ADVENT SOFTWARE INC /DE/ - FORM 10-Q

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UNITED STATES

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, 2014

o 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)

600 Townsend Street, San Francisco, California 94103

(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 o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x		Accelerated filer ¨

Non-accelerated filer ¨		Smaller reporting company ¨
(Do not check if a smaller reporting company)

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

The number of shares of the registrant’s common stock outstanding as of October 31, 2014 was 51,699,021.

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INDEX

	PART I. FINANCIAL INFORMATION	3
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
	PART II. OTHER INFORMATION	36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	49
Signatures		51

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

	September 30			December 31
	2014			2013
ASSETS
Current assets:
Cash and cash equivalents	$	36,692		$	33,828
Accounts receivable, net	55,280			58,717
Deferred taxes, current	24,897			24,898
Prepaid expenses and other	24,724			30,114
Current assets of discontinued operation	—			100
Total current assets	141,593			147,657
Property and equipment, net	28,502			31,698
Goodwill	205,178			207,818
Other intangibles, net	21,004			27,392
Deferred taxes, long-term	21,213			23,020
Other assets	14,055			17,372
Noncurrent assets of discontinued operation	1,337			1,337

Total assets	$	432,882		$	456,294

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	10,155		$	5,348
Dividends payable	6,712			—
Accrued liabilities	34,677			41,625
Deferred revenues	176,288			186,107
Current portion of long-term debt	20,000			20,000
Current liabilities of discontinued operation	632			600
Total current liabilities	248,464			253,680
Deferred revenue, long-term	7,250			7,809
Long-term income taxes payable	7,667			7,667
Long-term debt	235,000			285,000
Other long-term liabilities	8,447			11,171
Noncurrent liabilities of discontinued operation	2,324			2,782

Total liabilities	509,152			568,109

Commitments and contingencies (See Note 13)

Stockholders’ deficit:
Common stock	516			513
Additional paid-in capital	58,394			42,533
Accumulated deficit	(142,765		)	(165,870		)
Accumulated other comprehensive income	7,585			11,009
Total stockholders’ deficit	(76,270		)	(111,815		)

Total liabilities and stockholders’ deficit	$	432,882		$	456,294

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
	2014			2013			2014			2013

Net revenues:
Recurring revenues	$	90,689		$	88,116		$	272,352		$	260,862
Non-recurring revenues	8,293			8,651			23,804			24,518

Total net revenues	98,982			96,767			296,156			285,380

Cost of revenues:
Recurring revenues	20,088			17,782			59,304			52,173
Non-recurring revenues	8,106			11,501			23,675			31,088
Amortization of developed technology	1,690			2,508			5,178			7,405

Total cost of revenues	29,884			31,791			88,157			90,666

Gross margin	69,098			64,976			207,999			194,714

Operating expenses:
Sales and marketing	17,658			18,546			55,687			58,967
Product development	16,962			17,369			51,805			52,254
General and administrative	10,846			10,894			32,115			43,895
Amortization of other intangibles	809			953			2,588			2,863
Recapitalization costs	—			—			—			6,041
Restructuring charges (benefit)	2,579			(157		)	4,494			2,959

Total operating expenses	48,854			47,605			146,689			166,979

Income from continuing operations	20,244			17,371			61,310			27,735
Interest and other income (expense), net	(1,423		)	(2,977		)	(5,596		)	(4,610		)

Income from continuing operations before income taxes	18,821			14,394			55,714			23,125
Provision for income taxes	6,818			4,561			20,149			5,390

Net income from continuing operations	$	12,003		$	9,833		$	35,565		$	17,735

Discontinued operation:
Net (loss) income from discontinued operation (net of applicable taxes of $(14), $(16), $(38) and $45, respectively)	(20		)	(20		)	(57		)	68

Net income	$	11,983		$	9,813		$	35,508		$	17,803

Basic net income (loss) per share:
Continuing operations	$	0.23		$	0.19		$	0.69		$	0.35
Discontinued operation	(0.00		)	(0.00		)	(0.00		)	0.00
Total operations	$	0.23		$	0.19		$	0.69		$	0.35

Diluted net income (loss) per share:
Continuing operations	$	0.22		$	0.18		$	0.66		$	0.33
Discontinued operation	(0.00		)	(0.00		)	(0.00		)	0.00
Total operations	$	0.22		$	0.18		$	0.66		$	0.33

Weighted average shares used to compute net income (loss) per share:
Basic	51,579			51,576			51,464			51,241
Diluted	53,877			53,937			53,574			53,329

Cash dividends declared per common share	$	0.13		$	—		$	0.26		$	—

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

Net income (loss) per share is based on actual calculated values and totals may not sum due to rounding.

