**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **ý** | ** ** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|------------|------------|---------------------------------------------------------------------------------------------------------|

 

**for thequarterly period ended September 30, 2005**

 

**or**

 
| **o** | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**Commissionfile number:  0-26994**

 

**ADVENTSOFTWARE, INC.**

(Exact name of registrant asspecified 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) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.

 

Yes  ý   No  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

 

Yes  ý   No  o

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). 

 

Yes  o   No  ý

 

The number of shares of the registrant’sCommon Stock outstanding as of October 31, 2005 was 30,933,561.

 

 

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**INDEX**

 
| **PART I. FINANCIAL INFORMATION** |     |
|----------------------------------------|----------|
|                                   | Item 1.  | Financial Statements | 3 |
|                                   |     | 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 | 18 |
|                                   | Item 3.  | Quantitative and Qualitative Disclosures  About Market Risk | 43 |
|                                   | Item  4. | Controls  and Procedures | 43 |
| **PART II. OTHER INFORMATION**    | 44       |
|                                   | Item 1.  | Legal Proceedings | 44 |
|                                   | Item 2.  | Unregistered Sales of Equity Securities and  Use of Proceeds | 45 |
|                                   | Item 3.  | Defaults Upon Senior Securities | 45 |
|                                   | Item 4.  | Submission of Matters to a Vote of Security  Holders | 45 |
|                                   | Item 5.  | Other Information | 45 |
|                                   | Item 6.  | Exhibits | 46 |
| **Signatures**                         | 47       |
|                                        |          |  |  |  |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**ADVENTSOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                      | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2005**              | ** ** | **2004**             | ** ** |
| **ASSETS**                                      |       |                  |       |                 |       |
| Current assets:                                 |       |                  |       |                 |       |
| Cash and  cash equivalents                      |       | $                     | 55,536     |                 | $          | 21,177 |   |
| Marketable  securities                          |       | 90,979                |       | 144,352              |       |
| Accounts  receivable, net                       |       | 28,099                |       | 32,778               |       |
| Prepaid  expenses and other                     |       | 11,926                |       | 10,415               |       |
| Total  current assets                           |       | 186,540               |       | 208,722              |       |
| Property and equipment, net                     |       | 15,655                |       | 18,432               |       |
| Goodwill                                        |       | 94,944                |       | 99,393               |       |
| Other intangibles, net                          |       | 10,298                |       | 14,668               |       |
| Other assets, net                               |       | 12,373                |       | 13,362               |       |
|                                            |       |                  |       |                 |       |
| Total assets                                    |       | $                     | 319,810    |                 | $          | 354,577 |   |
|                                            |       |                  |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**   |       |                  |       |                 |       |
| Current liabilities:                            |       |                  |       |                 |       |
| Accounts  payable                               |       | $                     | 2,790      |                 | $          | 2,825 |   |
| Accrued  liabilities                            |       | 18,426                |       | 17,570               |       |
| Deferred  revenues                              |       | 56,729                |       | 56,405               |       |
| Income taxes  payable                           |       | 2,897                 |       | 4,036                |       |
| Total  current liabilities                      |       | 80,842                |       | 80,836               |       |
| Deferred income taxes                           |       | 2,005                 |       | 2,250                |       |
| Other long-term liabilities                     |       | 5,392                 |       | 5,816                |       |
|                                            |       |                  |       |                 |       |
| Total liabilities                               |       | 88,239                |       | 88,902               |       |
|                                            |       |                  |       |                 |       |
| Commitments and contingencies (See Note 13)     |       |                  |       |                 |       |
|                                            |       |                  |       |                 |       |
| Stockholders’ equity:                      |       |                  |       |                 |       |
| Common stock                                    |       | 307                   |       | 327                  |       |
| Additional  paid-in capital                     |       | 324,043               |       | 339,995              |       |
| Accumulated  deficit                            |       | (99,739               | )          | (86,921              | )          |
| Accumulated  other comprehensive income         |       | 6,960                 |       | 12,274               |       |
| Total  stockholders’ equity                |       | 231,571               |       | 265,675              |       |
|                                            |       |                  |       |                 |       |
| Total liabilities and stockholders’ equity |       | $                     | 319,810    |                 | $          | 354,577 |   |

 

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

 

3

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**ADVENTSOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Inthousands, except per share data)**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                            | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net revenues:**                                                     |       |                                     |       |                                    |       |   |   |   |   |
| License and development fees                                          |       | $                                        | 9,200      |                                    | $          | 8,798 |   | $ | 28,428 |   | $ | 25,525 |   |
| Maintenance and other recurring                                       |       | 27,796                                   |       | 24,167                                  |       | 79,099 |   | 70,367 |   |
| Professional services and other                                       |       | 6,039                                    |       | 4,323                                   |       | 16,376 |   | 13,142 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| Total net  revenues                                                   |       | 43,035                                   |       | 37,288                                  |       | 123,903 |   | 109,034 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| **Cost of revenues:**                                                 |       |                                     |       |                                    |       |   |   |   |   |
| License and development fees                                          |       | 328                                      |       | 598                                     |       | 968 |   | 1,618 |   |
| Maintenance and other recurring                                       |       | 7,314                                    |       | 6,754                                   |       | 21,951 |   | 20,954 |   |
| Professional services and other                                       |       | 4,328                                    |       | 3,706                                   |       | 12,985 |   | 11,386 |   |
| Amortization and impairment of developed  technology                  |       | 641                                      |       | 2,379                                   |       | 1,869 |   | 5,071 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| Total cost  of revenues                                               |       | 12,611                                   |       | 13,437                                  |       | 37,773 |   | 39,029 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| Gross margin                                                          |       | 30,424                                   |       | 23,851                                  |       | 86,130 |   | 70,005 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| **Operating expenses:**                                               |       |                                     |       |                                    |       |   |   |   |   |
| Sales and marketing                                                   |       | 9,459                                    |       | 9,705                                   |       | 30,005 |   | 27,774 |   |
| Product development                                                   |       | 6,800                                    |       | 7,967                                   |       | 22,567 |   | 24,320 |   |
| General and administrative                                            |       | 8,007                                    |       | 6,329                                   |       | 24,288 |   | 18,517 |   |
| Amortization and impairment of other  intangibles                     |       | 997                                      |       | 4,414                                   |       | 3,064 |   | 8,498 |   |
| Restructuring charges (benefit)                                       |       | 116                                      |       | (1                                      | )          | 1,719 |   | 5,859 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| Total  operating expenses                                             |       | 25,379                                   |       | 28,414                                  |       | 81,643 |   | 84,968 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| Income (loss) from operations                                         |       | 5,045                                    |       | (4,563                                  | )          | 4,487 |   | (14,963 | ) |
| Interest income and other, net                                        |       | 977                                      |       | 641                                     |       | 6,586 |   | 625 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| Income (loss) before income taxes                                     |       | 6,022                                    |       | (3,922                                  | )          | 11,073 |   | (14,338 | ) |
| Provision for (benefit from) income taxes                             |       | (207                                     | )          | 1,211                                   |       | 784 |   | 1,190 |   |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| **Net  income (loss)**                                                |       | $                                        | 6,229      |                                    | $          | (5,133 | ) | $ | 10,289 |   | $ | (15,528 | ) |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| Net income (loss) per share:                                          |       |                                     |       |                                    |       |   |   |   |   |
| Basic                                                                 |       | $                                        | 0.20       |                                    | $          | (0.16 | ) | $ | 0.33 |   | $ | (0.47 | ) |
| Diluted                                                               |       | $                                        | 0.19       |                                    | $          | (0.16 | ) | $ | 0.32 |   | $ | (0.47 | ) |
|                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| Weighted  average shares used to compute net income (loss) per share: |       |                                     |       |                                    |       |   |   |   |   |
| Basic                                                                 |       | 30,602                                   |       | 32,894                                  |       | 31,047 |   | 33,046 |   |
| Diluted                                                               |       | 32,301                                   |       | 32,894                                  |       | 32,091 |   | 33,046 |   |

 

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

 

4

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**ADVENTSOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                                                                | ** ** | **Nine Months Ended September 30** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                | ** ** | **2004** | ** ** |
| **Cash flows from operating activities:**                                                 |       |                                    |       |   |   |
| Net income  (loss)                                                                        |       | $                                       | 10,289     |   | $ | (15,528 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |       |                                    |       |   |   |
| Non-cash  stock based compensation                                                        |       | —                                  |       | 21 |   |
| Depreciation  and amortization                                                            |       | 12,004                                  |       | 16,681 |   |
| Non-cash  restructuring charges                                                           |       | —                                  |       | 863 |   |
| Impairment  of intangible assets                                                          |       | —                                  |       | 3,370 |   |
| Loss on  dispositions of fixed assets                                                     |       | 143                                     |       | 388 |   |
| Reduction of  doubtful accounts                                                           |       | (191                                    | )          | (89 | ) |
| (Gain) loss  on investments                                                               |       | (3,384                                  | )          | 298 |   |
| Deferred  income taxes                                                                    |       | (246                                    | )          | (26 | ) |
| Other                                                                                     |       | (929                                    | )          | (335 | ) |
| Changes in  operating assets and liabilities:                                             |       |                                    |       |   |   |
| Accounts  receivable                                                                      |       | 4,870                                   |       | 5,680 |   |
| Prepaid and  other assets                                                                 |       | 157                                     |       | 6,005 |   |
| Accounts  payable                                                                         |       | (35                                     | )          | (52 | ) |
| Accrued  liabilities                                                                      |       | 2,562                                   |       | 1,219 |   |
| Deferred  revenues                                                                        |       | 350                                     |       | (847 | ) |
| Income taxes  payable                                                                     |       | (1,139                                  | )          | 541 |   |
|                                                                                      |       |                                    |       |   |   |
| Net cash provided by operating activities                                                 |       | 24,451                                  |       | 18,189 |   |
|                                                                                      |       |                                    |       |   |   |
| **Cash flows from investing activities:**                                                 |       |                                    |       |   |   |
| Net cash  used in acquisitions                                                            |       | (1,028                                  | )          | (8,513 | ) |
| Purchases of  property and equipment                                                      |       | (4,460                                  | )          | (2,723 | ) |
| Capitalized  software development costs                                                   |       | (1,280                                  | )          | — |   |
| Purchases of  marketable securities                                                       |       | (105,187                                | )          | (136,744 | ) |
| Sales and  maturities of marketable securities                                            |       | 157,248                                 |       | 132,286 |   |
| Proceeds  from sale of other investments                                                  |       | 3,791                                   |       | — |   |
| Other                                                                                     |       | 3                                       |       | — |   |
|                                                                                      |       |                                    |       |   |   |
| Net cash provided by (used in) investing  activities                                      |       | 49,087                                  |       | (15,694 | ) |
|                                                                                      |       |                                    |       |   |   |
| **Cash flows from financing activities:**                                                 |       |                                    |       |   |   |
| Proceeds  from issuance of common stock                                                   |       | 13,505                                  |       | 4,372 |   |
| Repurchase  of common stock                                                               |       | (52,585                                 | )          | (11,899 | ) |
|                                                                                      |       |                                    |       |   |   |
| Net cash used in financing activities                                                     |       | (39,080                                 | )          | (7,527 | ) |
|                                                                                      |       |                                    |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                             |       | (99                                     | )          | (29 | ) |
|                                                                                      |       |                                    |       |   |   |
| **Net change in cash and cash equivalents**                                               |       | 34,359                                  |       | (5,061 | ) |
| **Cash and cash equivalents at beginning of  period**                                     |       | 21,177                                  |       | 34,761 |   |
|                                                                                      |       |                                    |       |   |   |
| **Cash and cash equivalents at end of period**                                            |       | $                                       | 55,536     |   | $ | 29,700 |   |

 

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

 

5

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**ADVENTSOFTWARE, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**Note1—Basis of Presentation**

 

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

 

Advent has prepared these condensedconsolidated financial statements in accordance with the rules andregulations of the Securities and Exchange Commission (“SEC”) applicable tointerim financial information. Certain information and footnote disclosuresincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have been omittedin these interim statements pursuant to such SEC rules and regulations.These interim financial statements should be read in conjunction with theaudited financial statements and related notes included in Advent’s AnnualReport on Form 10-K for the year ended December 31, 2004 (see Note 2below). Interim results are not necessarily indicative of the results to beexpected for the full year, and no representation is made thereto.

 

These condensed consolidated financial statementsinclude all adjustments necessary to state fairly the financial position andresults of operations for each interim period shown. All such adjustments occurin the ordinary course of business and are of a normal, recurring nature.Certain prior year amounts have been reclassified to conform to the currentyear presentation. These reclassifications do not affect net revenues, netincome (loss) or stockholders’ equity. 

 

**Note 2—Restatement of Disclosure forStock-Based Employee Compensation Expense**

 

Inconnection with its preparation of the condensed consolidated financialstatements for the quarter ended March 31, 2005, management of the Companydetermined that the financial statements for the years ending December 31,2002, 2003 and 2004 and for the first three quarters of fiscal 2003 and 2004cannot be relied on for the following reason. The Company’s disclosure forstock-based employee compensation expense under Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS123”), as amended by SFAS No. 148 “Accounting for Stock-BasedCompensation – Transition and Disclosure” (“SFAS 148”), included in Note 1 to its previously issuedfinancial statements contained in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2004 (“2004 10-K”) and in the QuarterlyReports on Form 10-Q for each of the quarterly periods referred to above, containederrors in its disclosure of the pro forma effects on operating results as ifAdvent had elected to use the fair value approach to account for allstock-based compensation plans. Specifically, the errors related to thecalculation of the effect of a stock option exchange program that took place onDecember 4, 2002, and the overall determination of the tax treatment ofthe pro forma option expense and forfeitures. As a result of these errors,Advent will restate the disclosure for stock-based employee compensationexpense for fiscal 2002, 2003 and 2004 included in Note 1 to the previouslyissued financial statements contained in its 2004 10-K together with theassociated disclosure for the first three quarters of fiscal 2003 and 2004. Inaddition, the Company has incorporated these corrections to its disclosure forstock-based employee compensation expense included in Note 4, “Stock-BasedCompensation” to these condensed consolidated financial statements. Theseerrors had no impact on the Company’s balance sheets, statements of operations,cash flows, comprehensive income or stockholders’ equity for any period. 

 

The following is asummary of the effect of these corrections on the Company’s pro formacalculation of its net loss and net loss per share for the three and ninemonths ended September 30, 2004 had compensation been determined correctlybased on the fair value at the grant date for awards (in thousands, except pershare data):

 

6

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| ** **                                                                                                             | ** ** | **As Previously** | ** ** | ** **      | ** ** | **As**       | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                                                             | ** ** | **Reported**      | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Three months ended September 30, 2004**                                                                         |       |              |       |            |       |         |       |
| Net loss - as reported                                                                                                 |       | $                 | (5,133     | )               | $          | —       |       | $ | (5,133 | ) |
| Stock-based  employee compensation expense included in reported net loss, net of tax                                   |       | 3                 |       | —          |       | 3            |       |
| Total  stock-based employee compensation expense determined under fair value based  method for all options, net of tax |       | (2,247            | )          | (1,844          | )          | (4,091       | )          |
|                                                                                                                   |       |              |       |            |       |         |       |
| Net loss -  pro forma                                                                                                  |       | $                 | (7,377     | )               | $          | (1,844       | )          | $ | (9,221 | ) |
|                                                                                                                   |       |              |       |            |       |         |       |
| Net loss per share:                                                                                                    |       |              |       |            |       |         |       |
| Basic and diluted - as reported                                                                                        |       | $                 | (0.16      | )               | $          | —       |       | $ | (0.16 | ) |
| Basic and diluted - pro forma                                                                                          |       | $                 | (0.22      | )               | $          | (0.06        | )          | $ | (0.28 | ) |
|                                                                                                                   |       |              |       |            |       |         |       |
| **Nine months ended September 30, 2004**                                                                          |       |              |       |            |       |         |       |
| Net loss - as reported                                                                                                 |       | $                 | (15,528    | )               | $          | —       |       | $ | (15,528 | ) |
| Stock-based  employee compensation expense included in reported net loss, net of tax                                   |       | 21                |       | —          |       | 21           |       |
| Total  stock-based employee compensation expense determined under fair value based  method for all options, net of tax |       | (7,307            | )          | (5,275          | )          | (12,582      | )          |
|                                                                                                                   |       |              |       |            |       |         |       |
| Net loss -  pro forma                                                                                                  |       | $                 | (22,814    | )               | $          | (5,275       | )          | $ | (28,089 | ) |
|                                                                                                                   |       |              |       |            |       |         |       |
| Net loss per share:                                                                                                    |       |              |       |            |       |         |       |
| Basic and diluted - as reported                                                                                        |       | $                 | (0.47      | )               | $          | —       |       | $ | (0.47 | ) |
| Basic and diluted - pro forma                                                                                          |       | $                 | (0.69      | )               | $          | (0.16        | )          | $ | (0.85 | ) |

 

**Note3—Recent Accounting Pronouncements**

 

In December 2004, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-BasedPayment” (“SFAS 123R”), which replaces SFAS 123 and supersedes AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”). SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values, beginning with the firstinterim or annual period after June 15, 2005, with early adoptionencouraged. The pro forma disclosures previously permitted under SFAS 123 nolonger will be an alternative to financial statement recognition. In April 2005,the SEC subsequently adopted a new rule delaying compliance with SFAS 123Runtil the beginning of the Company’s next fiscal year, instead of the nextreporting period that begins after June 15, 2005. Under the SEC’s recentrule, Advent is required to adopt SFAS 123R in the first quarter of fiscal2006, beginning January 1, 2006. Under SFAS 123R, Advent mustdetermine the appropriate fair value model to be used for valuing share-basedpayments, the amortization method for compensation cost and the transitionmethod to be used at date of adoption. The transition method includesprospective and retroactive adoption methods. Under the retroactive method,prior periods may be restated either as of the beginning of the year ofadoption or for all periods presented. The prospective method requires thatcompensation expense be recorded for all unvested stock options and restrictedstock at the beginning of the first quarter of adoption of SFAS 123R,while the retroactive method would record compensation expense for all unvestedstock options and restricted stock beginning with the first period restated.Advent is evaluating the requirements of SFAS 123R and expects that theadoption of SFAS 123R will have a material impact on its condensedconsolidated results of operations and earnings per share. Advent has not yetdetermined the method of adoption or the effect of adopting SFAS 123R, andhas not determined whether the adoption will result in amounts that are similarto the current pro forma disclosures under SFAS 123.

