other asset write-downs will not happen, particularly if the downturn in the financial services industry and the decline in information technology spending continues. If future write-downs do occur, they could harm our business and results of operations.

 

Information We Provide to Investors is Accurate Only as of the Date We Disseminate it.

 

From time to time, we may publicly disseminate forward-looking information or guidance in compliance with Regulation FD. This information or guidance represents our outlook only as of the date we disseminate it, and we do not undertake to update such information or guidance.

 

Our Stock Price has Fluctuated Significantly.

 

Like many companies in the technology and emerging growth sector, our stock price may be subject to wide fluctuations, particularly during times of high market volatility. If net revenues or earnings in any quarter fail to meet the investment community’s expectations, our stock price is likely to decline. In addition, our stock price is affected by trends in the financial services sector and by broader market trends unrelated to our performance. For instance, in the event of increased hostilities abroad or additional terrorist attacks, there could be increased market volatility, which could negatively impact our stock price.

 

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If Our Relationship with Interactive Data Corporation Is Terminated, Our Business May Be Harmed.

 

Many of our clients use our proprietary interface to electronically retrieve pricing and other data from Interactive Data Corporation (IDC). IDC pays us a commission based on their revenues from providing this data to our clients. Our software products have been customized to be compatible with their system and this software would need to be redesigned if their services were unavailable for any reason. Termination of our agreement with IDC would require at least two years notice by either us or them, or 90 days in the case of material breach. Our revenue could be adversely impacted if our relationship with IDC were terminated or their services were unavailable to our clients for any reason.

 

If We Are Unable to Protect Our Intellectual Property We May Be Subject to Increased Competition That Could Seriously Harm Our Business.

 

Our success depends significantly upon our proprietary technology. We currently rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We have registered trademarks for many of our products and services and will continue to evaluate the registration of additional trademarks as appropriate. We generally enter into confidentiality agreements with our employees and with our resellers and customers. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Despite these efforts, it may be possible for unauthorized third parties to copy certain portions of our products or to reverse engineer or otherwise obtain and use our proprietary information. We do not have any patents, and existing copyright laws afford only limited protection. In addition, we cannot be certain that others will not develop substantially equivalent or superseding proprietary technology, or that equivalent products will not be marketed in competition with our products, thereby substantially reducing the value of our proprietary rights. We cannot be sure that we will develop proprietary products or technologies that are patentable, that any patent, if issued, would provide us with any competitive advantages or would not be challenged by third parties, or that the patents of others will not adversely affect our ability to do business. Litigation may be necessary to protect our proprietary technology. This litigation may be time-consuming and expensive. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. We cannot be sure that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products or design around any patent that may be issued to us or other intellectual property rights of ours.

 

If We Infringe the Intellectual Property Rights of Others, We May Incur Additional Costs or Be Prevented from Selling our Products and Services.

 

We cannot be certain that our products or services do not infringe the intellectual property rights of others. As a result, we may be subject to litigation and claims, including claims of infringement of patents, copyrights and other intellectual property rights of third parties that would be time-consuming and costly to resolve. If we discovered that our products or services violated the intellectual property rights of third parties, we would have to make substantial changes to our products or services or obtain licenses from such third parties. We might not be able to obtain such licenses on favorable terms or at all, and we may be unable to change our products successfully or in a timely manner. Failure to resolve an infringement matter successfully or in a timely manner, would force us to incur significant costs, including damages, redevelopment costs, diversion of management’s attention and satisfaction of indemnification obligations that we have with our clients, as well as prevent us from selling certain products or services.

 

Business Interruptions Could Adversely Affect Our Business.

 

Our operations are exposed to interruption by fire, earthquake, power loss, telecommunications failure, and other events beyond our control. Additionally, we are vulnerable to interruption caused by political and terrorist incidents. For example, our facilities in New York were temporarily closed due to the September 11, 2001 terrorist attacks. Immediately after the terrorist attacks, our clients who were located in the World Trade Center area were concentrating on disaster recovery rather than licensing additional software components, while the grounding of transportation impeded our ability to deliver professional services at client sites. Additionally, during the temporary closure of the U.S. stock markets, our clients did not use our market data services. Such interruptions could affect our ability to sell and deliver products and services and other critical functions of our business and could seriously harm us. Further, such attacks could cause instability in the financial markets upon which we depend.

 

Undetected Software Errors or Failures Found in New Products May Result in Loss of or Delay in Market Acceptance of Our Products That Could Seriously Harm Our Business.

 

Our products may contain undetected software errors or failures or scalability limitations at any point in the life of the product, but particularly when first introduced or as new versions are released. Despite testing by us and by current and potential customers, errors may not be found in new products until after commencement of commercial shipments, resulting in loss of or a

 

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delay in market acceptance, damage to our reputation, customer dissatisfaction and reductions in revenues and margins, any of which could seriously harm our business. Additionally, our agreements with customers that attempt to limit our exposure to liability claims may not be enforceable in jurisdictions where we operate.