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ADVENT SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Three Months Ended September 30					Nine Months Ended September 30
	2014			2013		2014			2013

Net income	$	11,983		$	9,813	$	35,508		$	17,803

Other comprehensive (loss) income, net of taxes
Foreign currency translation	(4,413		)	3,495		(3,424		)	(155		)
Unrealized gain on marketable securities (net of applicable taxes of $0, $(11), $0 and $(20), respectively)	—			36		—			11
Total other comprehensive (loss) income, net of taxes	(4,413		)	3,531		(3,424		)	(144		)

Comprehensive income	$	7,570		$	13,344	$	32,084		$	17,659

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
	2014			2013
Cash flows from operating activities:
Net income	$	35,508		$	17,803
Adjustment to net income for discontinued operation net loss (income)	57			(68		)
Net income from continuing operations	35,565			17,735

Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:
Stock-based compensation	22,571			40,597
Excess tax benefit from stock-based compensation	(9,003		)	(4,220		)
Depreciation and amortization	16,138			18,903
Amortization of debt issuance costs	1,079			593
Loss on disposal of fixed assets	2,786			—
(Reduction of) provision for doubtful accounts	(6		)	290
Reduction of sales reserves	(538		)	(196		)
Deferred income taxes	10,370			6,281
Other	(500		)	(45		)
Effect of statement of operations adjustments	42,897			62,203
Changes in operating assets and liabilities:
Accounts receivable	3,443			4,181
Prepaid and other assets	7,789			(860		)
Accounts payable	3,919			3,843
Accrued liabilities	(12,279		)	(9,801		)
Deferred revenues	(9,841		)	(10,210		)
Income taxes payable	84			(5,190		)
Effect of changes in operating assets and liabilities	(6,885		)	(18,037		)

Net cash provided by operating activities from continuing operations	71,577			61,901

Cash flows from investing activities:
Purchases of property and equipment	(6,845		)	(2,161		)
Capitalized software development costs	(1,427		)	(2,556		)
Change in restricted cash	(173		)	—
Purchases of marketable securities	—			(57,863		)
Sales and maturities of marketable securities	—			228,619

Net cash (used in) provided by investing activities from continuing operations	(8,445		)	166,039

Cash flows from financing activities:
Proceeds from common stock issued from exercises of stock options	3,171			18,382
Proceeds from common stock issued under the employee stock purchase plan	3,493			3,211
Excess tax benefits from stock-based compensation	9,003			4,220
Withholding taxes related to equity award net share settlement	(5,665		)	(8,043		)
Proceeds from debt issuance	—			375,000
Repayment of debt	(50,000		)	(120,000		)
Debt issuance costs	—			(5,725		)
Repurchase of common stock	(12,878		)	(41,256		)
Payment of cash dividend	(6,693		)	(470,133		)

Net cash used in financing activities from continuing operations	(59,569		)	(244,344		)

Net cash transferred to discontinued operation	(383		)	(358		)

Effect of exchange rate changes on cash and cash equivalents	(316		)	(75		)

Net change in cash and cash equivalents from continuing operations	2,864			(16,837		)
Cash and cash equivalents of continuing operations at beginning of period	33,828			58,217

Cash and cash equivalents of continuing operations at end of period	$	36,692		$	41,380

Supplemental disclosure of cash flow information:
Noncash investing activities:
Capital expenditures included in accounts payable	$	1,019		$	738

Cash flows from discontinued operation of MicroEdge, Inc.:
Net cash used in operating activities	$	(383	)	$	(358	)
Net cash transferred from continuing operations	383			358

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. and its subsidiaries (collectively “Advent” or the “Company”). All inter-company amounts and transactions have been eliminated.

Advent has prepared these condensed consolidated financial statements in accordance with the rules and regulations of the U.S. 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2013. 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, in the opinion of management, all adjustments necessary to state fairly the financial position, results of continuing operations and cash flows for each interim period shown. All such adjustments occur in the ordinary course of business and are of a normal, recurring nature.

Recent Accounting Pronouncements

With the exception of the below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2014, as compared to the recent accounting pronouncements described in Advent’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, that are of significance, or potential significance, to the Company’s condensed consolidated financial statements.

In April 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This update raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures for discontinued operations and disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014, which means that it will be effective for Advent’s fiscal year beginning January 1, 2015. Early adoption of ASU 2014-08 is permitted, but only for disposals or assets held for sale that have not been reported in previously issued (or available to be issued) financial statements. Advent has not early adopted the provisions of ASU 2014-08. Advent expects to adopt this new standard in the first quarter of fiscal year 2015 and does not expect the adoption to have a material impact on the Company’s condensed consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective. ASU 2014-09 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2016, which means that it will be effective for Advent’s fiscal year beginning January 1, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt the standard and early adoption is not permitted. The Company is evaluating the impact of the adoption of ASU 2014-09 on its condensed consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide that a Performance Target Could be Achieved after the Requisite Service Period.” ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. ASU 2014-12 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015, which means that it will be effective for Advent’s fiscal year beginning January 1, 2016. Early adoption of ASU 2014-12 is permitted. The Company will adopt ASU 2014-12 effective January 1, 2016 and does not expect the adoption to have a material impact on the Company’s condensed consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires management to evaluate, at each annual and interim reporting period, whether there are