 

In March 2005, the SEC issued StaffAccounting Bulletin No. 107 (“SAB 107”) regarding the staff’sinterpretation of Share-Based Payments. This interpretation expresses the viewsof the staff regarding the interaction between SFAS 123R and certain SEC rules andregulations and provides the staff’s views regarding the valuation ofshare-based payment arrangements for publicly traded companies. In particular,SAB 107 provides guidance related to share-based payment transactions withnon-employees, the transition from nonpublic to public entity status, valuationmethods, the accounting for certain redeemable financial instruments issuedunder share-based payment arrangements, the classification of compensation expense,non-GAAP

 

7

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financial measures, first-time adoption of SFAS 123R in an interimperiod, capitalization of compensation cost related to share-basedarrangements, the accounting for income tax effects of share-based paymentarrangements upon adoption of SFAS 123R, the modification of employee shareoptions prior to adoption of SFAS 123R and disclosures in Management’sDiscussion and Analysis subsequent to adoption of SFAS 123R. Advent will adoptSAB 107 in connection with its adoption of SFAS 123R, which the Company expectsto have a material impact on its condensed consolidated results of operationsand earnings per share. 

 

In March 2005, the FASB issuedInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations – An Interpretation of FASB Statement No. 143” (“FIN 47”), toclarify the requirement to record liabilities stemming from a legal obligationto clean up and retire fixed assets, such as a plant or factory, when an assetretirement depends on a future event. The Company plans to adopt FIN 47 in the fourthquarter of fiscal 2005, and has not yet determined whether the application ofFIN 47 will have a material impact on its condensed consolidated results ofoperations, cash flows or financial position. 

 

In May 2005, the FASB issued SFAS No. 154,“Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20and FASB Statement No. 3” (“SFAS 154”). This statement applies to allvoluntary changes in accounting principle and changes required by an accountingpronouncement where no specific transition provisions are included. SFAS 154requires retrospective application to prior periods’ financial statements ofchanges in accounting principle, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change.Retrospective application is limited to the direct effects of the change; theindirect effects should be recognized in the period of the change. Thisstatement carries forward without change the guidance contained in Opinion 20for reporting the correction of an error in previously issued financialstatements and a change in accounting estimate. However, SFAS 154 redefinesrestatement as the revising of previously issued financial statements toreflect the correction of an error. The provisions of SFAS 154 are effectivefor accounting changes and corrections of errors made in fiscal periods thatbegin after December 15, 2005, although early adoption is permitted. TheCompany does not anticipate that the implementation of this standard will havea material impact on its condensed consolidated results of operations, cashflows or financial position.  

 

**Note 4—Stock-Based Compensation**

 

Advent currently uses the intrinsic value-basedmethod as prescribed in APB 25 to account for all stock-basedemployee compensation plans and has adopted the disclosure-only alternative ofSFAS 123, as amended by SFAS 148. Advent is required to disclose the pro formaeffects on operating results as if Advent had elected to use the fair valueapproach to account for all stock-based employee compensation plans.Stock-based compensation for non-employees is based on the fair value of therelated stock or options.

 

The fair value of warrants, options or stockexchanged for services is expensed over the period benefited. The warrants andoptions are valued using the Black-Scholes option pricing model. 

 

If compensation had been determined based onthe fair value at the grant date for awards during the three and nine monthsended September 30, 2005 and 2004, consistent with the provisions of SFAS123, Advent’s net loss and net loss per share would have been as follows (inthousands, except per share data):

 

8

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| ** **                                                                                                                 | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                 | ** ** | ** **                               | ** ** | **(Restated,**                          | ** ** | ** ** | ** ** | **(Restated,** | ** ** |
| ** **                                                                                                                 | ** ** | ** **                               | ** ** | **See Note 2)**                         | ** ** | ** ** | ** ** | **See Note 2)** | ** ** |
| ** **                                                                                                                 | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                 | ** ** | ** **                               | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss) - as reported                                                                                            |       | $                                        | 6,229      |                                    | $          | (5,133 | ) | $ | 10,289 |   | $ | (15,528 | ) |
| Stock-based  employee compensation expense included in reported net loss, net of tax (1)                                   |       | —                                   |       | 3                                       |       | — |   | 21 |   |
| Total stock  based employee compensation expense determined under fair value based method  for all options, net of tax (1) |       | (3,739                                   | )          | (4,091                                  | )          | (12,041 | ) | (12,582 | ) |
|                                                                                                                       |       |                                     |       |                                    |       |   |   |   |   |
| Net loss - pro forma                                                                                                       |       | $                                        | 2,490      |                                    | $          | (9,221 | ) | $ | (1,752 | ) | $ | (28,089 | ) |
|                                                                                                                       |       |                                     |       |                                    |       |   |   |   |   |
| Net income (loss) per share - as reported:                                                                                 |       |                                     |       |                                    |       |   |   |   |   |
| Basic                                                                                                                      |       | $                                        | 0.20       |                                    | $          | (0.16 | ) | $ | 0.33 |   | $ | (0.47 | ) |
| Diluted                                                                                                                    |       | $                                        | 0.19       |                                    | $          | (0.16 | ) | $ | 0.32 |   | $ | (0.47 | ) |
|                                                                                                                       |       |                                     |       |                                    |       |   |   |   |   |
| Net income (loss) per share - pro forma:                                                                                   |       |                                     |       |                                    |       |   |   |   |   |
| Basic                                                                                                                      |       | $                                        | 0.08       |                                    | $          | (0.28 | ) | $ | (0.06 | ) | $ | (0.85 | ) |
| Diluted                                                                                                                    |       | $                                        | 0.08       |                                    | $          | (0.28 | ) | $ | (0.06 | ) | $ | (0.85 | ) |

 

----

(1)          Assumes an effective tax rate of 0% for the three and nine months ended September 30,2005 and 2004 due to the full valuation allowance established against theCompany’s deferred tax assets during the fourth quarter of 2003. 

 

The weighted-average grant-date fair value ofoptions granted were $12.76 for the three months ended September 30, 2005and $10.16 and $10.79 per option for the nine months ended September 30,2005 and 2004, respectively. The Company did not grant options during the threemonths ended September 30, 2004. The weighted-average fair values of theEmployee Stock Purchase Plan (“ESPP”) rights, measured on the grant date usingBlack-Scholes option pricing model, were $4.62 per share for the three and ninemonths ended September 30, 2005 and $4.47 per share for the three and ninemonths ended September 30, 2004. 

 

The fair value of each option grant and ESPP rightswere estimated on the date of grant using the Black-Scholes option pricingmodel with the following weighted average assumptions:

 
| ** **              | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| **Stock Options**       | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free interest rate |       | 4.0%                                     |       | *                                       |       | 3.9% |   | 2.9% |   |
| Volatility              |       | 58.1%                                    |       | *                                       |       | 61.2% |   | 67.0% |   |
| Expected life           |       | 5 years                                  |       | *                                       |       | 5 years |   | 5 years |   |
| Expected dividends      |       | None                                     |       | *                                       |       | None |   | None |   |

 
| **Employee Stock Purchase Plan **** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Risk-free interest rate             |       | *          |       | *          |       | 2.8%       |       | 1.4%       |       |
| Volatility                          |       | *          |       | *          |       | 27.8%      |       | 35.8%      |       |
| Expected life                       |       | *          |       | *          |       | 6 months   |       | 6 months   |       |
| Expected dividends                  |       | *          |       | *          |       | None       |       | None       |       |

 

----

* There were no stock option grants or employeestock purchase plan rights during these respective periods.  

 

** The ESPP plan offering periods begin every sixmonths in the second and fourth quarter of each year.

 

**Note 5—Net Income(Loss) Per Share**

 

Basic net income (loss) per share is computed by dividing net income(loss) by the weighted average number of common shares outstanding during theperiod. Diluted net income (loss) per share is computed by dividing net income(loss) by the sum of the weighted average number of common shares outstandingand the potential number of dilutive common shares outstanding during theperiod, excluding the effect of any anti-dilutive securities. Potential dilutivecommon shares consist of the shares issuable upon the exercise of stock optionsor warrants and from withholdings associated with the Company’s employee stockpurchase plan.

 

9

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The following table sets forth thecomputation of basic and diluted net income (loss) per share for the three and ninemonths ended September 30, 2005 and 2004 (in thousands, except per-sharedata):

 
| ** **                                                                                                                                        | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                        | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                              |       |                                     |       |                                    |       |   |   |   |   |
| **Numerator:**                                                                                                                                    |       |                                     |       |                                    |       |   |   |   |   |
| Net income (loss)                                                                                                                                 |       | $                                        | 6,229      |                                    | $          | (5,133 | ) | $ | 10,289 |   | $ | (15,528 | ) |
|                                                                                                                                              |       |                                     |       |                                    |       |   |   |   |   |
| **Denominator:**                                                                                                                                  |       |                                     |       |                                    |       |   |   |   |   |
| Denominator  for basic net income (loss) per share- weighted average shares outstanding                                                           |       | 30,602                                   |       | 32,894                                  |       | 31,047 |   | 33,046 |   |
|                                                                                                                                              |       |                                     |       |                                    |       |   |   |   |   |
| Dilutive  common equivalent shares:                                                                                                               |       |                                     |       |                                    |       |   |   |   |   |
| Employee  stock options and other                                                                                                                 |       | 1,699                                    |       | —                                  |       | 1,044 |   | — |   |
|                                                                                                                                              |       |                                     |       |                                    |       |   |   |   |   |
| Denominator  for diluted net income (loss) per share- weighted average shares outstanding,  assuming exercise of potential dilutive common shares |       | 32,301                                   |       | 32,894                                  |       | 32,091 |   | 33,046 |   |
|                                                                                                                                              |       |                                     |       |                                    |       |   |   |   |   |
| Basic net income (loss) per share                                                                                                                 |       | $                                        | 0.20       |                                    | $          | (0.16 | ) | $ | 0.33 |   | $ | (0.47 | ) |
| Diluted net income (loss) per share                                                                                                               |       | $                                        | 0.19       |                                    | $          | (0.16 | ) | $ | 0.32 |   | $ | (0.47 | ) |

 

Weighted average stock options and warrantsof approximately 0.5 million and 1.3 million for the three and nine monthsended September 30, 2005, respectively, were excluded from the calculationof diluted net income per share because their inclusion would have beenanti-dilutive. Similarly, weighted average stock options and warrants ofapproximately 5.7 million and 5.8 million for the three and nine months ended September 30,2004, were excluded from the calculation of diluted net loss per share.

 

**Note 6—Goodwill**

 

The changes in the carrying value of goodwillduring the nine months ended September 30, 2005 were as follows (inthousands):

 
| ** **                          | ** ** | **Goodwill** | ** ** |
|-------------------------------------|------------|--------------|------------|
| ** **                          | ** ** | ** **   | ** ** |
| Balance at December 31, 2004   |       | $            | 99,393     |   |
| Translation adjustments             |       | (4,449       | )          |
|                                |       |         |       |
| Balance at September 30,  2005 |       | $            | 94,944     |   |

 

Inaccordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”Advent reviews goodwill for impairment annually during the fourth quarter ofthe fiscal year and more frequently if an event or circumstance indicates thatan impairment loss has occurred. During the fourth quarter of2004, Advent completed the annual impairment test which indicated that there wasno impairment. There were no events or changes in circumstances during the ninemonths ended September 30, 2005 which triggered an impairment review. Foreign currency translation adjustments totaling$4.4 million reflect the strengthening of the U.S. dollar versus Europeancurrencies during the nine months ended September 30, 2005.  

 

**Note7—Other Intangibles**

 

The following is a summary of other intangiblesas of September 30, 2005 (in thousands):

 

10

----

 
| ** **                          | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                          | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                          | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchased technologies              |       | 4.9              |       | $                | 12,735     |             | $          | (11,578          | )          | $ | 1,157 |   |
| Product development costs           |       | 3.0              |       | 1,280            |       | (29              | )          | 1,251            |       |
| Customer relationships              |       | 5.6              |       | 20,857           |       | (13,090          | )          | 7,767            |       |
| Other intangibles                   |       | 2.5              |       | 307              |       | (184             | )          | 123              |       |
|                                |       |             |       |             |       |             |       |             |       |
| Balance at September 30,  2005 |       |             |       | $                | 35,179     |             | $          | (24,881          | )          | $ | 10,298 |   |

 

The following is a summary of otherintangibles as of December 31, 2004 (in thousands):

 
| ** **                         | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                         | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                         | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                         | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                               |       |             |       |             |       |             |       |             |       |
| Purchased technologies             |       | 4.9              |       | $                | 12,776     |             | $          | (9,779           | )          | $ | 2,997 |   |
| Customer relationships             |       | 5.5              |       | 22,589           |       | (11,099          | )          | 11,490           |       |
| Other intangibles                  |       | 2.5              |       | 307              |       | (126             | )          | 181              |       |
|                               |       |             |       |             |       |             |       |             |       |
| Balance at December 31,  2004 |       |             |       | $                | 35,672     |             | $          | (21,004          | )          | $ | 14,668 |   |

 

The changes in the carrying value of other intangiblesduring the nine months ended September 30, 2005 were as follows (inthousands):

 
| ** **                          | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|-------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                          | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                                |       |             |       |             |       |             |       |
| Balance at December 31, 2004   |       | $                | 35,672     |             | $          | (21,004          | )          | $ | 14,668 |   |
| Additions                           |       | 1,280            |       | —           |       | 1,280            |       |
| Amortization                        |       | —           |       | (4,933           | )          | (4,933           | )          |
| Translation adjustments             |       | (1,773           | )          | 1,056            |       | (717             | )          |
|                                |       |             |       |             |       |             |       |
| Balance at September 30,  2005 |       | $                | 35,179     |             | $          | (24,881          | )          | $ | 10,298 |   |

 

Amortization and impairment of other intangibleswas as follows for the periods presented (in thousands):

 
| ** **                      | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|---------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Amortization and impairment of: |       |                                     |       |                                    |       |   |   |   |   |
| Technology intangibles          |       | $                                        | 641        |                                    | $          | 2,379 |   | $ | 1,869 |   | $ | 5,071 |   |
| Non-technology intangibles      |       | 997                                      |       | 4,414                                   |       | 3,064 |   | 8,498 |   |
|                            |       |                                     |       |                                    |       |   |   |   |   |
| Total                           |       | $                                        | 1,638      |                                    | $          | 6,793 |   | $ | 4,933 |   | $ | 13,569 |   |

 

In the third quarter of 2004, Advent recordeda non-cash impairment charge of $3.4 million to write off the carrying value ofintangible assets related to the Techfi product line. Of this amount, $1.0million was included in amortization and impairment of developed technologywithin cost of revenues as it related to existing and core technology and theremaining $2.4 million was included in operating expenses. In September 2004,the Company decided to discontinue certain products within the Techfi productline, which was acquired in July 2002, as demand for the Techfi productline has been significantly lower than expected. As a result, the Companyreviewed the recoverability of its Techfi-related intangible assets.Recoverability was measured by a comparison of the assets’ carrying amount totheir expected future undiscounted net cash flows. The Company determined thatthese intangible assets had no remaining value and wrote off the remainingcarrying value in the third quarter of 2004.