 

Recently Enacted and Proposed Changes in Securities Laws and Regulations Will Increase Our Costs.

 

The Sarbanes-Oxley Act (“the Act”) of 2002, which became law in July 2002, requires changes in some of our corporate governance and securities disclosure and/or compliance practices. As part of the Act’s requirements, the Securities and Exchange Commission has been promulgating new rules on a variety of subjects, in addition to other rule proposals, and the NASDAQ Stock Market has enacted new corporate governance listing requirements. These developments have and will continue to increase our accounting and legal compliance costs, particularly in 2004, and could also expose us to additional liability. In addition, such developments may make retention and recruitment of qualified persons to serve on our board of directors or executive management more difficult. We continue to evaluate and monitor regulatory and legislative developments and cannot reliably estimate the timing or magnitude of all costs we may incur as a result of the Act or other related legislation or regulation.

 

Our Financial Results Could be Affected by Potential Changes in the Accounting Rules Governing the Recognition of Stock-based Compensation Expense.

 

We measure compensation expense for our employee stock compensation plans under the intrinsic value method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees.” On March 31, 2004, the FASB issued an Exposure Draft of a proposed new Statement of Financial Accounting Standard (“Statement”) entitled “Share-Based Payments”, which proposes a requirement to use a fair-value based method similar to the fair-value method prescribed in FASB Statement No. 123, “Accounting for Stock-Based Compensation.” On October 13, 2004, the FASB delayed the effective date of this proposed standard. Public companies with calendar year-ends would be required to adopt the provisions of the standard effective for periods beginning after June 15, 2005, rather than January 1, 2005 as originally proposed. There is ongoing debate as to whether stock option and employee stock purchase plan shares should be treated as compensation, and if so, how to value such compensation charges. The ultimate requirements of any new accounting standard are uncertain. However, if we are required to record an expense for our stock-based compensation plans using a fair-value method, we could have significant accounting charges. For example, for the three and nine months ended September 30, 2004, had we accounted for stock-based compensation plans using the fair-value method prescribed in FASB Statement No. 123, our net loss would have increased by $2.2 million and $7.3 million, respectively.

 

Security Risks May Harm Our Business.

 

A significant barrier to commerce and communications over public networks is the secure transmission of confidential information. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of our security systems. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. In addition, computer viruses or software programs that disable or impair computers could be introduced into our systems or those of our customers or other third parties, which could disrupt or make our systems inaccessible to customers. Our security measures may be inadequate to prevent security breaches, which could harm our business, exposing us to a risk of loss, litigation and other possible liabilities, as well as possibly requiring us to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches.

 

While We Believe We Currently Have Adequate Internal Control Over Financial Reporting, We Are Required to Evaluate Our Internal Control Over Financial Reporting Under Section 404 of the Sarbanes Oxley Act of 2002 And Any Adverse Results From Such Evaluation Could Result in a Loss of Investor Confidence in Our Financial Reports And Have An Adverse Effect On Our Stock Price.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2004, we will be required to furnish a report by our management on our internal control over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Such report must also contain a statement that our independent auditors have issued an attestation report on management’s assessment of such internal controls.

 

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework for companies to assess and improve their internal control systems. Auditing Standard No. 2 provides the professional standards and related performance guidance for independent auditors to attest to, and report on, management’s assessment of the

 

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effectiveness of internal control over financial reporting under Section 404. Management’s assessment of internal controls over financial reporting requires management to make subjective judgments and, particularly because Auditing Standard No. 2 is newly effective, some of the judgments will be in areas that may be open to interpretation and therefore the report may be uniquely difficult to prepare and our independent auditors may not agree with our assessments.

 

While we currently believe our internal control over financial reporting is effective, we are still performing the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective. If we are unable to assert that our internal control over financial reporting is effective as of December 31, 2004 (or if our independent auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our stock price.

 

We cannot be certain as to the timing of completion of our evaluation, testing and any required remediation due in large part to the fact that there is no precedent available by which to measure compliance with the new Auditing Standard No. 2. In this regard, we recently received a letter from our independent auditors informing us that it is of critical importance that we continue diligently to complete our Section 404 work and to provide our results and assessments to our independent auditors on a timely basis so that our independent auditors can have available the staff necessary to complete their work and issue their attestation report by the required date. If we are not able to complete our assessment under Section 404 in a timely manner, we and our independent auditors would be unable to conclude that our internal control over financial reporting is effective as of December 31, 2004.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. Historically, much of our revenues and capital spending was transacted in U.S. dollars. However, since the acquisitions of Advent Denmark, Advent Norway, Advent Sweden, Advent Hellas, Advent Netherlands, and Advent Europe’s remaining distributors in the United Kingdom and Switzerland, whose revenues, with the exception of Geneva transactions and capital spending, are transacted in local country currencies, we have greater exposure to foreign currency fluctuations. The results of operations from these territories are not material to our operating results; therefore, we believe that foreign currency exchange rates should not materially adversely affect our consolidated financial position, results of operations or cash flows.