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conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for the annual reporting period ending after December 15, 2016, and for annual and interim periods thereafter, which means that it will be effective for Advent’s fiscal year beginning January 1, 2017. Early adoption of ASU 2014-15 is permitted. The Company will adopt ASU 2014-15 effective January 1, 2017 and does not expect the adoption to have a material impact on the Company’s condensed consolidated financial statements.

Note 2—Financial Statement Detail

Recurring and non-recurring revenues

The following is a summary of recurring and non-recurring revenues (in thousands):

	Three Months Ended September 30				Nine Months Ended September 30
	2014		2013		2014		2013

Term license revenues	$	48,558	$	47,087	$	144,862	$	133,369
Perpetual maintenance revenues	15,778		16,632		48,490		49,401
Assets under administration revenues	1,481		1,471		5,477		6,376
Other recurring revenues	24,872		22,926		73,523		71,716

Total recurring revenues	$	90,689	$	88,116	$	272,352	$	260,862

Professional services and other revenues	$	7,956	$	8,281	$	22,492	$	22,675
Perpetual license fees	337		370		1,312		1,843

Total non-recurring revenues	$	8,293	$	8,651	$	23,804	$	24,518

Prepaid expenses and other

The following is a summary of prepaid expenses and other (in thousands):

	September 30		December 31
	2014		2013

Prepaid contract expense	$	9,071	$	10,139
Deferred commissions	6,346		6,552
Debt issuance costs	1,417		1,417
Prepaid income tax	—		2,659
Other	7,890		9,347

Total prepaid expenses and other	$	24,724	$	30,114

Other assets

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

	September 30		December 31
	2014		2013

Prepaid contract expense, long-term	$	3,973	$	4,466
Long-term deferred commissions	3,099		4,098
Debt issuance costs	3,837		4,899
Deposits	2,917		2,608
Other	229		1,301

Total other assets	$	14,055	$	17,372

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Deposits include a restricted cash balance of $1.5 million at September 30, 2014 and $1.3 million at December 31, 2013 primarily related to the Company’s San Francisco headquarters and facilities in New York. Refer to Note 13, “Commitments and Contingencies” for additional information.

Dividend Payable

In September 2014, Advent’s Board of Directors (the “Board”) declared a cash dividend of $0.13 per common share payable to shareholders of record as of September 30, 2014. On October 15, 2014, the Company paid this dividend which totaled $6.7 million. Any future dividends are subject to the approval of the Board.

Accrued liabilities

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

	September 30		December 31
	2014		2013

Salaries and benefits payable	$	17,656	$	26,425
Accrued dividend equivalents on restricted stock units	3,245		3,171
Deferred rent, current portion	2,004		2,138
Accrued restructuring, current portion	1,237		998
Other	10,535		8,893

Total accrued liabilities	$	34,677	$	41,625

Accrued restructuring charges are discussed further in Note 14, “Restructuring Charges” contained herein. As part of the recapitalization in 2013, as disclosed in Advent’s 2013 Annual Report on Form 10-K, holders of restricted stock units (RSUs) have the right to receive a dividend equivalent payment of $9.00 per RSU upon vesting. At September 30, 2014 and December 31, 2013, “Other” accrued liabilities included accruals for sales and business taxes and other miscellaneous items.

Deferred revenues

The following table sets forth the composition of total short-term and long-term deferred revenues (in thousands):

	September 30		December 31
	2014		2013

Term license deferred revenue	$	93,066	$	99,473
Term implementations deferred revenue	39,794		40,221
Perpetual license/maintenance deferred revenue	28,771		32,657
Other recurring deferred revenue	21,907		21,565

Total deferred revenues	$	183,538	$	193,916

Other long-term liabilities

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

	September 30		December 31
	2014		2013

Deferred rent	$	6,332	$	8,677
Long-term deferred tax liability	1,540		1,982
Other	575		512

Total other long-term liabilities	$	8,447	$	11,171

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Note 3—Goodwill

The changes in the carrying value of goodwill for the nine months ended September 30, 2014 were as follows (in thousands):

	Carrying Value

Balance at December 31, 2013	$	207,818
Translation adjustments	(2,640		)

Balance at September 30, 2014	$	205,178

Translation adjustments reflect the impact of translating goodwill balances denominated in various foreign currencies to the U.S. Dollar. The $(2.6) million in translation adjustments resulted from a strengthening of the U.S. Dollar exchange rate versus other currencies during the nine months ended September 30, 2014.