 

11

----

 

Based on the carrying amount of other intangiblesas of September 30, 2005, the estimated future amortization is as follows(in thousands): 

 
| ** **                        | ** ** | **Three**            | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|----------------------|------------|---------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                        | ** ** | **Months Ended**     | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **December 31** | ** ** | **Year Ended December 31** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **2005**             | ** ** | **2006**                        | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Total**  | ** ** |
| Estimated future amortization of: | ** ** | ** **           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Technology intangibles            |       | $                    | 705        |                            | $          | 907        |       | $          | 506        |       | $          | 290        |       | $ | — |   | $ | 2,408 |   |
| Non-technology intangibles        |       | 988                  |       | 3,775                           |       | 1,770      |       | 917        |       | 440        |       | 7,890      |       |
|                              |       |                 |       |                            |       |       |       |       |       |       |       |       |       |
| Total                             |       | $                    | 1,693      |                            | $          | 4,682      |       | $          | 2,276      |       | $          | 1,207      |       | $ | 440 |   | $ | 10,298 |   |

 

**Note 8—BalanceSheet Detail**

 

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

 
| ** **                                                            | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2005**              | ** ** | **2004**             | ** ** |
|                                                                  |       |                  |       |                 |       |
| Long-term investments, gross                                          |       | $                     | 13,800     |                 | $          | 16,300 |   |
| Accumulated write-downs due to  other-than-temporary decline in value |       | (5,341                | )          | (7,658               | )          |
| Long-term investments, net                                            |       | 8,459                 |       | 8,642                |       |
| Long-term prepaid assets                                              |       | 2,604                 |       | 3,303                |       |
| Deposits                                                              |       | 1,310                 |       | 1,417                |       |
|                                                                  |       |                  |       |                 |       |
| Total other  assets, net                                              |       | $                     | 12,373     |                 | $          | 13,362 |   |

 

Long-term investments include equity investments in several privatelyheld companies, most of which can still be considered in the start-up ordevelopment stages. 

 

In 2002, Advent acquired approximately 15% of the outstanding votingstock of LatentZero Limited (“LatentZero”), a privately-held company located inthe United Kingdom, for $7.0 million. Through December 28, 2004, LatentZerowas accounted for under the equity method of accounting as Advent’s ChiefExecutive Officer was a member of LatentZero’s board of directors and Adventaccordingly considered itself to have significant influence over this company.During the three and nine months ended September 30, 2004, Advent recordedincome of $322,000 and a loss of $284,000, respectively, resulting from Advent’spro rata share of net income and losses on this equity method investment whichwas included in interest income and other, net on Advent’s condensedconsolidated statement of operations. Effective December 28, 2004, Advent’sChief Executive Officer resigned her seat on the investee’s board of directorsand as a result, Advent no longer believes it has significant influence overLatentZero. Therefore, this investment is carried at the lower of cost or fairvalue at December 31, 2004 and September 30, 2005, similar to theCompany’s other non-marketable investments. 

 

During the second quarter of 2005, Advent sold its private equityinvestment in PlusFunds Group Inc. with a carrying value of $183,000 for totalproceeds of $3.8 million. The Company recorded the associated gain on sale ofthis investment of $3.6 million in interest income and other, net on Advent’scondensed consolidated statement of operations for the nine months ended September 30,2005. 

 

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

 
| ** **                    | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                    | ** ** | **2005**              | ** ** | **2004**             | ** ** |
|                          |       |                  |       |                 |       |
| Salaries and benefits payable |       | $                     | 7,548      |                 | $          | 8,208 |   |
| Accrued restructuring         |       | 1,392                 |       | 1,127                |       |
| Other                         |       | 9,486                 |       | 8,235                |       |
|                          |       |                  |       |                 |       |
| Total  accrued liabilities    |       | $                     | 18,426     |                 | $          | 17,570 |   |

 

Accrued restructuring charges are discussed further in Note 10, “RestructuringCharges”. Other accrued liabilities include accruals for royalties, sales andbusiness taxes, acquisition related costs, and other miscellaneous items.

 

12

----

 

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

 
| ** **                               | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                               | ** ** | **2005**              | ** ** | **2004**             | ** ** |
|                                     |       |                  |       |                 |       |
| Deferred rent                            |       | $                     | 1,450      |                 | $          | 2,456 |   |
| Accrued restructuring, long-term portion |       | 3,310                 |       | 3,042                |       |
| Other                                    |       | 632                   |       | 318                  |       |
|                                     |       |                  |       |                 |       |
| Total other  long-term liabilities       |       | $                     | 5,392      |                 | $          | 5,816 |   |

 

**Deferred Rent.**Certaindeferred rent liabilities have been reclassified from long-term to short-term.Advent has historically classified all amounts accrued for deferred rent as “otherlong-term liabilities” on the condensed consolidated balance sheet. Based uponAdvent’s re-evaluation of these liabilities, the Company has reclassifieddeferred rent liabilities that are to be recognized within a year of thebalance sheet date to “accrued liabilities” on the condensed consolidatedbalance sheets. These reclassifications had no impact on the Company’s resultsof operations or cash flows. The following is a summary of the effect of thesereclassifications on the Company’s condensed consolidated balance sheet as of December 31,2004 (in thousands):

 
| ** **                  | ** ** | **Condensed Consolidated Balance  Sheet** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **As Previously**                         | ** ** | ** ** | ** ** | **As** | ** ** |
| **December 31, 2004**  | ** ** | **Reported**                              | ** ** | **Reclassifications** | ** ** | **Reclassified** | ** ** |
| Accrued liabilities         |       | $                                         | 16,855     |   | $ | 715 |   | $ | 17,570 |   |
| Total current liabilities   |       | $                                         | 80,121     |   | $ | 715 |   | $ | 80,836 |   |
| Other long-term liabilities |       | $                                         | 6,531      |   | $ | (715 | ) | $ | 5,816 |   |
| Total liabilities           |       | $                                         | 88,902     |   | $ | — |   | $ | 88,902 |   |

 

**Note 9—Comprehensive Income (Loss)**

 

The components of comprehensive income (loss) were as follows for theperiods presented (in thousands):

 
| ** **                                                   | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                   | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                         |       |                                     |       |                                    |       |   |   |   |   |
| Net income (loss)                                            |       | $                                        | 6,229      |                                    | $          | (5,133 | ) | $ | 10,289 |   | $ | (15,528 | ) |
| Unrealized  gain (loss) on marketable securities, net of tax |       | (136                                     | )          | 407                                     |       | (226 | ) | (149 | ) |
| Foreign currency translation adjustment                      |       | (156                                     | )          | 778                                     |       | (5,088 | ) | (598 | ) |
| Total comprehensive  income (loss)                           |       | $                                        | 5,937      |                                    | $          | (3,948 | ) | $ | 4,975 |   | $ | (16,275 | ) |

 

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

 
| ** **                                                            | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                                            | ** ** | **2005**              | ** ** | **2004**             | ** ** |
| ** **                                                            | ** ** | ** **            | ** ** | ** **           | ** ** |
| Accumulated net unrealized loss on  marketable securities, net of tax |       | $                     | (628       | )                    | $          | (402 | ) |
| Accumulated foreign currency translation  adjustments                 |       | 7,588                 |       | 12,676               |       |
| Total  accumulated other comprehensive income                         |       | $                     | 6,960      |                 | $          | 12,274 |   |

 

**Note 10—Restructuring Charges**

 

##### ***In response to the downturn in the financial services industry, thedecline in information technology spending, duplicative efforts in parts of thebusiness as a result of various acquisitions, and excess facilities capacity,Advent implemented several phases of restructuring beginning in 2003. Theseplans were implemented to reduce costs and improve operating efficiencies bybetter aligning Advent’s resources to the Company’s near-term revenueopportunities.***

#####  

The restructuring charges recorded for thethree and nine months ended September 30, 2005 and 2004 were as follows(in thousands):

 

13

----

 
| ** **                             | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                   |       |                                     |       |                                    |       |   |   |   |   |
| Facility exit costs                    |       | $                                        | 116        |                                    | $          | (1 | ) | $ | 1,724 |   | $ | 4,864 |   |
| Severance and benefits                 |       | —                                   |       | —                                  |       | (5 | ) | 132 |   |
| Property and equipment abandoned       |       | —                                   |       | —                                  |       | — |   | 863 |   |
| Total  restructuring charges (benefit) |       | $                                        | 116        |                                    | $          | (1 | ) | $ | 1,719 |   | $ | 5,859 |   |

 

During the nine months ended September 30,2005, Advent recorded total restructuring charges of $1.7 million consisting ofcharges of $83,000, $1.5 million and $116,000 recorded in the first, second andthird quarters, respectively, of 2005. The second quarter charge of $1.5million primarily consisted of net facility and exit costs related tosub-leasing one floor of its office space in New York, New York. The netrestructuring charges of $83,000 and $116,000 recorded in the first and thirdquarters, respectively, were to adjust original estimates for vacatedfacilities.

 

During the nine months ended September 30,2004, Advent recorded total restructuring charges of $5.9 million consisting ofa benefit of $43,000 recorded in the first quarter of fiscal 2004 and a chargeof approximately $5.9 million recorded in the second quarter of fiscal 2004.The benefit of $43,000 incurred in the first quarter of fiscal 2004 consistedof a $163,000 adjustment related to entering a final sub-lease agreement on oneof the vacated facilities in New York, New York and a $16,000 adjustment to non-cashseverance. These adjustments were partially offset by a restructuring charge of$136,000 related to the termination of nine employees, located primarily in NewYork. The $5.9 million charged incurred in the second quarter of fiscal 2004consisted of $4.9 million of facility exit costs and $0.9 million of propertyand equipment impairment charges related to vacating a facility in SanFrancisco, California, $72,000 related to vacating a portion of a facility inCambridge, Massachusetts and a $12,000 adjustment related to severance forterminated employees in the first quarter of 2004. 

 

The following table sets forth an analysis ofthe components of the restructuring charges and the payments and non-cashcharges made against the accrual during the nine months ended September 30,2005 (in thousands):

 
| ** **                                                   | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|-------------------|------------|--------------------------|------------|------------|------------|
| ** **                                                   | ** ** | **Costs**         | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                         |       |              |       |                     |       |       |       |
| Balance of restructuring accrual at December 31,  2004  |       | $                 | 4,157      |                     | $          | 12         |       | $ | 4,169 |   |
| Restructuring charges                                        |       | 1,472             |       | —                   |       | 1,472      |       |
| Reversal of deferred rent related to  facilities exited      |       | 704               |       | —                   |       | 704        |       |
| Cash payments                                                |       | (1,890            | )          | —                   |       | (1,890     | )          |
| Adjustment of prior restructuring costs                      |       | 252               |       | (5                       | )          | 247        |       |
| Balance of  restructuring accrual at September 30, 2005 |       | $                 | 4,695      |                     | $          | 7          |       | $ | 4,702 |   |

 

Of the remaining restructuring accrual of $4.7million at September 30, 2005, $1.4 million and $3.3 million are includedin accrued liabilities and other long-term liabilities, respectively, on theaccompanying condensed consolidated balance sheet. The remaining excessfacility costs of $4.7 million are stated at estimated fair value, net ofestimated sublease income of approximately $8.7 million. Advent expects to paythe remaining obligations associated with the vacated facilities no later thanover the remaining lease terms, which expire on various dates through 2012.Advent expects to pay the remaining severance and benefits in 2005. 

 

**Note 11—CommonStock Repurchase Programs**

 

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

 

During 2001 and 2002, the Board authorizedthe repurchase of up to 4.0 million shares of outstanding common stock. ThroughMay 2004 when this program was terminated, Advent had repurchased andretired 3.8 million shares of common stock since inception of this stockrepurchase program at a total cost of $78.8 million and an average price of$20.82 per share.

 

In May 2004, the Board authorized therepurchase of an additional 1.2 million shares of outstanding common stock. In September 2004,February 2005 and May 2005, the Board authorized an extension of thisstock repurchase program to cover the

 

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repurchase of an additional 0.8 million, 1.8 million and 1.0 million sharesof outstanding common stock, respectively. The following table summarizes theCompany’s total cost, number of shares repurchased and average price of commonstock repurchased during the first three quarters of 2005 (in thousands, exceptfor average price per repurchased share): 

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| ** **                          | ** ** | **2005**               | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                |       |                   |       |   |   |   |   |
| Total cost                          |       | $                      | 38,020     |   | $ | 10,731 |   | $ | 3,833 |   |
| Number of shares repurchased        |       | 2,124                  |       | 555 |   | 156 |   |
| Average price per repurchased share |       | $                      | 17.90      |   | $ | 19.32 |   | $ | 24.65 |   |

 

Since the inception of this program in May 2004through September 30, 2005, Advent has repurchased 3.6 million shares fora total cost of $64.5 million and an average price of $18.02 per share. As of September 30,2005, approximately 1.2 million shares were available to be repurchased underthis share repurchase plan. 

 

#### **Note 12—Acquisitions**

 

In May 2004, Advent acquired the remainingindependent distributor businesses from its independent European distributor,Advent Europe Holding BV (“Advent Europe”), in the United Kingdom andSwitzerland, as well as certain assets of Advent Europe. Advent made theseacquisitions in order to gain direct control over all of its Europeanoperations, which it views as an increasingly important market. Theconsideration of $6.0 million consisted of $5.7 million in cash, $242,000 ofassumed liabilities and $83,000 of closing costs. A total of $5.5 million ofthe cash consideration was paid at closing and the remaining $0.2 million waspaid by the Company during the second quarter of 2005. In addition, the Companypaid an earn-out distribution of approximately $1.8 million under a formula basedon revenue bookings, which was recorded as additional goodwill in the secondquarter of 2004. No further earn-out distributions were earned or paid. 

 

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

 

The allocation of the purchase price for AdventUnited Kingdom, Advent Switzerland and certain assets of Advent Europe at thedate of purchase was as follows (in thousands, except estimated remaininguseful life):

 
| ** **               | ** ** | **Estimated Remaining** | ** ** | ** **         | ** ** |
|--------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **               | ** ** | **Useful Life**         | ** ** | **Purchase Price** | ** ** |
| ** **               | ** ** | **(Years)**             | ** ** | **Allocation**     | ** ** |
| ** **               | ** ** | ** **              | ** ** | ** **         | ** ** |
| Goodwill                 |       |                    |       | $                  | 3,765      |   |
| 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    |       |                    |       | $                  | 5,976      |   |

 

Residual goodwill has been recorded based on thepurchase price remaining after allocating the purchase price to the fair marketvalue of assets purchased less liabilities assumed and to identifiableintangible assets. Residual goodwill arises as a result of, among otherfactors, new customers as well as the implicit value of future cost savings asa result of the combining of entities. Goodwill resulting from this acquisitionwas assigned to the Advent Investment Management segment and was expected to benon-deductible for tax purposes under Internal Revenue Code Section 197.

 

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

 
| ** **                             | ** ** | **Three Months**            | ** ** | **Nine Months**             | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **Ended**                   | ** ** | **Ended**                   | ** ** |
| ** **                             | ** ** | **September 30, 2004** | ** ** | **September 30, 2004** | ** ** |
| Net revenues                           |       | $                           | 37,288     |                        | $          | 110,165 |   |
| Net loss                               |       | $                           | (5,133     | )                           | $          | (16,460 | ) |
| Net loss per share - basic and diluted |       | $                           | (0.16      | )                           | $          | (0.50 | ) |

 

#### **Note 13—Commitments and Contingencies**

 

Advent leases office space and equipmentunder non-cancelable operating lease agreements, which expire at various datesthrough May 2012. Certain operating leases contain escalation provisionsfor adjustments in the consumer price index. Advent is responsible formaintenance, insurance, and property taxes. As of September 30, 2005,Advent’s remaining operating lease commitments through 2012 were approximately$23.6 million, net of future minimum rental income of $10.1 million to bereceived under non-cancelable sub-leases. 

 

As permitted or required under Delaware lawand to the maximum extent allowable under that law, Advent has certainobligations to indemnify its current and former officers and directors forcertain events or occurrences while the officer or director is, or was, servingat Advent’s request in such capacity. These indemnification obligations arevalid as long as the director or officer acted in good faith and in a mannerthe person reasonably believed to be in or not opposed to the best interests ofthe corporation, and, with respect to any criminal action or proceeding, had noreasonable cause to believe his or her conduct was unlawful. The maximum potentialamount of future payments Advent could be required to make under theseindemnification obligations is unlimited; however, Advent has a director andofficer insurance policy that mitigates Advent’s exposure and enables Advent torecover a portion of any future amounts paid. The Company believes theestimated fair value of these indemnification obligations is minimal. 