 

Our interest rate risk relates primarily to our investment portfolio, which consisted of $58.6 million in cash equivalents and $90.2 million in marketable securities as of September 30, 2004. An immediate sharp increase in interest rates could have a material adverse effect on the fair value of our investment portfolio. Conversely, immediate sharp declines in interest rates could seriously harm interest earnings of our investment portfolio. We do not currently use derivative financial instruments in our investment portfolio, nor hedge for these interest rate exposures.

 

By policy, we limit our exposure to longer-term investments, and a majority of our investment portfolio at September 30, 2004 and December 31, 2003 had maturities of less than one year. As a result of the relatively short duration of our portfolio, an immediate hypothetical parallel shift to the yield curve of plus 25 basis points (BPS), 50 BPS and 100 BPS would result in a reduction of 0.16% ($235,000), 0.32% ($470,000) and 0.63% ($940,000), respectively, in the market value of our investment portfolio as of September 30, 2004.

 

We have also invested in several privately-held companies, most of which can still be considered in the start-up or development stages. These non-marketable investments are classified as other assets on our condensed consolidated balance sheets. Our investments in privately-held companies could be affected by an adverse movement in the financial markets for publicly-traded equity securities, although the impact cannot be directly quantified. These investments are inherently risky as the market for the technologies or products these privately-held companies have under development are typically in the early stages and may never materialize. The value of these investments is also influenced by factors including the operating effectiveness of these companies, the overall health of the companies’ industries and the strength of the private equity markets. We could lose our entire investment in these companies. At September 30, 2004 our net investments in privately-held companies totaled $8.6 million.

 

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Item 4. Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures.

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to Advent’s management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide reasonable assurance that such information is accumulated and communicated to our management. Our disclosure controls and procedures include components of our internal control over financial reporting. Management’s assessment of the effectiveness of our internal control over financial reporting is expressed at the level of reasonable assurance because a control system, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that the control system’s objectives will be met.

 

(b) Changes in internal controls over financial reporting.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2004, we will be required to furnish a report by our management on our internal control over financial reporting. In anticipation of this requirement we are enhancing our internal control over financial reporting by identifying and strengthening key controls, adding resources in key functional areas, conforming our documentation to our operations, ensuring segregation of duties and upgrading systems security, as specified by the new Auditing Standard No. 2 issued by the Public Company Accounting Oversight Board. We discuss with and disclose these matters to the audit committee of our board of directors and to our independent auditors.

 

While we currently believe our internal control over financial reporting is effective, we are still performing the system and process documentation and evaluation needed to comply with Section 404. We cannot be certain as to the timing of completion of our evaluation, testing and any required remediation due in large part to the fact that there is no precedent available by which to measure compliance with the new Auditing Standard No. 2. If we are not able to complete our assessment under Section 404 in a timely manner, we and our independent auditors would be unable to conclude that our internal control over financial reporting is effective as of December 31, 2004.

 

There were no significant changes to our internal controls during our most recent quarter that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time Advent is involved in litigation incidental to the conduct of our business. Advent is not party to any lawsuit or proceeding that, in Advent’s opinion, is likely to seriously harm the Company’s business.

 

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

 

Issuer Purchases of Equity Securities

 

During 2001 and 2002, the Board of Directors authorized the repurchase of up to 4.0 million shares of outstanding common stock. Through May 2004 when this program was terminated, Advent had repurchased and retired 3.8 million shares of common stock since inception of this stock repurchase program at a total cost of $78.8 million.

 

In May 2004, the Board of Directors approved a plan to repurchase up to an additional 1.2 million shares of Advent’s common stock in the open market. In September 2004, the Board authorized an extension of this stock repurchase program to cover the repurchase of an additional 0.8 million shares of outstanding common stock.

 

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The following table provides a month-to-month summary of the repurchase activity under the 2004 stock repurchase program during the three months ended September 30, 2004:

 

    

Total
Number

of Shares
Purchased (1)


   Average
Price
Paid
Per Share


   Maximum
Number of Shares That
May Yet Be Purchased
Under Our Share
Repurchase Programs


     (shares in thousands)

July 2004

   —      $ —      1,152

August 2004

   645      15.76    507

September 2004

   51      17.18    1,256
    
  

  

Total

   696    $ 15.86    1,256
    
  

  

(1) All shares were repurchased as part of publicly announced plans.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibits:

 

31.1   Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002
32.2   Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

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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.

 

   

ADVENT SOFTWARE, INC.

Dated: November 9, 2004

 

By:

 

/s/ Graham V. Smith


       

Graham V. Smith

        Executive Vice President, Chief Financial Officer and Secretary
        (Principal Financial and Accounting Officer)

 

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