Note 4—Other Intangibles, Net

Other intangibles are summarized as follows (in thousands, except weighted average amortization period):

	Weighted
	Average
	Amortization
	Period			Accumulated
	(Years)	Gross		Amortization			Net

Purchased technologies	5.1	$	50,907	$	(42,697	)	$	8,210
Product development costs	3.0	21,978		(18,789		)	3,189

Developed technology sub-total		72,885		(61,486		)	11,399

Customer relationships	6.4	40,971		(31,991		)	8,980
Other intangibles	4.1	4,647		(4,022		)	625

Other intangibles sub-total		45,618		(36,013		)	9,605

Balance at September 30, 2014		$	118,503	$	(97,499	)	$	21,004

	Weighted
	Average
	Amortization
	Period			Accumulated
	(Years)	Gross		Amortization			Net

Purchased technologies	5.1	$	50,711	$	(38,877	)	$	11,834
Product development costs	3.0	20,524		(17,183		)	3,341

Developed technology sub-total		71,235		(56,060		)	15,175

Customer relationships	6.4	40,936		(29,786		)	11,150
Other intangibles	4.1	4,645		(3,578		)	1,067

Other intangibles sub-total		45,581		(33,364		)	12,217

Balance at December 31, 2013		$	116,816	$	(89,424	)	$	27,392

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The changes in the carrying value of other intangibles during the nine months ended September 30, 2014 are summarized as follows (in thousands):

			Accumulated
	Gross		Amortization			Net

Balance at December 31, 2013	$	116,816	$	(89,424	)	$	27,392
Additions	1,453		—			1,453
Amortization	—		(7,766		)	(7,766		)
Translation adjustments	234		(309		)	(75		)

Balance at September 30, 2014	$	118,503	$	(97,499	)	$	21,004

Based on the carrying amount of other intangibles as of September 30, 2014, the estimated future amortization is as follows (in thousands):

	Three
	Months Ending
	December 31		Years Ending December 31
	2014		2015		2016		2017		2018		Thereafter		Total

Developed technology	$	1,585	$	5,918	$	3,493	$	382	$	18	$	3	$	11,399
Other intangibles	808		3,231		2,720		1,885		942		19		9,605

Total	$	2,393	$	9,149	$	6,213	$	2,267	$	960	$	22	$	21,004

Note 5—Debt

On June 12, 2013, Advent entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”). The Restated Credit Agreement amended and restated Advent’s prior Credit Agreement, dated November 30, 2011. The Restated Credit Agreement provides for (i) a $200 million revolving credit facility, with a $25 million letter of credit sublimit and a $10 million swingline loan sublimit and (ii) a $225 million term loan facility. Advent may request revolving loans, swingline loans or the issuance of letters of credit until June 12, 2018, subject to demonstrating pro forma compliance with the financial covenant requirement under the Restated Credit Agreement. The Restated Credit Agreement also contains an incremental facility permitting Advent, subject to certain requirements, to arrange with the Lenders and/or new lenders for up to an aggregate of $75 million in additional commitments in the form of revolving loans or term loans. The proceeds of the revolving loans and term loans under the Restated Credit Agreement may be used for general purposes, including to finance dividends, repurchase common shares, finance acquisitions, or to finance other investments.

Minimum principal payments with respect to the term loans are due in 20 equal consecutive quarterly principal installments of $5.0 million, commencing on September 13, 2013, with the remaining outstanding principal balance and all accrued and unpaid interest due on June 12, 2018. Principal payments with respect to the revolving loans, together with all accrued and unpaid interest, are due on June 12, 2018. Advent may prepay the term loans and revolving loans at any time without penalty.

The revolving loans and term loans bear interest, at Advent’s option, at the alternate base rate plus a margin of 0.25% to 1.25% or an adjusted LIBOR rate (based on one, two, three or six-month interest periods) plus a margin of 1.25% to 2.25%, in each case with such margin being determined based on the consolidated leverage ratio for the preceding four fiscal quarter period. The “alternate base rate” means the highest of (i) the Agent’s prime rate, (ii) the federal funds rate plus a margin equal to 0.50% and (iii) the adjusted LIBOR rate for a one-month interest period plus a margin equal to 1.00%. Swingline loans accrue interest at a per annum rate based on the alternate base rate plus the applicable margin for alternate base rate loans. Advent is also obligated to pay other customary closing fees, arrangement fees, administration fees, commitment fees and letter of credit fees for a credit facility of this size and type.

The obligations under the Restated Credit Agreement are guaranteed by Advent’s present and future domestic subsidiaries, subject to certain exceptions. The loan is secured by substantially all of the assets of Advent and the guarantors party thereto, including all of the capital stock of Advent’s domestic subsidiaries and 66% of the capital stock of Advent’s or a guarantor’s first-tier foreign subsidiaries.