 

##### ***From time to time, Advent is involved in claims and legal proceedingsthat arise in the ordinary course of business activities including claims forcommercial, employment and other matters. Based on currently availableinformation, management does not believe that the ultimate outcome of theseunresolved matters, individually and in the aggregate, is likely to have amaterial adverse effect on Advent’s financial position or results ofoperations. However, litigation is subject to inherent limitations and Advent’sview of these matters may change in the future. Were an unfavorable outcome tooccur, there exists the possibility of a material adverse impact on Advent’sfinancial position and results of operations for the period in which theunfavorable outcome occurs, and potentially in future periods.***

#####  

On March 8, 2005, certain of the formershareholders of Kinexus and the shareholders’ representative filed suit againstAdvent in the Delaware Chancery Court. The complaint alleges that Adventbreached the Agreement and Plan of Merger dated as of December 31, 2001pursuant to which Advent acquired all of the outstanding shares of Kinexus dueprincipally to the fact that no amount was paid by Advent on an earn-out of upto $115 million. The earn-out, which was payable in cash or stock at theelection of Advent, was based upon Kinexus meeting certain revenue targets inboth 2002 and 2003. The complaint seeks unspecified compensatory damages, anaccounting and restitution for unjust enrichment. Advent advised theshareholders’ representative in January 2003 that the earn-out terms hadnot been met in 2002 and accordingly no earn-out was payable for 2002 and wouldnot be payable for 2003. Advent disputes the plaintiffs’ claims and believesthat it has meritorious defenses and intends to vigorously defend this action.Management believes that any potential loss associated with this litigation isneither probable nor reasonably estimable at this time and accordingly has notaccrued any amounts for any potential loss. 

 

On May 26, 2005, certain of the formermembers of Advent Outsource Data Management LLC (“plaintiffs”) filed suitagainst Advent in San Francisco Superior Court. The complaint asserts claimsfor breach of contract, breach of the covenant of good faith and fair dealing,fraud, conversion, declaratory relief and accounting relating to allegedbreaches of the Agreement and Plan of Merger dated October 31, 2002 (“Agreement”).Pursuant to the Agreement, in addition to cash compensation, Advent agreed topay plaintiffs an “earn-out” payment based on “2003 Net Revenues” and “2004 NetRevenues” from sales of “Relevant Products” as defined by the Agreement with amaximum earn-out payment of $5 million. Advent has made earn-out payments toplaintiffs totaling approximately $3.9 million. However, plaintiffs claim thatthe earn-out payment should have been the maximum amount of $5 million. Basedon these allegations, plaintiffs seek compensatory damages of approximately$1.1 million and other special damages including attorneys’ fees. Adventdisputes the plaintiffs’ claims and believes that it has meritorious defensesand intends to vigorously defend this action. In addition, on September 12,2005 and September 19, 2005,

 

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atotal of four former employees of Advent Outsource Data Management, LLC filedsuits against Advent in San Francisco Superior Court.  Each of the complaints alleges substantiallythe same causes of action, including breach of contract, breach of the covenantof good faith and fair dealing, conversion, and violations of various laborcodes relating to alleged breaches of the respective employment agreements inplace with Advent.  Pursuant to theemployees' employment agreements, each of which was for a term ending December 31,2004, Advent agreed to pay incentive compensation based on amounts received forcustomer contracts for certain products, with a maximum incentive compensationof $100,000 per employee for calendar year 2003 and 2004. Advent has made theincentive compensation payments to these employees totaling $121,000; however,the employees claim that the incentive commission is not limited by the term ofthe employment agreement and should have been the maximum amount of $100,000per calendar year during the existence of the relevant customer contracts.Based on these allegations, the employees are seeking compensatory damages andother special damages, including attorneys fees and costs of suit. Adventdisputes the employee’s claims and believes that it has meritorious defensesand intends to vigorously defend these actions. Management believes that anypotential loss associated with these lawsuits is neither probable norreasonably estimable at this time and accordingly has not accrued any amountsfor any potential loss.  

 

**Note 14—Segment Information**

 

*Description of Segments*

 

SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” established standards forreporting information about operating segments in annual financial statementsand requires disclosure of selected information about operating segments ininterim reports. It also established standards for related disclosures aboutproducts and services, major customers and geographic areas. Operating segmentsare defined as components of an enterprise about which separate financialinformation is available that is evaluated regularly by the chief operatingdecision maker (“CODM”), or decision making group, in deciding how to allocateresources and in assessing performance. Advent’s CODM is the Chief ExecutiveOfficer.

 

Advent’s organizational structure is based ona number of factors that the CODM uses to evaluate, view and run its businessoperations which include, but are not limited to, customer base, homogeneity ofproducts and technology. Advent’s operating segments are based on thisorganizational structure and information reviewed by Advent’s CODM to evaluatethe operating segment results. During fiscal 2004, Advent determined that itsoperations were organized into two reportable segments: 1) Advent InvestmentManagement; and 2) MicroEdge. The segment information for the three and ninemonths ended September 30, 2005 and 2004 below reflect this organizationalchange. Future changes to this organizational structure may result in changesto the business segments. A description of the types of products and servicesprovided by each operating segment follows. 

 

Advent Investment Management is the Company’score business and derives revenues from the development, marketing and sale ofsoftware products, data interfaces and related maintenance and services thatautomate, integrate and support certain mission critical functions ofinvestment management organizations. MicroEdge derives revenues from the saleof software and services for grant management and matching gifts for the grant-makingcommunity worldwide.

 

*Segment Data*

 

The results of the operating segments arederived directly from Advent’s internal management reporting system. Theaccounting policies used to derive operating segment results are substantiallythe same as those used by the consolidated company. Management measures theperformance of each operating segment based on several metrics, includingincome (loss) from operations. These results are used, in part, to evaluate theperformance of, and to assign resources to, each of the operating segments.Certain operating expenses, including amortization and impairment of developedtechnology and other intangibles, which Advent manages separately at thecorporate level, are not allocated to the operating segments. Advent does notseparately accumulate and review asset information by segment. 

 

Segment information for the periods presentedis as follows (in thousands):

 

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| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net revenues:                                        |       |                                     |       |                                    |       |   |   |   |   |
| Advent Investment  Management                        |       | $                                        | 37,216     |                                    | $          | 32,207 |   | $ | 107,324 |   | $ | 94,607 |   |
| MicroEdge                                            |       | 4,986                                    |       | 4,425                                   |       | 14,488 |   | 12,428 |   |
| Other                                                |       | 833                                      |       | 656                                     |       | 2,091 |   | 1,999 |   |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| Total net  revenues                                  |       | $                                        | 43,035     |                                    | $          | 37,288 |   | $ | 123,903 |   | $ | 109,034 |   |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| Income (loss) from operations:                       |       |                                     |       |                                    |       |   |   |   |   |
| Advent  Investment Management                        |       | $                                        | 5,523      |                                    | $          | 1,926 |   | $ | 7,224 |   | $ | (1,891 | ) |
| MicroEdge                                            |       | 997                                      |       | 222                                     |       | 1,947 |   | 334 |   |
| Other                                                |       | 163                                      |       | 82                                      |       | 249 |   | 163 |   |
| Unallocated  corporate operating costs and expenses: |       |                                     |       |                                    |       |   |   |   |   |
| Amortization  of developed technology                |       | (641                                     | )          | (2,379                                  | )          | (1,869 | ) | (5,071 | ) |
| Amortization  of other intangibles                   |       | (997                                     | )          | (4,414                                  | )          | (3,064 | ) | (8,498 | ) |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| Total income  (loss) from operations                 |       | $                                        | 5,045      |                                    | $          | (4,563 | ) | $ | 4,487 |   | $ | (14,963 | ) |

 

*Major Customers*

 

No single customer represented 10% or more ofAdvent’s total net revenues in any period presented. 

 

**Note 15—Related Party Transactions**

 

As of September 30, 2005, Citigroup, Inc.(“Citigroup”) owned more than 10% of the voting stock of Advent. Adventrecognized approximately $533,000 and $1.5 million of revenue from Citigroupduring the three and nine months ended September 30, 2005, respectively. Duringthe three and nine months ended September 30, 2004, Advent recognizedapproximately $260,000 and $734,000 of revenue from Citigroup. The Company’saccounts receivable from Citigroup was $794,000 and $659,000 as of September 30,2005 and December 31, 2004, respectively. 

 

In addition, Advent acts as a trustee for theCompany’s short-term disability plan—Advent Software California VoluntaryDisability Plan (VDI). For the three and nine months ended September 30,2005, withholdings totaled $87,000 and $311,000 respectively. Cash held byAdvent related to the VDI was $315,000 and $162,000 as of September 30,2005 and December 31, 2004, respectively, which are included in “otherassets, net” in the condensed consolidated balance sheets. 

 

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

 

**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

You should read the following discussion inconjunction with our condensed consolidated financial statements and relatednotes. The following discussion contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 as amended and Section 21Eof the Securities Exchange Act of 1934 as amended, including, but not limitedto statements referencing our expectations relating to future revenues andexpenses. Forward-looking statements can be identified by the use of terminologysuch as “may”, “will”, “should”, “expect”, “plan” “anticipate”, “believe”, “estimate”,“predict”, “potential”, “continue” or other similar terms and the negative ofsuch terms regarding beliefs, plans, expectations or intentions regarding thefuture. Forward looking statements include, among others, statements regarding growthin the investment management market and opportunities for us related thereto,future expansion, acquisition, divestment of or investment in other businesses,projections of revenues, future cost and expense levels, expected timing andamount of amortization expenses related to past acquisitions, the adequacy ofresources to meet future cash requirements, estimates or predictions of actionsby customers, suppliers, competitors or regulatory authorities, future clientwins, future hiring and future product introductions. Such forward-lookingstatements are based on our current plans and expectations and involve knownand unknown risks and uncertainties which may cause our actual results orperformance to be materially different from any results or performanceexpressed or implied by such forward-looking statements. Such factors include,but are not limited to the “Risk Factors” set forth below as well as otherrisks identified from time to time in other Securities and Exchange Commission(“SEC”) reports. You should not place undue reliance on our forward-lookingstatements, as they are not guarantees of future results, levels of activity orperformance and represent our expectations only as of the date they are made.

 

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

 

**Overview and Strategy**

 

Weoffer integrated software solutions for automating and integrating data andwork flows across the investment management organization, as well as theinformation flows between the investment management organization and externalparties. Our products are intended to increase operational efficiency, improvethe accuracy of client information and enable better decision-making. Eachsolution focuses on specific mission-critical functions of the investmentmanagement organization and is tailored to meet the needs of the particularclient, as determined by size, assets under management and complexity of theinvestment environment. 

 

During the third quarter of 2005, we continued toexperience positive results: revenue growth, progress on our term pricingtransition, new client wins, achieving positive earnings per share for the thirdconsecutive quarter, operating cash flow, expense management, and new productlaunches. 

 

Net revenues for the third quarter of 2005 grew 4%from the previous quarter and over 15% year over year. We continued ourtransition to term licensing in the third quarter. Term licensing has theeffect, depending on the signing dates of a particular quarter’s contracts, ofdeferring all or almost all of that quarter’s license revenue into futureperiods, whereas with a predominantly perpetual licensing model most of aquarter’s license revenue is typically recognized in that quarter. Over thepast five quarters, we have been able to manage this transition with steadytop-line growth measured year over year for two reasons:

 

•                  Ourdiverse mix of products has allowed us to phase in term licensing by product;and

•                  Wehave a large installed base of customers, whom we are not requiring to convertto term licenses for upgrades or additional licenses on products they alreadyown. 

 

In the third quarter, we launched Advent PortfolioExchange (“APX”), our next generation portfolio management and client reportingplatform. APX will be sold on a term license model, and, as a result will, webelieve, cause a higher percentage of our license revenue to be deferred intofuture periods. 

 

We began to accelerate the conversion to termlicensing in the second half of 2004 as part of our long-term strategy to buildrecurring revenue streams and increase the lifetime value of our customers. Overthe past five quarters, we have cumulatively sold $21.2 million in termcontracts, which includes third quarter contracts totaling $4.9 million with anaverage term of 3.3 years. Going forward, we anticipate that term licensingwill become more prevalent which will eventually enhance the growth andpredictability of our revenues. However, in the short term, our revenues andoperating margins will be lower than they would be in a perpetual licensingmodel. 

 

In the third quarter of 2005, we added 79 new clients,including four Geneva clients and 17 coming from our Advent Office Essentialsproduct offering. 

 

We generated positive earnings per share for the thirdconsecutive quarter and generated positive cash flow from operations for the eighthconsecutive quarter. Although we have not yet returned to our historical levelsof profitability, and the transition to term licensing has a negative impact onprofitability in the short term, we have nevertheless made steady progress inimproving our operating performance.  

 

During 2005, we continue to manage our expenses.Total third quarter of 2005 expenses of $38.0 million were down from $41.8million in the second quarter of 2005 and $41.9 million in the third quarter of2004. In the second quarter of 2005, we recorded a restructuring charge of $1.5million as a result of sub-leasing one floor of our New York City office space.Our total headcount as of September 30, 2005 was 737, flat with 734 as of June 30,2005, down from 750 as of March 31, 2005, and down from its high of 980 asof December 31, 2003. 

 

The third quarter of 2005 was also a significantquarter for us in terms of product launches. In September 2005, welaunched APX for which we have received positive feedback. We already haveclients in production on APX and others going into production in the fourthquarter. APX combines portfolio accounting, reporting and client relationshipmanagement into a single platform, and features an industry-standard relationaldatabase and sophisticated security and audit features, combining both frontand back office operations in a single, customizable solution. APX ispositioned between Axys and Geneva, expanding our product portfolio andallowing us to offer a comprehensive product to firms that have beenunderserved in the past.

 

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Earlier in the quarter, we introduced the latestversion of Axys, which continues to be a very important product for us, and forthe approximately 4,000 customers using it. This version of Axys features newreporting capabilities, improved support for operating systems and third-partytechnologies, and greater automation for managers. This release is consistentwith our future plans for Axys. We will continue to add functionality toaddress changes in areas such as the regulatory environment, operating systemplatform requirements, third-party technologies and demand for new reports. Clientsseeking platform upgrades, increased integration with other products, orsignificant new functionality will likely want to migrate to either our APX orGeneva products. 

 

Also in the third quarter, our services and supportorganization was recognized when Advent received Support Center PracticesCertification for the delivery of world-class customer support. We are thefirst company in the investment management software industry to receive thisdesignation. 

 

Our focus for the remainder of 2005 continues to beon three areas:

 

•                  First,improving our financial performance. We will continue to exercise tight controlover headcount and expenses and are taking steps to further improve ourefficiency;

•                  Second,growing our customer base across all the markets we serve; and

•                  Third,continuing to launch leading edge products that help our customers grow theirbusinesses. 

 

Over the longer term, we expect a continued challengingbusiness environment and limited visibility. In addition, we may, from time totime, invest in areas we deem appropriate. 

 

**Critical Accounting Policies and Estimates**

 

Our management’s discussion and analysis ofour financial condition and results of operations are based upon our condensedconsolidated financial statements and related notes, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America. We review the accounting policies used in reporting ourfinancial results on a regular basis. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent liabilities. On an ongoing basis, we evaluate our process used todevelop estimates, including those related to product returns, accountsreceivable, investments, intangible assets, income taxes, restructuring,contingencies and litigation. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable for making judgments about thecarrying value of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates due to actualoutcomes being different from those on which we based our assumptions. Webelieve the following critical accounting policies affect our more significantjudgments and estimates used in the preparation of our condensed consolidatedfinancial statements. 

 

**Revenue recognition.** We recognize revenue from software licenses, development fees,maintenance, other recurring revenues, professional services and otherrevenues. In addition, we earn commissions from customers who use ourbroker/dealer, Second Street Securities, to “soft dollar” the purchase ofnon-Advent products and services with “soft dollars”. “Soft dollaring” enablesthe customers to use the commissions earned on trades to pay all or part of thefees owed to us for non-Advent products or services, which are initially paidfor by Second Street Securities. The commission revenues earned from “softdollar” purchases of non-Advent products or services are recorded as otherrevenues in professional services and other revenues on our condensedconsolidated statements of operations.

 

We offer a wide variety of products and services to alarge number of financially sophisticated customers. While many of ourlower-priced license transactions, maintenance contracts, subscription-basedtransactions and professional services projects conform to a standardstructure, many of our larger transactions are complex and may requiresignificant review and judgment in our application of generally acceptedaccounting principles.