The Restated Credit Agreement contains customary affirmative and negative covenants, including covenants that limit or restrict Advent and its subsidiaries’ ability to, among other things, incur indebtedness, grant liens, merge or consolidate, dispose of assets, pay dividends or make distributions, make investments, make acquisitions, prepay certain indebtedness, enter into certain transactions with affiliates, enter into sale and leaseback transactions, enter into swap agreements and enter into restrictive agreements, in each case subject to customary exceptions for a credit facility of this size and type. Advent is also required to maintain compliance with a consolidated leverage ratio and a consolidated interest coverage ratio. At September 30, 2014, Advent had a total debt balance of $255.0 million under its Restated Credit Agreement, of which $55.0 million was under the revolving

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credit facility; and at December 31, 2013, Advent had a total debt balance of $305.0 million under its Restated Credit Agreement, of which $90.0 million was under the revolving credit facility.

Advent was in compliance with all associated covenants as of September 30, 2014 as follows:

		Ratio Calculation
	Covenant	as of
Covenant	Requirement	September 30, 2014

Leverage ratio (1)	Maximum 3.75x (2)	2.0x

Interest coverage ratio (3)	Minimum 2.5x	15.6x

(1) Calculated as the ratio of total debt to EBITDA, as defined by the Restated Credit Agreement, for the period of four consecutive fiscal quarters on the measurement date.

(2) The leverage ratio covenant requirement lowers to a maximum of 3.50x on June 30, 2015 and 3.25x on June 30, 2016.

(3) Calculated as the ratio of EBITDA to interest expense, as defined by the Restated Credit Agreement, for the period of four consecutive fiscal quarters on the measurement date.

The Restated Credit Agreement includes customary events of default that include, among other things, non-payment defaults, defaults due to the inaccuracy of representations and warranties, covenant defaults, cross default to material indebtedness, bankruptcy and insolvency defaults, material judgment defaults, defaults due to an unenforceability of the security documents or guarantees, and a change of control default. The occurrence of an event of default could result in the acceleration of the obligations under the Restated Credit Agreement. A default interest rate will apply on all obligations during the existence of a payment event of default under the Restated Credit Agreement at a per annum rate equal to 2.00% above the otherwise applicable interest rate.

Note 6—Stockholders’ Deficit

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, net of related taxes, at September 30, 2014 and December 31, 2013, included accumulated foreign currency translation adjustments of $7.6 million and $11.0 million, respectively.

Dividends

In April 2014, Advent’s Board declared the Company’s first quarterly cash dividend of $0.13 per common share payable to shareholders of record as of June 30, 2014. On July 15, 2014, the Company paid this dividend which totaled $6.7 million. In September 2014, the Board declared a cash dividend of $0.13 per common share payable to shareholders of record as of September 30, 2014. On October 15, 2014, the Company paid this dividend which totaled $6.7 million. Any future dividends are subject to the approval of the Board.

Common Stock Repurchases

The Company repurchased approximately 426,000 shares of our common stock for a total cash outlay of $12.4 million at an average price of $29.11 per share during the second quarter of 2014, and during the third quarter of 2014 repurchased approximately 15,000 shares for a total cash outlay of $0.5 million at an average price of $30.94 per share.

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Note 7—Fair Value Measurements

The accounting guidance for fair value measurements establishes a three-tier hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

Level Input		Input Definition

Level 1		Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2		Inputs other than quoted prices included within Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.

Level 3		Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.

In general, and where applicable, the Company uses quoted prices in active markets for identical assets or liabilities to determine fair value. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then the Company uses quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly.

The Company measures certain financial assets and liabilities at fair value on a recurring basis. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, dividends payable and accrued liabilities approximate fair value based on the short-term maturities of these instruments. The carrying amount of debt approximates fair value as the underlying variable interest rate approximates current market rates and the Company’s credit risk has not changed significantly since the date of issuance. At September 30, 2014 and December 31, 2013, Advent had outstanding debt of $255.0 million and $305.0 million, respectively, which was valued using level 2 inputs.

There were no transfers between Level 1 and Level 2 assets during the nine months ended September 30, 2014, and Advent does not have any significant assets or liabilities that utilize unobservable or Level 3 inputs.