 

*Software license and development fees.* We recognize revenue from the licensing ofsoftware when persuasive evidence of an arrangement exists, the product hasbeen delivered, the fee is fixed or determinable and collection of theresulting receivable is probable. We generally use a signed license agreementas evidence of an arrangement. Sales through our distributors are evidenced bya master agreement governing the relationship together with binding order formsand signed contracts from the distributor’s customers. Revenue is recognizedupon shipment to the distributor’s customer and when all other revenuerecognition criteria have been met. Delivery occurs when product is deliveredto a common carrier F.O.B shipping point. Some of our arrangements includeacceptance provisions, and if such acceptance provisions are provided, deliveryis deemed to occur upon acceptance. We assess whether the fee is fixed ordeterminable based on the payment terms

 

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associatedwith the transaction. We assess whether the collectibility of the resultingreceivable is probable based on a number of factors, including the creditworthiness of the customer determined through review of credit reports, ourtransaction history with the customer, other available information andpertinent country risk if the customer is located outside the United States. Ourstandard payment terms are due at 180 days or less unless the transaction ispart of a soft dollar arrangement through our in-house broker/dealersubsidiary, Second Street Securities, for which payment is then required withinone year; however, terms may vary based on the country in which the agreementis executed. Software licenses are sold with maintenance and, frequently,professional services. We allocate revenue to delivered components, normallythe license component of the arrangement, using the residual method, based onvendor specific objective evidence, or VSOE, of fair value of the undeliveredelements (generally the maintenance and professional services components),which is specific to us. We determine the fair value of the undeliveredelements based on the historical evidence of the Company’s stand-alone sales ofthese elements to third parties, or also, in the case of maintenance,substantive renewal rates. When VSOE does not exist for undelivered elements,then the entire arrangement fee is deferred until delivery of the element. 

 

We offer term licenses as an alternative to perpetuallicenses and generally recognize revenue for term licenses ratably over theperiod of the contract term. The term license contract price includesboth the software license fee and maintenance and support fees, and, as aresult, we allocate approximately half of the contract price to license revenueand the other half to maintenance and recurring revenues, based on ourassessment of the relative fair value of the two elements. We have begun atransition from selling mostly perpetual licenses to selling a mix of term andperpetual contracts, and we expect term license revenue to increase as aproportion of total license revenue in the future. Including our entry level product, AdventOffice Essentials, we recognized approximately 27% and 23% of license revenuefrom term licenses during the three and nine months ended September 30, 2005,respectively, as compared to 7% in the comparable periods of 2004. 

 

Development fees are derived from contracts that wehave entered into with other companies, including customers and developmentpartners. Agreements for which we receive development fees generally providefor the development of technologies and products that are expected to becomepart of our general product offerings in the future. Revenues for licensedevelopment projects are recognized primarily using thepercentage-of-completion method of accounting, based on costs incurred to datecompared with the estimated cost of completion, or using the completed contractmethod, when the development project is finished.

 

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

 

Our standard practice is to enforce our contractterms and not allow our customers to return software. We have, however,allowed customers to return software on a limited case-by-case basis and haverecorded sales returns reserves as offsets to revenue in the period the salesreturn becomes probable, in accordance with FASB Statement No. 48, “RevenueRecognition when Right of Return Exists”. The estimates for returns areadjusted periodically based upon historical rates of returns and other relatedfactors.

 

We do have three situations where we provide acontractual limited right of return to end-user customers only:  inshrink-wrap license agreements for Advent products, our MicroEdge product andour NPO product. The shrink-wrap license agreement for Advent productsprovides for a right of return within seven days of delivery of thesoftware. The MicroEdge software license agreement allows for a thirty-daymoney back guarantee. The NPO license agreement allows for a seven-dayright of return. We recognize revenue on delivery since the fee is fixed ordeterminable, the buyer is obligated to pay, the risk of loss passes to thecustomer, and we have the ability to estimate returns. Our ability toestimate returns is based on a long history of experience with relativelyhomogenous transactions and the fact that the return period is short. We haverecorded a sales returns reserve (contra revenue account) to account for thesesituations based on our historical experience of approximately $(135,000) and $203,000for the three and nine months ended September 30, 2005, respectively. Wehave an algorithm for calculating the value of reserves that takes the previous18 months of experience into account which we have applied consistently andresulted in a credit of $135,000 to license revenue during the three monthsended September 30, 2005.

 

*Maintenance and other recurring revenues.* We offer annual maintenance programs thatprovide for technical support and updates to our software products. Maintenancefees are bundled in the initial licensing year and charged separately forrenewals of annual maintenance in subsequent years. We offer other recurringrevenue services that are either subscription-based or transaction-based, andprimarily include the provision of software interfaces to, and the capability todownload

 

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securitiesinformation from, third party data providers. Fair value for maintenance isbased upon renewal rates stated in the contracts or, in limited cases, separatesales of renewals to other customers. We recognize revenue for maintenanceratably over the contract term. We recognize revenue from recurring revenuetransactions either ratably over the subscription period or as the transactionsoccur.  Term license contractsinclude fees for both software and maintenance and support. As noted above, weallocate approximately half of term license fees to maintenance and recurringrevenues, based on our estimate of the relative fair value of the maintenanceand support fees as a percentage of the total contract price. Our ability to estimate returns is based on along history of experience with relatively homogenous transactions and the factthat the return period is short. We have recorded a returns reserve (contrarevenue account) to account for these situations based on our historicalexperience of $(231,000) and $1.5 million for the three and nine months ended September 30,2005, respectively. During the third quarter of 2005, we recognized a netbenefit from reducing our maintenance revenue reserves by approximately$500,000. We have an algorithm for calculating the value of reserves that takesthe previous 18 months of experience into account which we have appliedconsistently and resulted in a credit to revenue during the three months ended September 30,2005.

 

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

 

*Professional services and other revenues.* We offer a variety of professional servicesthat include project management, implementation, data conversion, integration,custom report writing and training. Fair value for professional services isbased upon separate sales of these services by us to other customers. Ourprofessional services are generally billed based on hourly rates together withreimbursement for travel and accommodation expenses. Our professional servicesand other revenue also include revenue from our annual user conferences. Wegenerally recognize revenue as these professional services are performed.Certain professional services arrangements involve acceptance criteria. Inthese 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 andservices are recorded as other revenues on a net basis as we are not theprimary obligor in these transactions. Revenues for these “soft dollar”transactions are recognized on a trade-date basis as securities transactionsoccur. 

 

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

 

•                  ourhistorical operating results; 

•                  thelength of time over which the differences will be realized;

•                  taxplanning opportunities; and

•                  expectationsfor future earnings.

 

In considering whether or not we will realize abenefit from net deferred tax assets, recent losses must be given substantiallymore weight than any projections of future profitability. In 2003, we determinedthat, under applicable accounting principles, based on our history ofconsecutive losses since the second quarter of 2002, it was more likely thannot that we would not realize any value for our net deferred tax assets.Accordingly, we established a valuation allowance equal to 100% of the amountof these assets. In fiscal 2004 and fiscal year-to-date 2005, we continued tomaintain a full valuation allowance against our deferred tax assets due to ourhistory of losses through fiscal 2004. Income tax expense recorded in thefuture will be reduced to the extent sufficient positive evidence materializesto support a reversal of, or decrease in, the valuation allowance. A history ofcumulative profitability is generally considered as sufficient positiveevidence to support the more likely than not criterion for a decrease in orreversal of a valuation allowance.

 

**Impairment of long-lived assets**. We review our goodwill for impairmentannually during the fourth quarter of our fiscal year (as of November 1)and more frequently if an event or circumstance indicates that an impairmentloss has occurred. We are required to test our goodwill for impairment at thereporting unit level. We have determined that we had five reporting units as ofNovember 1, 2004. The test for goodwill impairment is a two-step process: 

 

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

 

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The second step, used to measure the amount ofimpairment loss, compares the implied fair value of each reporting unit’sgoodwill with the respective carrying amount of that goodwill. If the carryingamount of the reporting unit goodwill exceeds the implied fair value of thatgoodwill, an impairment loss shall be recognized in an amount equal to thatexcess. 

 

The process for evaluating the potential impairmentof goodwill is subjective and requires judgment at many points during the testincluding future revenue forecasts, discount rates and various reporting unitallocations. During the fourth quarter of 2004, we completed our annualimpairment test which did not indicate impairment. Therefore, the second stepof the impairment test was not necessary to perform. There were noevents or changes in circumstances during the nine months ended September 30,2005 which triggered an impairment review.  

 

We review our other long-lived assets includingproperty and equipment and other intangibles for impairment whenever events orchanges in circumstances indicate that the carrying amount of these assets may notbe recoverable. Factors we consider important which could trigger an impairmentreview include the following:

 

•                  significantunderperformance relative to expected historical or projected future operatingresults;

•                  significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business; 

•                  significantnegative market or economic trends; 

•                  significantdecline in our stock price for a sustained period; and 

•                  ourmarket capitalization relative to net book value. 

 

Recoverability is measured by a comparison of theassets’ carrying amount to their expected future undiscounted net cash flows.If such assets are considered to be impaired, the impairment to be recognizedis measured based on the amount by which the carrying amount of the assetexceeds its fair value. For example, demand for our Techfi product line wassignificantly lower than expected and thus we discontinued certain productswithin our Techfi product line in September 2004. As a result, we recordeda non-cash impairment charge of $3.4 million in the third quarter of 2004 towrite-off the carrying value of certain Techfi-related intangible assets. 

 

We hold minority interests in several privately heldcompanies having operations or technology in areas within our strategic focus.Most of these investments can be considered as early stage investmentopportunities and are classified as other assets and valued at the lower ofcost or fair value on our condensed consolidated balance sheets. Through December 28,2004, one of these investments had been accounted for under the equity methodof accounting as our Chief Executive Officer was a member of this investee’sboard of directors. Effective December 28, 2004, our Chief ExecutiveOfficer resigned her seat on this investee’s board of directors and as aresult, we no longer believe we have significant influence over this investee.Therefore, this investment is carried at the lower of cost or fair value at December 31,2004 and September 30, 2005, similar to our other investments. 

 

Future adverse changes in market conditions or pooroperating results of underlying investments could result in losses or aninability to recover the carrying value of the investments that may not bereflected in an investment’s current carrying value, thereby possibly requiringan impairment charge in the future. We estimate an investment’s carrying valueusing a variety of valuation methodologies. Such methodologies includecomparing the private company with publicly traded companies in similar linesof business, applying revenue multiples to estimated future operating resultsfor the private company and estimating discounted cash flows for that company. 

 

**Restructuring charges and related accruals**. Since 2003, we have developed and implementedformalized plans for restructuring our business to better align our resourcesto market conditions and recorded significant charges. In connection with theseplans, we recorded estimated expenses for severance and benefits, leasecancellations, asset write-offs and other restructuring costs. Given thesignificance of, and the timing of the execution of such activities, thisprocess is complex and involves periodic reassessments of estimates made at thetime the original decisions were made, including evaluating real estate marketconditions for expected vacancy periods and sub-lease rents. We continuallyevaluate the adequacy of the remaining liabilities under our restructuringinitiatives. Although we believe that these estimates accurately reflect the costsof our restructuring plans, actual results may differ, thereby requiring us torecord additional provisions or reverse a portion of such provisions. 

 

**Recent Accounting Pronouncements**

 

In December 2004, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 123R, “Share-Based Payment” (“SFAS 123R”), which replacesSFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”)and supercedes Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees (“APB 25”). SFAS 123R requires all share-basedpayments to employees, including grants of employee stock

 

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options, to be recognized in the financial statements based on theirfair values, beginning with the first interim or annual period after June 15,2005, with early adoption encouraged. The pro forma disclosures previouslypermitted under SFAS 123 no longer will be an alternative to financialstatement recognition. In April 2005, the SEC subsequently adopted a new rule delayingcompliance with SFAS 123R until the beginning of our next fiscal year, insteadof the next reporting period, that begins after June 15, 2005. Under theSEC’s recent rule, we are required to adopt SFAS 123R in our first quarterof fiscal 2006, beginning January 1, 2006. Under SFAS 123R, we mustdetermine the appropriate fair value model to be used for valuing share-basedpayments, the amortization method for compensation cost and the transitionmethod to be used at date of adoption. The transition method includesprospective and retroactive adoption methods. Under the retroactive method,prior periods may be restated either as of the beginning of the year ofadoption or for all periods presented. The prospective method requires thatcompensation expense be recorded for all unvested stock options and restrictedstock at the beginning of the first quarter of adoption of SFAS 123R,while the retroactive method would record compensation expense for all unvestedstock options and restricted stock beginning with the first period restated. Weare evaluating the requirements of SFAS 123R and we expect that theadoption of SFAS 123R will have a material impact on our consolidatedresults of operations and earnings per share. We have not yet determined themethod of adoption or the effect of adopting SFAS 123R, and we have notdetermined whether the adoption will result in amounts that are similar to thecurrent pro forma disclosures under SFAS 123.

 

In March 2005, the SEC issued StaffAccounting Bulletin No. 107 (“SAB 107”) regarding the staff’sinterpretation of Share-Based Payments. This interpretation expresses the viewsof the staff regarding the interaction between SFAS 123R and certain SEC rules andregulations and provides the staff’s views regarding the valuation ofshare-based payment arrangements for publicly traded companies. In particular,SAB 107 provides guidance related to share-based payment transactions withnon-employees, the transition from nonpublic to public entity status, valuationmethods, the accounting for certain redeemable financial instruments issuedunder share-based payment arrangements, the classification of compensationexpense, non-GAAP financial measures, first-time adoption of SFAS 123R in aninterim period, capitalization of compensation cost related to share-basedarrangements, the accounting for income tax effects of share-based paymentarrangements upon adoption of SFAS 123R, the modification of employee shareoptions prior to adoption of SFAS 123R and disclosures in Management’sDiscussion and Analysis subsequent to adoption of SFAS 123R. We will adopt SAB107 in connection with our adoption of SFAS 123R, which is expected to have amaterial impact on our condensed consolidated results of operations andearnings per share. 

 

In March 2005, the FASB issuedInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations – An Interpretation of FASB Statement No. 143” (“FIN 47”), toclarify the requirement to record liabilities stemming from a legal obligationto clean up and retire fixed assets, such as a plant or factory, when an assetretirement depends on a future event. We plan to adopt FIN 47 in the fourthquarter of fiscal 2005, and have not yet determined whether the application ofFIN 47 will have a material impact on our condensed consolidated results ofoperations, cash flows or financial position. 

 

In May 2005, the FASB issued SFAS No. 154,“Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20and FASB Statement No. 3 (“SFAS 154”). This statement applies to allvoluntary changes in accounting principle and changes required by an accountingpronouncement where no specific transition provisions are included. SFAS 154requires retrospective application to prior periods’ financial statements ofchanges in accounting principle, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change.Retrospective application is limited to the direct effects of the change; theindirect effects should be recognized in the period of the change. Thisstatement carries forward without change the guidance contained in Opinion 20for reporting the correction of an error in previously issued financial statementsand a change in accounting estimate. However, SFAS 154 redefines restatement asthe revising of previously issued financial statements to reflect thecorrection of an error. The provisions of SFAS 154 are effective for accountingchanges and corrections of errors made in fiscal periods that begin after December 15,2005, although early adoption is permitted. We do not anticipate that theimplementation of this standard will have a material impact on our condensedconsolidated results of operations, cash flows or financial position.  

 

**Restatement of Disclosure for Stock-BasedEmployee Compensation Expense**

 

In connection with our preparation of the condensedconsolidated financial statements for the quarter ended March 31, 2005, wedetermined that the financial statements for the years ending December 31,2002, 2003 and 2004 and for the first three quarters of fiscal 2003 and 2004cannot be relied upon for the following reason. Our disclosure for stock-basedemployee compensation expense under SFAS 123, as amended by SFAS No. 148 “Accountingfor Stock-Based Compensation – Transition and Disclosure”, included in Note 1to the previously issued financial statements contained in our Annual Report onForm 10-K for the year ended December 31, 2004 (“2004 10-K”) and inthe Quarterly Reports on Form 10-Q for each of the quarterly periodsreferred to above, included errors in our disclosure of the pro forma effectson operating results as if we had elected to use the fair value approach toaccount for all stock-based compensation plans. Specifically, the errorsrelated to the calculation of the effect of a stock option exchange programthat took place on December 4, 2002, and the overall determination of thetax treatment of the pro forma option expense and forfeitures. As a result ofthese errors, we will restate the disclosure for stock-based employeecompensation expense for fiscal 2002, 2003 and 2004 included in Note 1 to the

 

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previouslyissued financial statements contained in our 2004 10-K together with theassociated disclosure for the first three quarters of fiscal 2003 and 2004. Inaddition, we have incorporated these corrections to our disclosure forstock-based employee compensation expense included in Note 4, “Stock-BasedCompensation” to these condensed consolidated financial statements. Theseerrors had no impact on our balance sheets, statements of operations, cashflows, comprehensive income or stockholders’ equity for any period. 