Note 8—Stock-Based Compensation

Stock-Based Compensation Expense

Stock-based compensation expense related to stock options, stock appreciation rights (“SARs”), employee stock purchase plan (“ESPP”) shares, and restricted stock units (“RSUs”) was recognized in the Company’s condensed consolidated statements of operations for the periods presented as follows (in thousands):

	Three Months Ended September 30						Nine Months Ended September 30
	2014			2013			2014			2013
Statement of operations classification
Cost of recurring revenues	$	793		$	853		$	2,469		$	2,647
Cost of non-recurring revenues	293			578			1,022			2,690
Total cost of revenues	1,086			1,431			3,491			5,337

Sales and marketing	2,461			2,874			7,757			10,920
Product development	2,005			2,083			5,853			6,941
General and administrative	1,707			2,003			5,470			17,399
Total operating expenses	6,173			6,960			19,080			35,260

Total stock-based employee compensation expense	7,259			8,391			22,571			40,597

Tax effect on stock-based employee compensation expense	(2,733		)	(2,938		)	(8,641		)	(16,100		)

Effect on net income from continuing operations, net of tax	$	4,526		$	5,453		$	13,930		$	24,497

As of September 30, 2014, total compensation cost related to unvested awards not yet recognized under all equity compensation plans was $50.8 million and is expected to be recognized over the remaining vesting period of each grant, with a weighted average remaining period of 2.5 years for the group as a whole.

Valuation Assumptions

Advent uses the Black-Scholes option pricing model and the straight-line attribution approach to determine the grant date fair value of stock options, SARs and the ESPP. The fair value of RSUs is equal to the Company’s closing stock price on the date of grant.

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The following Black-Scholes option pricing model assumptions were used for stock options and SARs granted in the following periods:

	Three Months Ended September 30		Nine Months Ended September 30
	2014	2013	2014	2013
Stock Options & SARs
Risk-free interest rate	1.7% - 1.9%	1.5% - 1.8%	1.2% - 1.9%	0.5% - 1.8%
Volatility	32.4% - 32.7%	35.1% - 38.3%	32.4% - 35.1%	33.4% - 38.8%
Expected life (in years)	4.85	5.06	3.69 - 4.85	3.94 - 5.06
Expected dividend yield	1.6% - 1.7%	0%	0% - 1.8%	0%

Employee Stock Purchase Plan
Risk-free interest rate			0.1%	0.1%
Volatility			32.1%	31.8%
Expected life (in years)			0.5	0.5
Expected dividend yield			1.7%	0%

Volatility for the periods presented was calculated using an equally weighted average of the Company’s historical and implied volatility of its common stock. The Company believes that this blended calculation of volatility is the most appropriate indicator of expected volatility and best reflects expected market conditions.

Expected life for the periods presented was determined based on the Company’s historical experience of similar awards, giving consideration to the contractual terms or offering periods, vesting schedules and expectations of future employee behavior.

Risk-free interest rate for the periods presented was based on the U.S. Treasury yield curve in effect at the date of grant for periods corresponding with the expected life.

The expected dividend yield for each grant was determined by annualizing the most recent dividend declared and dividing the result by the Company’s closing stock price on the date of grant. The dividend yield assumption for grants prior to April 28, 2014 was based on the Company’s history of not paying regular dividends and the future expectation of no recurring dividend payouts at the time of grant.

Equity Award Activity

The Company’s stock option and SAR activity for the nine months ended September 30, 2014 was as follows:

					Weighted
			Weighted		Average	Aggregate
	Number of		Average		Remaining	Intrinsic
	Shares		Exercise		Contractual Life	Value
	(in thousands)		Price		(in years)	(in thousands)

Outstanding at December 31, 2013	5,590		$	15.05
Options & SARs granted	748		29.19
Options & SARs exercised	(800	)	13.86
Options & SARs canceled	(181	)	20.65
Outstanding at September 30, 2014	5,357		$	17.01	6.62	$	78,069
Exercisable at September 30, 2014	2,773		$	13.35	4.84	$	50,503

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the Company’s closing stock price of $31.56 on September 30, 2014 for options and SARs that were in-the-money as of that date.

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The weighted average grant date fair value of options and SARs granted, total intrinsic value of options and SARs exercised and cash received from options exercised during the periods presented were as follows (in thousands, except weighted average grant date fair value):

	Nine Months Ended September 30
	2014		2013
Options and SARs
Weighted average grant date fair value	$	8.06	$	10.44
Total intrinsic value of awards exercised	$	14,138	$	34,259

Options
Cash received from exercises	$	3,171	$	18,382

The Company settles exercised stock options and SARs with newly issued common shares.

The Company’s RSU activity for the nine months ended September 30, 2014 was as follows:

			Weighted
	Number of		Average
	Shares		Grant Date
	(in thousands)		Fair Value

Outstanding and unvested at December 31, 2013	1,159		$	20.16
RSUs granted	767		30.16
RSUs vested	(322	)	29.10
RSUs canceled	(95	)	27.85
Outstanding and unvested at September 30, 2014	1,509		$	22.85

In March 2014, the Company granted approximately 334,000 RSUs with performance-based criteria to certain of its executives and other key employees under its 2002 Stock Plan. These awards are scheduled to vest three years from the date of grant and expense is being recognized on a straight-line basis in proportion to the number of shares expected to vest. The number of shares that will ultimately vest will vary from 0% to 100% of the granted shares, depending upon the amount of cumulative recurring revenue (35% weight) and cumulative non-GAAP operating profit (65% weight) during the three-year period. On a quarterly basis, the Company assesses the number of shares that will ultimately vest and, if necessary, will record a cumulative adjustment to stock-based compensation expense recognized in the quarter the assessment changes.

The weighted average grant date fair value of RSUs was determined based on the closing market price of the Company’s common stock on the date of the award. The aggregate intrinsic value of RSUs outstanding at September 30, 2014 was $47.6 million based on the Company’s closing stock price of $31.56 per share on that date.

Note 9—Derivative Financial Instruments

The Company periodically enters into foreign currency forward contracts with financial institutions to reduce the risk that the Company’s cash flows and earnings will be adversely affected by foreign currency exchange rate fluctuations. These forward contracts are not designated for trading or speculative purposes and are not designated as hedging instruments. The Company uses foreign currency forward contracts to hedge a portion of its receivable balances denominated in Euro, Swedish Krona, British Pounds, South African Rand and Norwegian Kroner. The Company recognizes gains and losses on these contracts, as well as related costs, in “Interest and other income (expense), net” in the condensed consolidated statement of operations along with the gains and losses of the related hedged items. The Company records the fair value of derivative instruments as either “Prepaid expenses and other” or “Accrued liabilities” in the condensed consolidated balance sheet based on current market rates.

As of September 30, 2014, Advent had no outstanding foreign currency forward contracts and there was no impact to the accompanying condensed consolidated statements of operations for the nine months ended September 30, 2014. At September 30, 2013, the Company had no net derivative assets. The effect of the derivative financial instruments on the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2013 was to increase foreign exchange gains by approximately $45,000, which reflects net realized and unrealized gains related to our derivative financial instruments.

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Note 10—Income Taxes

The following table summarizes the activity relating to the Company’s unrecognized tax benefits during the nine months ended September 30, 2014 (in thousands):

	Total

Balance at December 31, 2013	$	14,678
Gross increases related to current period tax positions	469
Balance at September 30, 2014	$	15,147

At September 30, 2014 and December 31, 2013, Advent had gross unrecognized tax benefits of $15.1 million and $14.7 million, respectively. During the nine months ended September 30, 2014, the Company increased the amount of unrecognized tax benefits by approximately $0.5 million related primarily to state research credits. If recognized, the total unrecognized tax benefits would decrease Advent’s tax provision and increase net income by approximately $12.4 million. The impact on net income reflects the liabilities for unrecognized tax benefits, net of the federal tax benefit of state income tax items. The Company’s liabilities for unrecognized tax benefits relate primarily to federal research credits, state research credits and enterprise zone tax credits and various state net operating losses.

Advent is subject to taxation in the U.S. and various states and jurisdictions outside the U.S. Advent is currently undergoing a State of California franchise tax examination for the 2006 and 2007 tax years and a state of New York corporate income tax examination for the 2011, 2012, and 2013 tax years. At September 30, 2014, Advent was not under examination in any other income tax jurisdiction and at the present time does not anticipate the total amount of its unrecognized tax benefits to significantly change over the next 12 months. The material jurisdictions that are subject to examination by tax authorities include federal for tax years after 2010 and California for tax years after 2005.

As of September 30, 2014, Advent made no provision for a cumulative total of $23.3 million of undistributed earnings for certain non-U.S. subsidiaries, which are deemed to be permanently reinvested.

Note 11—Discontinued Operation

During 2009, the Company discontinued the operations of its wholly-owned subsidiary, MicroEdge, Inc. (“MicroEdge”). In connection with the sale of MicroEdge, the Company vacated its MicroEdge facilities in New York and entered into a sub-lease agreement with the purchaser, whereby the purchaser contracted to sub-lease the premises through the end of the amended lease term in November 2018.

The following table sets forth an analysis of the components of the restructuring charges related to the Company’s discontinued operation and the payments and non-cash charges made against the accrual during the nine months ended September 30, 2014 (in thousands):

	Facility Exit
	Costs

Balance of restructuring accrual at December 31, 2013	$	3,351
Restructuring charges	21
Cash payments	(521		)
Accretion of prior restructuring costs	73

Balance of restructuring accrual at September 30, 2014	$	2,924

Of the remaining restructuring accrual of $2.9 million at September 30, 2014, $0.6 million is included in “Current liabilities of discontinued operation” in the accompanying condensed consolidated balance sheet. The facility exit costs will be paid over the remaining lease term through November 2018.