 

The following is a summary of the effect of thesecorrections on the pro forma calculation of our net loss and net loss per sharefor the three and nine months ended September 30, 2004 had compensationbeen determined based on the fair value at the grant date for awards (inthousands, except per share data):

 
| ** **                                                                                                             | ** ** | **As Previously** | ** ** | ** **      | ** ** | **As**       | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                                                             | ** ** | **Reported**      | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| **Three months ended September 30, 2004**                                                                         |       |              |       |            |       |         |       |
| Net loss - as reported                                                                                                 |       | $                 | (5,133     | )               | $          | —       |       | $ | (5,133 | ) |
| Stock-based  employee compensation expense included in reported net loss, net of tax                                   |       | 3                 |       | —          |       | 3            |       |
| Total  stock-based employee compensation expense determined under fair value based  method for all options, net of tax |       | (2,247            | )          | (1,844          | )          | (4,091       | )          |
|                                                                                                                   |       |              |       |            |       |         |       |
| Net loss -  pro forma                                                                                                  |       | $                 | (7,377     | )               | $          | (1,844       | )          | $ | (9,221 | ) |
|                                                                                                                   |       |              |       |            |       |         |       |
| Net loss per share:                                                                                                    |       |              |       |            |       |         |       |
| Basic and diluted - as reported                                                                                        |       | $                 | (0.16      | )               | $          | —       |       | $ | (0.16 | ) |
| Basic and diluted - pro forma                                                                                          |       | $                 | (0.22      | )               | $          | (0.06        | )          | $ | (0.28 | ) |
|                                                                                                                   |       |              |       |            |       |         |       |
| **Nine months ended September 30, 2004**                                                                          |       |              |       |            |       |         |       |
| Net loss - as reported                                                                                                 |       | $                 | (15,528    | )               | $          | —       |       | $ | (15,528 | ) |
| Stock-based  employee compensation expense included in reported net loss, net of tax                                   |       | 21                |       | —          |       | 21           |       |
| Total  stock-based employee compensation expense determined under fair value based  method for all options, net of tax |       | (7,307            | )          | (5,275          | )          | (12,582      | )          |
|                                                                                                                   |       |              |       |            |       |         |       |
| Net loss -  pro forma                                                                                                  |       | $                 | (22,814    | )               | $          | (5,275       | )          | $ | (28,089 | ) |
|                                                                                                                   |       |              |       |            |       |         |       |
| Net loss per share:                                                                                                    |       |              |       |            |       |         |       |
| Basic and diluted - as reported                                                                                        |       | $                 | (0.47      | )               | $          | —       |       | $ | (0.47 | ) |
| Basic and diluted - pro forma                                                                                          |       | $                 | (0.69      | )               | $          | (0.16        | )          | $ | (0.85 | ) |

 

**Reclassifications**

 

Certain prior period amounts have been reclassifiedto conform to the current period presentation to better reflect our view of thecurrent business. These reclassifications do not affect total net revenues, netincome (loss), cash flows, or stockholders’ equity. 

 

**Deferred Rent.**Certaindeferred rent liabilities have been reclassified from long-term to short-term.We have historically classified all amounts accrued for deferred rent as “otherlong-term liabilities” on the condensed consolidated balance sheets. Based uponour re-evaluation of these liabilities, we have reclassified deferred rentliabilities that are to be recognized within a year of the balance sheet dateto “accrued liabilities” on the condensed consolidated balance sheets. Thesereclassifications had no impact on our results of operations or cash flows. Thefollowing is a summary of the effect of these reclassifications on ourcondensed consolidated balance sheet as of December 31, 2004 (in thousands):

 

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| ** **                  | ** ** | **Condensed Consolidated Balance  Sheet** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| ** **                  | ** ** | **As Previously**                         | ** ** | ** ** | ** ** | **As** | ** ** |
| **December 31, 2004**  | ** ** | **Reported**                              | ** ** | **Reclassifications** | ** ** | **Reclassified** | ** ** |
| Accrued liabilities         |       | $                                         | 16,855     |   | $ | 715 |   | $ | 17,570 |   |
| Total current liabilities   |       | $                                         | 80,121     |   | $ | 715 |   | $ | 80,836 |   |
| Other long-term liabilities |       | $                                         | 6,531      |   | $ | (715 | ) | $ | 5,816 |   |
| Total liabilities           |       | $                                         | 88,902     |   | $ | — |   | $ | 88,902 |   |

 

**RESULTS OF OPERATIONS FOR THE THREE AND NINEMONTHS ENDED SEPTEMBER 30, 2005 AND 2004**

 

The following table sets forth, for the periodsindicated, certain financial information as a percentage of total net revenues.The financial information and the ensuing discussion should be read inconjunction with the accompanying condensed consolidated financial statementsand notes thereto: 

 
| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                 | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| **Net revenues:**                                    |       |                                     |       |                                    |       |   |   |   |   |
| License and development fees                         |       | 21                                       | %          | 24                                      | %          | 23 | % | 23 | % |
| Maintenance and other recurring                      |       | 65                                       |       | 64                                      |       | 64 |   | 65 |   |
| Professional services and other                      |       | 14                                       |       | 12                                      |       | 13 |   | 12 |   |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| Total net  revenues                                  |       | 100                                      |       | 100                                     |       | 100 |   | 100 |   |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| **Cost of revenues:**                                |       |                                     |       |                                    |       |   |   |   |   |
| License and development fees                         |       | 1                                        |       | 2                                       |       | 1 |   | 2 |   |
| Maintenance and other recurring                      |       | 17                                       |       | 18                                      |       | 18 |   | 19 |   |
| Professional services and other                      |       | 10                                       |       | 10                                      |       | 10 |   | 10 |   |
| Amortization and impairment of developed  technology |       | 1                                        |       | 6                                       |       | 1 |   | 5 |   |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| Total cost  of revenues                              |       | 29                                       |       | 36                                      |       | 30 |   | 36 |   |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| Gross margin                                         |       | 71                                       |       | 64                                      |       | 70 |   | 64 |   |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| **Operating expenses:**                              |       |                                     |       |                                    |       |   |   |   |   |
| Sales and marketing                                  |       | 22                                       |       | 26                                      |       | 24 |   | 26 |   |
| Product development                                  |       | 16                                       |       | 21                                      |       | 18 |   | 22 |   |
| General and administrative                           |       | 19                                       |       | 17                                      |       | 20 |   | 17 |   |
| Amortization and impairment of other  intangibles    |       | 2                                        |       | 12                                      |       | 3 |   | 8 |   |
| Restructuring charges (benefit)                      |       | 0                                        |       | (0                                      | )          | 1 |   | 5 |   |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| Total  operating expenses                            |       | 59                                       |       | 76                                      |       | 66 |   | 78 |   |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| Income (loss) from operations                        |       | 12                                       |       | (12                                     | )          | 4 |   | (14 | ) |
| Interest income and other, net                       |       | 2                                        |       | 1                                       |       | 5 |   | 1 |   |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| Income (loss) before income taxes                    |       | 14                                       |       | (11                                     | )          | 9 |   | (13 | ) |
| Provision for (benefit from) income taxes            |       | (0                                       | )          | 3                                       |       | 1 |   | 1 |   |
|                                                 |       |                                     |       |                                    |       |   |   |   |   |
| **Net  income (loss)**                               |       | 14                                       | %          | (14                                     | )%         | 8 | % | (14 | )% |

 

# **NET REVENUES**

 
| ** **                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                               |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Total net  revenues (in thousands) |       | $                                        | 43,035     |       | $          | 37,288                                  |       | $          | 5,747      |   | $ | 123,903 |   | $ | 109,034 |   | $ | 14,869 |   |
|                                    |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

Each of the major revenue categories hashistorically varied as a percentage of net revenues and we expect thisvariability to continue in future periods. This variability is partially due tothe timing of the introduction of new products, the relative size and timing ofindividual perpetual and term software licenses, as well as the size of theimplementation, the resulting proportion of the maintenance and professionalservices components of these license transactions and the amount of client useof pricing and related data. We expect total net revenues for the fourthquarter of 2005 to be between $41 million and $43 million.

 

***License and Development Fees***

 
| ** **                                   | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                   | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                         |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| License and  development fees (in thousands) |       | $                                        | 9,200      |       | $          | 8,798                                   |       | $          | 402        |   | $ | 28,428 |   | $ | 25,525 |   | $ | 2,903 |   |
| Percent of  total net revenues               |       | 21                                       | %          | 24         | %          |                                    |       | 23         | %          | 23 | % |   |   |
|                                              |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

The increase in license revenue anddevelopment fees reflected an improved overall economy and improved conditionswithin the financial services industry, which contributed to increases incapital expenditures by our customers. License and development fee revenue inthe three and nine months periods reflected an increase in Geneva-relatedassets under administration (AUA) revenues, and increasing term licenserevenues as our transition to a term license model continued. During the thirdquarter of 2005, we recognized approximately $800,000 from deferred licenserevenue as a result of shipping APX to two customers and from completing alarge MicroEdge development contract. Our Geneva-related AUA revenues increased$0.7 million and $3.6 million during the three and nine months ended September 30,2005, respectively, from the same periods in 2004 as a result of the growth inassets under administration of certain fund administration clients, whoseGeneva contracts provide for quarterly fees based on assets, resulting insignificant recurring quarterly revenue. While perpetual license revenuedecreased $2.0 million and $2.4 million in the three and nine month periods,respectively, due to our transition towards selling more contracts on a termbasis, revenue recognized from our core products from term license dealsincreased $1.2 million and $1.3 million in the three and nine month periods,respectively. In addition, we had significant overall revenue growth from ourMicroEdge subsidiary product lines. We expect license and development feerevenues to increase slightly in the fourth quarter of 2005 as we earn higherrevenues under our AUA revenue model. 

 

We typicallylicense our products on a per server, per user basis with the price percustomer varying based on the selection of the products licensed, the number ofsite installations and the number of authorized users. We earn development feeswhen we provide product solutions which are not part of our standard productoffering but will be incorporated into our future releases. For thethree and nine months ended September 30, 2005 and 2004, revenue fromdevelopment fees was less than 4% of total license and development fees revenue.** **Forthe three and nine months ended September 30, 2005 and 2004, soft dollarrevenues generated from Advent related licenses paid for through soft dollartransactions represented less than 3% of total license and developmentrevenues.

 

***Maintenance and Other Recurring Revenues***

 
| ** **                                               | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| Maintenance  and other recurring revenues (in thousands) |       | $                                        | 27,796     |       | $          | 24,167                                  |       | $          | 3,629      |   | $ | 79,099 |   | $ | 70,367 |   | $ | 8,732 |   |
| Percent of  total net revenues                           |       | 65                                       | %          | 64         | %          |                                    |       | 64         | %          | 65 | % |   |   |
|                                                          |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

The increase in maintenance and otherrecurring revenues in the three and nine month periods reflected newmaintenance support contracts as a result of new license deals, price increasesto our installed customer base, an increase in demand for our data services andan increase in our recurring revenue stream. Term license maintenance alsoincreased $687,000 and $1.7 million during the three and nine month periods,respectively, due to our term license pricing transition. We disclose ourmaintenance renewal rate one quarter in arrears in order to include all paymentsreceived against maintenance invoices. The maintenance renewal rate for the secondquarter of 2005 of 86% was within the range of 80% to 90% that we haveexperienced since the second quarter of 2004. During the third quarter of 2005, we alsorecognized a net benefit from reducing our maintenance revenue reserves byapproximately $500,000. We have an algorithm for calculating the value ofreserves that takes the previous 18 months of experience into account which wehave applied consistently and resulted in a

 

27

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creditto revenue during the three months ended September 30, 2005. Recurringrevenue increased $1.1 million and $3.2 million during the three and ninemonths ended September 30, 2005, respectively, as a result of growth inour subscription and data management revenue streams, as well as our receivinga revenue share from transaction charges generated by a partner program thatbegan in early 2004. 

 

Maintenance revenue has remained relatively flat asa proportion of total maintenance and recurring revenues at approximately 68%to 69% in the three and nine months ended September 30, 2005 and 2004.We expect maintenance and recurring revenues will decrease slightly in the fourthquarter of 2005 primarily as a result of a non-recurring benefit received froma reduction in the revenue reserves balance during the third quarter of 2005. Ourrevenue reserves are calculated from our experience of returns over the mostrecent 18-month period. 

 

***Professional Services and Other Revenues***

 
| ** **                                               | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| Professional  services and other revenues (in thousands) |       | $                                        | 6,039      |       | $          | 4,323                                   |       | $          | 1,716      |   | $ | 16,376 |   | $ | 13,142 |   | $ | 3,234 |   |
| Percent of  total net revenues                           |       | 14                                       | %          | 12         | %          |                                    |       | 13         | %          | 12 | % |   |   |
|                                                          |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Professional services and other revenuesinclude consulting, project management, custom integration, custom work,training and soft dollar transactions for products and services not related toAdvent product or services. Professional services related to Advent Officeproducts generally can be completed and accepted in a relatively short timeperiod while services related to Geneva products may require a six to ninemonth implementation period. Therefore, the revenues associated withprofessional services reflect a mix of services related to current quarterlicense revenue as well as transactions from prior quarters. Generally, ourconsulting revenues lag our license revenues by one or two quarters, but canalso be affected by specific milestone completions.

 

For the three and nine month periods ended September 30,2005, professional services and other revenues grew 40% and 25% respectively,with the majority of the growth coming from general consulting revenue. Thisgrowth is due to a general rise in demand for our products and services, with bothnew customers and existing clients upgrading their suite of products. Duringthe third quarter of 2005, we recognized approximately $400,000 of servicerevenue from deferred revenue as a result of shipping APX to two customers. Weexpect revenues from professional services to increase in the fourth quarter of2005 as a result of our annual user conference in October 2005.  

 

***Revenues by Segment***

 
| ** **                    | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                    | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                    | ** ** | **(in thousands)**                       | ** ** |
| Advent  Investment Management |       | $                                        | 37,216     |       | $          | 32,207                                  |       | $          | 5,009      |   | $ | 107,324 |   | $ | 94,607 |   | $ | 12,717 |   |
| MicroEdge                     |       | 4,986                                    |       | 4,425      |       | 561                                     |       | 14,488     |       | 12,428 |   | 2,060 |   |
| Other                         |       | 833                                      |       | 656        |       | 177                                     |       | 2,091      |       | 1,999 |   | 92 |   |
|                          |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Total net  revenues           |       | $                                        | 43,035     |       | $          | 37,288                                  |       | $          | 5,747      |   | $ | 123,903 |   | $ | 109,034 |   | $ | 14,869 |   |

 

We have two reportable segments: AdventInvestment Management (“AIM”) and MicroEdge. AIM derives revenues from thedevelopment, marketing and sale of software products, data interfaces andrelated maintenance and services that automate, integrate and support certainmission critical functions of investment management organizations. MicroEdgederives revenues from the sale of software and services for grant managementand matching gifts for the grant-making community worldwide. 

 

The 16% and 13% increase in AIM’s revenue inthe three and nine months ended September 30, 2005, respectively,reflected the improved economic conditions and growth in the financial markets,as well as the continued focus on selling our Advent Office and Genevaproducts. Our assets under administration revenues increased significantly fromthe same periods in 2004, as a result of the growth in assets underadministration for our fund administration clients, where certain Genevacontracts provide for quarterly fees based on assets, resulting in significantrecurring quarterly revenue. AIM’s revenue increase during the first ninemonths of 2005 also reflected an increase in new maintenance support contractsas a result of new license deals and price increases for maintenance contractsfrom our customer installed base, partially offset by attrition from within ourexisting customer base. We also had growth in international sales, partlyattributable to our acquisitions in the UK and Switzerland in May 2004. 

 

The technology spending patterns oforganizations in MicroEdge’s primary markets (independent foundations,community foundations and corporations) are directly affected by economicfluctuations as foundation budgets are largely

 

28

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driven by endowment income which often contains market-exposedcomponents. Foundation spending typically decreases in an economic downturn.Community foundations are subject to similar influences, compounded by the factthat in many cases much of their ongoing funding and endowment comes fromactive donors who may increase or reduce their giving depending on the economicclimate and the related effect on their income and wealth. Corporationstypically fund charitable activities from operating budgets, and the allocationto charitable donations and supporting company charitable operations is oftenclosely tied to a company’s performance. Thus, corporate philanthropy andspending on related technology are correlated with company and overall economicperformance. 

 

The 13% and 17% increase in MicroEdge revenuein the three and nine months ended September 30, 2005 also reflected theimproved economic conditions and growth in the financial markets which resultedin increased charitable contributions. This increase in charitablecontributions received by the foundations sector in the first nine months of2005 enabled foundations to increase their information technology expenditureswhich resulted in the increase in MicroEdge revenue in the first nine months of2005. 

 

### **COST OF REVENUES**

 
| ** **                             | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                   |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Total cost  of revenues (in thousands) |       | $                                        | 12,611     |       | $          | 13,437                                  |       | $          | (826       | ) | $ | 37,773 |   | $ | 39,029 |   | $ | (1,256 | ) |
| Percent of  total net revenues         |       | 29                                       | %          | 36         | %          |                                    |       | 30         | %          | 36 | % |   |   |
|                                        |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Our cost of revenues is made up of fourcomponents: cost of license and development fees; cost of maintenance and otherrecurring; cost of professional services and other; and amortization ofdeveloped technology.  

 

***Cost of License and Development Fees***

 
| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                 |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Cost of  license and development fees (in thousands) |       | $                                        | 328        |       | $          | 598                                     |       | $          | (270       | ) | $ | 968 |   | $ | 1,618 |   | $ | (650 | ) |
| Percent of  total license revenues                   |       | 4                                        | %          | 7          | %          |                                    |       | 3          | %          | 6 | % |   |   |
|                                                      |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of license and development fees consistsprimarily of royalties and other fees paid to third parties, the fixed directlabor involved in producing and distributing our software, labor costsassociated with generating development fees and cost of product media includingduplication, manuals and packaging materials. The decrease in the three and ninemonths ended September 30, 2005 primarily reflected a decrease inroyalties paid to third party vendors related to products sold, which includedtheir technology, and decreased shipping and related product costs. Although weexpect license and development fee revenue to increase slightly during thefourth quarter of 2005, we expect cost of license and development fees to remainflat in the fourth quarter of 2005 as there are no incremental costs associatedwith our AUA revenue model. 

 

***Cost of Maintenance and Other Recurring***

 
| ** **                                              | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                    |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Cost of  maintenance and other recurring (in thousands) |       | $                                        | 7,314      |       | $          | 6,754                                   |       | $          | 560        |   | $ | 21,951 |   | $ | 20,954 |   | $ | 997 |   |
| Percent of  total maintenance revenue                   |       | 26                                       | %          | 28         | %          |                                    |       | 28         | %          | 30 | % |   |   |
|                                                         |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of maintenance and other recurring revenuesis primarily comprised of the direct costs of providing technical support andother services for recurring revenues and royalties paid to third partysubscription-based and transaction-based vendors. The increase in the three andnine months ended September 30, 2005 was primarily due to an increase insalaries, employee bonus programs and royalties paid to third party vendorsrelated to product sold, which included their technology. This increase waspartially offset by a decrease in outside services. We expect cost ofmaintenance and other recurring revenues to remain flat to slightly up in thefourth quarter of 2005.

 

***Cost of Professional Services and Other***

 
| ** **                                              | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                    |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Cost of  professional services and other (in thousands) |       | $                                        | 4,328      |       | $          | 3,706                                   |       | $          | 622        |   | $ | 12,985 |   | $ | 11,386 |   | $ | 1,599 |   |
| Percent of  total professional services revenues        |       | 72                                       | %          | 86         | %          |                                    |       | 79         | %          | 87 | % |   |   |
|                                                         |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of professional services and otherrevenue consists primarily of personnel related costs associated with theclient services and support organization in providing consulting, custom reportwriting and conversions of data from clients’ previous 

 

29

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systems. Also included are direct costs associated with third-partyconsultants and travel expenses. The increase in the three and nine monthsended September 30, 2005 was primarily due to an increase in headcount of 10%and employee bonus programs. The increase was partially offset by decreases inoutside services. Gross margin on professional services and other improved to28% and 21% for three and nine months ended September 30, 2005,respectively, as compared to 14% and 13% during the three and nine months endedSeptember 30, 2004. These improvements were due to higher utilization ofconsultants in our support and services organization during fiscal 2005 andalso due to recognition of service revenue from the implementation of our newproduct, APX, with two new customers during the third quarter of 2005 which hadrelatively higher margins. We expect cost of professional services and otherrevenues to increase in the fourth quarter of 2005 as a result of costsassociated with our annual user conference during October 2005 and higher bonuscosts.

 

***Amortization and Impairment of DevelopedTechnology***

 
| ** **                                                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                                          | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| Amortization  and impairment of developed technology (in thousands) |       | $                                        | 641        |       | $          | 2,379                                   |       | $          | (1,738     | ) | $ | 1,869 |   | $ | 5,071 |   | $ | (3,202 | ) |
| Percent of  total net revenues                                      |       | 1                                        | %          | 6          | %          |                                    |       | 1          | %          | 5 | % |   |   |
|                                                                     |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization and impairment of developedtechnology represents amortization and impairment of acquisition-relatedintangible assets and amortization of capitalized software development costs. Amortizationof developed technology decreased, reflecting technology related intangibleassets from prior acquisitions becoming fully amortized, and the write-off ofTechfi and Advent Wealth Services developed technology intangible assets duringthe second half of 2004. During the third quarter of 2004, we recorded anon-cash impairment charge of $1.0 million to write-off our Techfi core andexisting technology which was a result of our decision to sunset certainproducts within our Techfi product line. We expect amortization of developedtechnology to be approximately $700,000 in the fourth quarter of 2005.

 

### **OPERATING EXPENSES**

### ** **

***Sales and Marketing***

 
| ** **                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Sales and  marketing (in thousands) |       | $                                        | 9,459      |       | $          | 9,705                                   |       | $          | (246       | ) | $ | 30,005 |   | $ | 27,774 |   | $ | 2,231 |   |
| Percent of  total net revenues      |       | 22                                       | %          | 26         | %          |                                    |       | 24         | %          | 26 | % |   |   |
|                                     |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Sales and marketing expenses consistprimarily of the costs of personnel involved in the sales and marketingprocess, sales commissions, advertising and promotional materials, salesfacilities expense, trade shows, and seminars. The slight decrease inexpense for the three months ended September 30, 2005 was primarily due todecreased outside services and royalties. The increase in expenses for the ninemonths ended September 30, 2005 was primarily due to increased salaryexpense of $2.6 million, partially offset by a decrease in outside services of$470,000. The increase in salary expense resulted from severance related to areduction in headcount and increased employee bonus programs. We expectsales and marketing expenses to increase in the fourth quarter of 2005 dueprimarily to higher commission expense and higher travel and accommodationcosts associated with our user conference. 

 

***Product Development***

 
| ** **                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Product  development (in thousands) |       | $                                        | 6,800      |       | $          | 7,967                                   |       | $          | (1,167     | ) | $ | 22,567 |   | $ | 24,320 |   | $ | (1,753 | ) |
| Percent of  total net revenues      |       | 16                                       | %          | 21         | %          |                                    |       | 18         | %          | 22 | % |   |   |
|                                     |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Product development expenses consist primarilyof salary and benefits for our development staff as well as contractors’ feesand other costs associated with the enhancements of existing products andservices and development of new products and services. We account forproduct development costs in accordance with SFAS 2, “Accounting for Research and Development Costs”, and SFAS 86, “Accounting for the Costs of ComputerSoftware to be Sold, Leased, or Otherwise Marketed”, which specifiesthat costs incurred to develop computer software products should be charged toexpense as incurred until technological feasibility is reached for the products.Once technological feasibility is reached, all software costs should becapitalized until the product is made available for general release tocustomers.

 

The decrease in expenses for the three and nine monthsended September 30, 2005 was primarily due to the capitalization ofsoftware development costs incurred in the second and third quarter of 2005 of$461,000 and $819,000, respectively. During the third quarter of 2005, we hadseveral major products, including APX, in their final beta phase. The

 

30

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capitalizedcosts will be amortized over approximately three years. We expectproduct development expenses to increase in the fourth quarter of 2005 as thelevel of software capitalization returns to a lower level following thecompletion of the APX beta.

 

***General and Administrative***

 
| ** **                                 | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                       |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| General and  administrative (in thousands) |       | $                                        | 8,007      |       | $          | 6,329                                   |       | $          | 1,678      |   | $ | 24,288 |   | $ | 18,517 |   | $ | 5,771 |   |
| Percent of  total net revenues             |       | 19                                       | %          | 17         | %          |                                    |       | 20         | %          | 17 | % |   |   |
|                                            |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

General and administrative expenses consistprimarily of personnel costs for finance, administration, operations andgeneral management, as well as legal and accounting expenses. The increasein the three and nine months ended September 30, 2005 was primarily due toincreases in personnel and related costs of $303,000 and $2.3 million,respectively, professional fees of $609,000 and $2.1 million, respectively, andoutside services of $807,000 and $960,000, respectively. The increase in personneland related costs was primarily due to severance for terminated employees and additionalheadcount associated with the acquisition of our remaining independentdistributor business in the United Kingdom and Switzerland in May 2004. The increase in professional fees was theresult of higher legal fees incurred for various inquiries and disputes andcosts associated with complying with the Sarbanes-Oxley Act of 2002. Theincrease in outside services was primarily due to costs associated with increasedutilization of outside contractors. We expect general and administrativeexpenses to decrease slightly in the fourth quarter of 2005 due to one-timeseverance charges incurred in the third quarter of 2005. 

 

***Amortization and Impairment of OtherIntangibles***

 
| ** **                                                       | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                                       | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| Amortization  and impairment of other intangibles (in thousands) |       | $                                        | 997        |       | $          | 4,414                                   |       | $          | (3,417     | ) | $ | 3,064 |   | $ | 8,498 |   | $ | (5,434 | ) |
| Percent of  total net revenues                                   |       | 2                                        | %          | 12         | %          |                                    |       | 3          | %          | 8 | % |   |   |
|                                                                  |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization and impairment of otherintangibles represents amortization and impairment of non-technology relatedintangible assets. Amortization of other intangibles decreased, reflecting the write-offof other intangibles related to our Techfi, Advent Wealth Services and AdventHellas subsidiaries during the second half of 2004, partially offset byadditional amortization of other intangibles associated with our acquisitionsin the United Kingdom and Switzerland in May 2004. During the thirdquarter of 2004, we recorded a non-cash impairment charge of $2.4 million towrite off the carrying value of our Techfi non-compete agreements andmaintenance contracts resulting from our decision to sunset certain productswithin our Techfi product line. We expect amortization of other intangibles tobe approximately $1.0 million in the fourth quarter of 2005.

 

***Restructuring Charges (Benefit)***

 
| ** **                                      | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                      | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                            |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Restructuring  charges (benefit) (in thousands) |       | $                                        | 116        |       | $          | (1                                      | )          | $          | 117        |   | $ | 1,719 |   | $ | 5,859 |   | $ | (4,140 | ) |
| Percent of  total net revenues                  |       | 0                                        | %          | 0          | %          |                                    |       | 1          | %          | 5 | % |   |   |
|                                                 |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

##### ***In response to the downturn in the financial services industry, thedecline in information technology spending, duplicative efforts in parts of our business as a result of ouracquisitions, and excess facilities capacity, we implemented several phases ofrestructuring beginning in 2003. These plans were implemented to reduce costsand improve operating efficiencies by better aligning our resources to our nearterm revenue opportunities.***

#####  

During the nine months ended September 30,2005, we recorded total restructuring charges of $1.7 million consisting ofcharges of $83,000, $1.5 million and $116,000 recorded in the first, second andthird quarters, respectively, of 2005. The second quarter charge of $1.5million primarily consisted of net facility and exit costs related to sub-leasingone floor of our office space in New York, New York. The net restructuringcharges of $83,000 and $116,000 recorded in first and third quarters,respectively, were to adjust original estimates for vacated facilities.

 

During the nine months ended September 30,2004, we recorded total restructuring charges of $5.9 million consisting of abenefit of $43,000 recorded in the first quarter of fiscal 2004 and a charge ofapproximately $5.9 million recorded in the second quarter of fiscal 2004. Thebenefit of $43,000 incurred in the first quarter of fiscal 2004 consisted of a$163,000 adjustment related to entering a final sub-lease agreement on one ofthe vacated facilities in New York, New York and a $16,000 adjustment tonon-cash severance. These adjustments were partially offset by a restructuringcharge of $136,000 related to the termination of nine employees, locatedprimarily in New York. The $5.9 million charged incurred in the second quarterof fiscal 2004 consisted of $4.9 million of facility exit costs and $0.9million of property and equipment impairment

 

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charges related to vacating a facility in San Francisco, California,$72,000 related to vacating a portion of a facility in Cambridge, Massachusettsand a $12,000 adjustment related to severance for terminated employees in thefirst quarter of 2004. 

 

The following table sets forth an analysis ofthe components of the restructuring charges and the payments and non-cashcharges made against the accrual during the nine months ended September 30,2005 (in thousands): 

 
| ** **                                                   | ** ** | **Facility Exit** | ** ** | **Severance &** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|-------------------|------------|--------------------------|------------|------------|------------|
| ** **                                                   | ** ** | **Costs**         | ** ** | **Benefits**             | ** ** | **Total**  | ** ** |
|                                                         |       |              |       |                     |       |       |       |
| Balance of restructuring accrual at December 31,  2004  |       | $                 | 4,157      |                     | $          | 12         |       | $ | 4,169 |   |
| Restructuring charges                                        |       | 1,472             |       | —                   |       | 1,472      |       |
| Reversal of deferred rent related to  facilities exited      |       | 704               |       | —                   |       | 704        |       |
| Cash payments                                                |       | (1,890            | )          | —                   |       | (1,890     | )          |
| Adjustment of prior restructuring costs                      |       | 252               |       | (5                       | )          | 247        |       |
| Balance of restructuring accrual at September 30,  2005 |       | $                 | 4,695      |                     | $          | 7          |       | $ | 4,702 |   |

 

Of the remaining restructuring accrual of $4.7million at September 30, 2005, $1.4 million and $3.3 million are includedin accrued liabilities and other long-term liabilities, respectively, on theaccompanying condensed consolidated balance sheet.  As of September 30, 2005, the remainingexcess facility costs of $4.7 million are stated at estimated fair value, netof estimated sublease income of approximately $8.7 million. We expect to payremaining obligations in connection with vacated facilities no later than overthe remaining lease terms, which expire on various dates through 2012. Weexpect to pay the remaining severance and benefits in 2005. As the result ofour restructuring activities implemented to date, we have reduced our totalexpenses by approximately $15 million on an annual basis. 

 

### ***OperatingIncome (Loss) by Segment***

### ** **

| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                           | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                       | ** ** |
| Advent  Investment Management                        |       | $                                        | 5,523      |       | $          | 1,926                                   |       | $          | 3,597      |   | $ | 7,224 |   | $ | (1,891 | ) | $ | 9,115 |   |
| MicroEdge                                            |       | 997                                      |       | 222        |       | 775                                     |       | 1,947      |       | 334 |   | 1,613 |   |
| Other                                                |       | 163                                      |       | 82         |       | 81                                      |       | 249        |       | 163 |   | 86 |   |
| Unallocated  corporate operating costs and expenses: |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Amortization  and impairment of developed technology |       | (641                                     | )          | (2,379     | )          | 1,738                                   |       | (1,869     | )          | (5,071 | ) | 3,202 |   |
| Amortization  and impairment of other intangibles    |       | (997                                     | )          | (4,414     | )          | 3,417                                   |       | (3,064     | )          | (8,498 | ) | 5,434 |   |
|                                                 |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Total  operating income (loss)                       |       | $                                        | 5,045      |       | $          | (4,563                                  | )          | $          | 9,608      |   | $ | 4,487 |   | $ | (14,963 | ) | $ | 19,450 |   |

 

Operating income for the AIM segment was $5.5million and $7.2 million for the three and nine months ended September 30,2005, respectively. Operating income (loss) for the AIM segment was $1.9million and $(1.9) million for the three and nine months ended September 30,2004, respectively. The increases from the comparable periods in 2004 were primarilythe result of AIM’s revenue growth of $5.0 million and $12.7 million during thethree and nine months ended September 30, 2005, respectively, and improvedgross margins during the periods. In addition, AIM’s restructuring chargesdecreased by $4.1 million during the nine months ended September 30, 2005relative to the comparable period in 2004. These were offset by increases incertain operating expenses including personnel and related costs, severance,retention bonuses, legal fees, compliance costs for Sarbanes Oxley, andaccelerated depreciation on assets we abandoned in our New York office spacethat we have been sub-leased. The increase in personnel and related costs wasdue to additional headcount associated with the acquisition of our remainingindependent distributor businesses in the United Kingdom and Switzerland in May 2004.

 

MicroEdge’s operating income during the threeand nine months ended September 30, 2005 increased by $775,000 and $1.6 million,respectively, from the comparable periods of 2004 primarily due to increases inrevenue of $561,000 and $2.1 million. The increases in MicroEdge’s revenuesduring these periods were partially offset by increases in operating activityresulting in higher compensation, marketing and outsourcing costs. 