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Note 12—Net Income (Loss) Per Share

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

	Three Months Ended September 30						Nine Months Ended September 30
	2014			2013			2014			2013
Numerator:
Net income (loss):
Continuing operations	$	12,003		$	9,833		$	35,565		$	17,735
Discontinued operation	(20		)	(20		)	(57		)	68

Total operations	$	11,983		$	9,813		$	35,508		$	17,803

Denominator:
Denominator for basic net income (loss) per share - weighted average shares outstanding	51,579			51,576			51,464			51,241

Dilutive common equivalent shares:
Employee stock options and other	2,298			2,361			2,110			2,088

Denominator for diluted net income (loss) per share - weighted average shares outstanding, assuming exercise of potential dilutive common equivalent shares	53,877			53,937			53,574			53,329

Net income (loss) per share (1):
Basic:
Continuing operations	$	0.23		$	0.19		$	0.69		$	0.35
Discontinued operation	(0.00		)	(0.00		)	(0.00		)	0.00

Total operations	$	0.23		$	0.19		$	0.69		$	0.35

Diluted:
Continuing operations	$	0.22		$	0.18		$	0.66		$	0.33
Discontinued operation	(0.00		)	(0.00		)	(0.00		)	0.00

Total operations	$	0.22		$	0.18		$	0.66		$	0.33

(1) Net income (loss) per share is based on actual calculated values and totals may not sum due to rounding.

Weighted average stock options, SARs and RSUs of approximately 0.8 million and 1.4 million for the three and nine months ended September 30, 2014, respectively, were excluded from the calculation of diluted net income (loss) per share because their inclusion would have been anti-dilutive. Similarly, weighted average stock options, SARs and RSUs of 1.3 million and 2.4 million were excluded in the comparable periods of 2013, respectively.

Note 13—Commitments and Contingencies

Lease Obligations

Advent leases office space and equipment under non-cancelable operating lease agreements, which expire at various dates through June 2025. Some operating leases contain escalation provisions for adjustments in the consumer price index. Advent is responsible for maintenance, insurance, utilities and property taxes. Excluding leases and associated sub-leases for MicroEdge facilities, as of September 30, 2014, Advent’s remaining operating lease commitments through 2025 were approximately $51.5 million.

On October 1, 2009, Advent completed the sale of the Company’s MicroEdge subsidiary. At September 30, 2014, the gross operating lease commitments and sub-lease income related to this discontinued operation facility totaled $5.4 million and $2.4 million, respectively.

Indemnifications

As permitted or required under Delaware law and to the maximum extent allowable under that law, Advent has certain obligations to indemnify its current and former officers and directors for certain events or occurrences while the officer or director is, or was serving, at Advent’s request in such capacity. These indemnification obligations are valid as long as the director or officer acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments Advent could be required to make under these indemnification obligations is unlimited; however, Advent has a director and officer insurance policy that mitigates Advent’s exposure and enables Advent to

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recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification obligations is minimal.

Legal Contingencies

From time to time, in the course of its operations, the Company is a party to litigation matters and claims, including claims related to employee relations, business practices and other matters, but does not consider these matters to be material either individually or in the aggregate at this time. Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict and the Company’s view of these matters may change in the future as the litigation and related events unfold. An unfavorable outcome in any legal matter, if material, could have a material adverse effect on the Company’s financial position, liquidity or results of operations in the period in which the unfavorable outcome occurs and potentially in future periods.

Advent reviews the status of each litigation matter or other claim and records a provision for a liability when it is considered both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed quarterly and adjusted as additional information becomes available. If either or both of the criteria are not met, the Company reassesses whether there is at least a reasonable possibility that a loss, or additional losses, may be incurred. If there is a reasonable possibility that a loss may be incurred, the Company discloses the estimate of the amount of loss or range of loss, discloses that the amount is immaterial (if true), or discloses that an estimate of loss cannot be made. In assessing potential loss contingencies, the Company considers a number of factors, including those listed in the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 450-20, Contingencies—Loss Contingencies, regarding assessing the probability of a loss occurring and assessing whether a loss is reasonably estimable. The Company expenses legal fees as incurred.

Based on currently available information, the Company’s management does not believe that the ultimate outcome of unresolved matters, individually and in the aggregate, is likely to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Note 14—Restructuring Charges

The following table sets forth an analysis of the changes in the restructuring accrual during the nine months ended September 30, 2014 (in thousands):

	Facility Exit			Severance and
	Costs			Benefits			Total

Balance of restructuring accrual at December 31, 2013	$	185		$	813		$	998
Restructuring charges	2,758			1,736			4,494
Non-cash write-off of leasehold improvements	(2,786		)	—			(2,786		)
Reversal of deferred rent related to facilities exited	1,113			—			1,113
Cash payments	(270		)	(2,312		)	(2,582		)

ADVENT SOFTWARE INC /DE/ - FORM 10-Q - November 7, 2014

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