 

### ***InterestIncome and Other, Net***

 
| ** **                                     | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                           |       |                                     |       |       |       |                                    |       |       |       |   |   |   |   |
| Interest  income and other, net (in thousands) |       | $                                        | 977        |       | $          | 641                                     |       | $          | 336        |   | $ | 6,586 |   | $ | 625 |   | $ | 5,961 |   |
| Percent of  total net revenues                 |       | 2                                        | %          | 1          | %          |                                    |       | 5          | %          | 1 | % |   |   |
|                                                |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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### **Interest income and other, net consists ofinterest income, realized gains and losses on short-term investments, our prorata share of net income or loss on our equity method investment and foreigncurrency gains and losses. The increases in interest income and other, net forthe three and nine months ended September 30, 2005 reflected increases in netinterest income of $298,000 and $1.3 million, respectively, as a result ofhigher average interest rates. The increase during the nine months ended September 30,2005 also reflects a gain on sale of a private equity investment of $3.6 millionduring the second quarter of 2005. Interest income and other, net for the threeand nine months ended September 30, 2004 also included our pro rata shareof net income (losses) on our equity method investment of $322,000 and $(284,000),respectively.**Effective December 28,2004, our Chief Executive Officer resigned her seat on LatentZero’s board ofdirectors. As a result, we no longer believe we have significant influence overLatentZero and therefore are not required to adjust the carrying amount of thisinvestment to recognize our share of LatentZero’s earnings or losses. Thisinvestment is carried at the lower of cost or fair value at December 31,2004 and September 30, 2005, similar to the Company’s other non-marketableinvestments. The remaining components of interest income and other, netfluctuate primarily due to foreign currency gains and losses and gains andlosses from sales of short-term investments. Foreign exchange losses decreased$94,000 and $83,000 during the three and nine months ended September 30,2005, respectively, while losses on investments decreased $236,000 during thethree and nine months ended September 30, 2005. During the fourth quarterof 2005, we expect to sell our Advent Hellas subsidiary (“Hellas”) to itscurrent management for proceeds of approximately $20,000. Due to thisanticipated sale, we expect interest income and other, net to increase duringthe fourth quarter of 2005 as we anticipate a gain on sale of Hellas currentlyestimated at approximately $1.8 million, resulting from foreign currencytranslation gains. These currency translation gains are associated primarilywith an increase in the value of goodwill as a result of the strengthening ofthe Euro against the U.S. dollar since the acquisition of Hellas in September 2002.

###  

### **Provision For(Benefit From) Income Taxes**

 
| ** **                                                | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------|------------|------------|------------|-----------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **2005**                                 | ** ** | **2004**   | ** ** | **Change**                              | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| Provision  for (benefit from) income taxes (in thousands) |       | $                                        | (207       | )          | $          | 1,211                                   |       | $          | (1,418     | ) | $ | 784 |   | $ | 1,190 |   | $ | (406 | ) |
| Percent of  total net revenues                            |       | 0                                        | %          | 3          | %          |                                    |       | 1          | %          | 1 | % |   |   |
|                                                           |            |                                          |            |            |            |                                         |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

For the three and nine months ended September 30,2005, we recorded a benefit from income taxes of $207,000 and a provision forincome taxes of $784,000, respectively, compared to a provision of $1.2 millionin the three and nine months ended September 30, 2004. We account forincome taxes under an asset and liability approach that requires the expectedfuture tax consequences of temporary differences between book and tax bases ofassets and liabilities to be recognized as deferred tax assets and liabilities.During the fourth quarter of 2003, we established a full valuation allowanceagainst our deferred tax assets in the United States because we determined itis more likely than not that these deferred tax assets will not be realized inthe foreseeable future. The decrease in the provision for income taxes for thethree and nine months ended September 30, 2005 primarily reflects anincrease in our provision for certain state income taxes in the U.S. during thethird quarter of 2004. The remaining components of income taxes reflect changesin foreign, state and federal alternative minimum tax charges. 

 

### **LIQUIDITY ANDCAPITAL RESOURCES**

###  

Our aggregate cash, cash equivalents and marketablesecurities were $146.5 million at September 30, 2005, compared with $165.5million at December 31, 2004. Cash equivalents are comprised of highlyliquid investments purchased with an original or remaining maturity of 90 daysor less at the date of purchase. 

 

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

 
| ** **                                           | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                | ** ** | **2004** | ** ** |
|                                                 |       |                                    |       |   |   |
| Net cash provided by operating activities            |       | $                                       | 24,451     |   | $ | 18,189 |   |
| Net cash provided by (used in) investing  activities |       | $                                       | 49,087     |   | $ | (15,694 | ) |
| Net cash used in financing activities                |       | $                                       | (39,080    | ) | $ | (7,527 | ) |

 

***Cash Flows from Operating Activities***

 

Our cash flows from operating activitiesrepresent the most significant source of funding for our operations. Our cashprovided by operating activities generally follows the trend in our netrevenues and operating results. Our cash provided by operating activities of $24.5million during the nine months ended September 30, 2005 was primarily the resultof our net income and non-cash charges including depreciation and amortization,partially offset by a non-operating gain from the sale of an equity investment.Other sources of cash during the first nine months of 2005 included a decreasein accounts receivable, and increases in accrued liabilities and deferredrevenue. The decrease in accounts receivable primarily reflected strongcollections during the first

 

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nine months of 2005. Days’ sales outstanding decreased from 73 days to60 days during this period. The increase in accrued liabilities was primarilydue to restructuring charges for facility exit costs during the second quarterof 2005. The increase in deferred revenue primarily reflected an increase indeferred maintenance. Uses of our operating cash included a reduction in incometaxes payable as a result of the payment of a tax settlement of $1.2 million.Other major uses of cash include funding payroll (salaries, bonuses andbenefits), general operating expenses (marketing, travel and office rent) andcost of revenues. 

 

Our cash provided by operating activities of$18.2 million during the nine months ended September 30, 2004 includeddecreases in accounts receivable, prepaid and other assets, income taxesreceivable and an increase in accrued liabilities. The decrease in accountsreceivable reflected strong collections during the period. The decrease inprepaid and other assets reflected prepaid expense amortization and collectionof a receivable for a litigation settlement recorded in the fourth quarter of2003. The decrease in income taxes receivable reflected the receipt of afederal tax refund. The increase in accrued liabilities was primarily due toadditional accrued restructuring charges during the period. Uses of cashincluded a decrease in deferred revenues which reflects revenue recognized inthe second quarter of 2004 related to license contracts signed in the prioryear. 

 

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

 

***Cash Flows from Investing Activities***

 

Net cash provided by investing activities of$49.1 million for the nine months ended September 30, 2005, consistedprimarily of net sales and maturities of marketable securities of $52.1 millionand proceeds from the sale of a private equity investment of $3.8 million offsetby capital expenditures of $4.5 million and cash used in acquisitions of $1.0million related to the final earn-out payment made to the shareholders ofAdvent Outsource Data Management and the final payment made to Advent Europe relatingto the acquisition of Advent United Kingdom and Switzerland in May 2004. 

 

Net cash used in investing activities of $15.7million for the nine months ended September 30, 2004 consisted of netpurchases of marketable securities of $4.5 million, cash used in acquisitions,including payments of assumed liabilities, of $8.5 million and capitalexpenditures of $2.7 million. 

 

***Cash Flows from Financing Activities***

 

Net cash used in financing activities for thenine months ended September 30, 2005 of $39.1 million reflected therepurchase of 2.8 million shares of our common stock for $52.6 million,partially offset by proceeds received from the issuance of common stock relatedto employee stock options and our employee stock purchase plan of $13.5million. Net cash used in financing activities for the nine months ended September 30,2004 of $7.5 million primarily reflected the repurchase of 744,000 shares ofcommon stock for $11.9 million partially offset by proceeds of $4.4 millionfrom the issuance of common stock related to employee stock options and ouremployee stock purchase plan. 

 

Our liquidity and capital resources in anyperiod could be affected by the exercise of outstanding stock options andissuance of common stock under our employee stock purchase plan. The resultingincrease in the number of outstanding shares could also affect our per shareresults of operations. However, we cannot predict the timing or amount ofproceeds from the exercise of these securities, or whether they will beexercised at all. Furthermore, we may continue our stock repurchase activityunder the share repurchase program approved by the Board of Directors andpublicly announced in May 2004. As of September 30, 2005,approximately 1.2 million shares were available to be repurchased under ourcurrent share repurchase plan.

 

At September 30, 2005, we had $105.7million in working capital. We currently have no significant capitalcommitments other than commitments under our operating leases, which declinedfrom $31.5 million at December 31, 2004 to $23.6 million at September 30,2005.

 

The following table summarizes ourcontractual cash obligations as of September 30, 2005 (in thousands):

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|---------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                            | ** ** | **December 31**   | ** ** | **Year Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **2005**               | ** ** | **2006**                        | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating  lease obligations, net of sub-lease income |       | $                      | 2,040      |                            | $          | 6,918      |       | $          | 5,184      |       | $          | 4,883          |       | $          | 1,941      |   | $ | 2,584 |   | $ | 23,550 |   |
|                                                       |            |                        |            |                                 |            |            |            |            |            |            |            |                |            |            |            |  |  |  |  |  |  |  |

 

34

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At September 30, 2005 and December 31,2004, we did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes. As such, we are not materially exposed to anyfinancing, liquidity, market or credit risk that could arise if we had engagedin such relationships.

 

We have taken numerous actions over the lasttwo years to strengthen our cash position and balance sheet and to improve ourability to generate positive cash flow from operating activities. Many of theseactions were taken in the last half of 2003 in order to offset the negativeimpacts of the economic downturn and decreased information technology spendingwhich negatively impacted our net revenues.

 

We expect that for the foreseeable future,our operating expenses will continue to constitute a significant use of cashflow. In addition, we may use cash to fund acquisitions or invest in otherbusinesses. Based upon our past performance and current expectations, webelieve that our cash and cash equivalents, marketable securities and cashgenerated from operations will be sufficient to satisfy our working capitalneeds, capital expenditures, investment requirements, stock repurchases andfinancing activities for at least the next twelve months. 

 

**Off-Balance Sheet Arrangements and ContractualObligations**

 

Our off-balance sheet arrangements as of September 30,2005 consist of obligations under operating leases. See Note 13, “Commitmentsand Contingencies” to the condensed consolidated financial statements and the “Liquidityand Capital Resources” section above for further discussion and a tabularpresentation of our contractual obligations.

 

###### ***RISK FACTORS***

######  

*Investors should carefully consider the risksdescribed below before making an investment decision. These risks are not theonly ones we face. Additional risks we are not presently aware of or that we currentlybelieve are immaterial may also impair our business operations. Our businesscould be harmed by any of these risks. The trading price of our common stockcould decline due to any of these risks. In assessing these risks, investorsshould also refer to the other information contained or incorporated byreference in this Quarterly Report on Form 10-Q filed with the SEC,including our condensed consolidated financial statements and related notesthereto.*

 

**Our Operating Results May FluctuateSignificantly.**

 

Although we are transitioning to a predominantterm license model, perpetual licenses still constitute over two-thirds of ourquarterly software license revenues. Individual perpetual software licensesvary significantly in value, and the value and timing of these transactions cantherefore cause our quarterly license revenues to fluctuate. We have oftenrecognized a substantial portion of each quarter’s license revenues in the lastmonth, weeks or even days of the quarter. As a result, the magnitude ofquarterly fluctuations in license revenue may not be evident until late in orafter the close of a particular quarter and a disruption late in the quartermay have a disproportionately large negative impact on revenue. In addition,some of our large professional services contracts contain performancemilestones or acceptance clauses, which affect the timing of revenue recognizedunder such contracts. As a result of these and other factors, our quarterly netrevenues may fluctuate significantly. Our expense levels are based insignificant part on our expectations of future revenues and therefore arerelatively 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 mayadversely affect our operating results. These factors have impacted and maycontinue to impact our operating results.

 

We are in a transition from selling predominantlyperpetual licenses to selling a mix of perpetual and multi-year term licenses,and we expect term license revenue to increase as a proportion of total licenserevenue in the future. We recognize revenue for term licenses ratably over theperiod of the contract term, which is typically three to five years. Includingour entry level product, Advent Office Essentials, we recognized approximately27% of license revenue from term licenses in the third quarter of 2005. If weare successful in our strategy to increase the proportion of our businesssigned on term license contracts, it will result in a greater portion oflicense revenue being deferred and as a result, our license revenue andprofitability could be reduced in the short term. However, over the long-termthe increases in deferred license revenue and backlog, which we define as thevalue of multi-year term license contracts not included in deferred revenue,will lower the quarterly variability of license revenues. 

 

In addition, we experience seasonality in ourlicense revenue. The fourth quarter of the year typically has the highestlicense revenue, followed by lower license revenue in the first quarter of thesucceeding year. We believe that this seasonality

 

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results primarily from customer budgeting cycles and expect thisseasonality to continue in the future, although if we are successful in movingmore of our licenses to a term model, we believe the impact of this seasonalitywill likely decrease.

 

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

 

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

 

The purchase of our software products oftenrequires prospective customers to provide significant executive-levelsponsorship and to make major systems architecture decisions. As a result, wemust generally engage in a relatively lengthy sales and contracting efforts.Sales transactions may therefore be delayed during the customer decisionprocess because we must provide a significant level of education to prospectivecustomers regarding the use and benefit of our products. This has beenexacerbated by the adverse and uncertain economic conditions that have causedexisting and potential clients to reduce or cancel expenditures and delaydecisions related to acquisition of software and related services. While wehave seen somewhat improved economic conditions over the past few quarters,customers are still cautious about capital and information technologyexpenditures. As a result, the sales cycle associated with the purchase of oursolutions is typically between two and twelve months depending upon the size ofthe client, and is subject to a number of significant risks over which we havelittle or no control, including customers’ budgeting constraints, internalselection procedures, and changes in customer personnel, among others. As aresult of a lengthy and unpredictable sales cycle, we have limited ability toforecast the timing and amount of specific license sales. The timing of largeindividual license sales is especially difficult to forecast, and we may not besuccessful in closing large license transactions on a timely basis or at all.In addition, customers may postpone their purchases of our existing products orproduct enhancements in advance of the anticipated introduction of new productsor product enhancements by us or our competitors. Because our expenses arerelatively fixed in the near term, any shortfall from anticipated revenuescould result in a significant variation in our operating results from quarterto quarter.

 

**We Depend Heavily on Our Product, Axys®.**

 

Historically, we have derived a significantportion of our net revenues from the licensing of Axys, and related ancillaryproducts and services. In addition, many of our other applications, such asPartner, Moxy, Qube and various data interfaces were designed to operate withAxys to provide an integrated solution. As a result, we believe that for theforeseeable future a majority of our net revenues will depend upon continuedmarket acceptance of Axys, as well as enhancements or upgrades to thoseproducts and related products and services. As our clients include a range of financialservices organizations, including asset managers, investment advisors,brokerage firms, banks, family offices, hedge funds and others, continuedmarket acceptance also will depend on the number of firms within each type oforganization and the degree to which Axys has previously penetrated those firmsand our ability to introduce new and upgraded products, such as APX, to thosefirms as well as new customers. 

 

**We Depend upon Financial Markets.**

 

The target clients for our products include arange of financial services organizations that manage investment portfolios,including asset managers, investment advisors, brokerage firms, banks, familyoffices, hedge funds and others. In addition, we target corporations, publicfunds, universities and non-profit organizations, which also manage investmentportfolios and have many of the same needs. The success of many of our clientsis intrinsically linked to the health of the financial markets. We believe thatdemand for our solutions has been, and could continue to be, disproportionatelyaffected by fluctuations, disruptions, instability or downturns in thefinancial services industry which may cause clients and potential clients toexit the industry or delay, cancel or reduce any planned expenditures forinvestment management systems and software products. In addition, a slowdown inthe formation of new investment firms, especially hedge funds, or a decline inthe growth of assets under management would cause a decline in demand for oursolutions. We believe that the downturn in the financial services industry andthe decline in information technology spending had a negative impact on thedemand for our products in fiscal 2002 and 2003, and that future uncertaintyabout financial markets and the financial services sector could have a materialadverse effect on our business and results of operations. 

 

**Uncertain Economic Conditions May Continueto Affect Our Revenues.**

 

We believe that the market for largeinvestment management software systems may be negatively impacted by a numberof factors, including reductions in capital expenditures by large customers,poor performance of major financial markets, and increasing competition. Thosefactors may, in turn, give rise to a number of market trends which weexperienced in fiscal 2002 and 2003 that have slowed revenue growth across thefinancial services industry, including longer sales and contracting cycles,deferral or delay of information technology projects and generally reducedexpenditures for software and related services. If there were a significant downturnin the financial services industry and information technology spending, thepresence of these factors

 

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in the market for large investment management solutions will likelymaterially adversely affect our business and results of operations.

 

**We Face Intense Competition.**

 

The market for investment management softwareis intensely competitive and highly fragmented, is subject to rapid change andis sensitive to new product introductions and marketing efforts by industryparticipants. Our largest single source of competition is from proprietarysystems used by existing and potential clients, many of whom develop their ownsoftware for their particular needs and therefore may be reluctant to licensesoftware products offered by independent vendors like Advent. Other competitorsinclude providers of software and related services as well as providers ofoutsourced services, and include some of the following vendors: Beauchamp,Charles River Development, CheckFree Corporation, DST International, the Eaglesubsidiary of Mellon Financial Corporation, Eze Castle Software, FT Integretorsia,IBSI, Indata, LatentZero, Linedata, Macgregor Financial Technologies, SchwabPerformance Technologies, Simcorp A/S, SS&C Technologies, Inc., SunGard,and the Portia Division of Thomson Financial.

 

Our competitors vary in size, scope ofservices offered and platforms supported. Many of our competitors have longeroperating histories and greater financial, technical, sales and marketingresources than we do. During 2005, two competitors have announced plans to bebought out by private equity firms, with the possibility of forming even largercompanies through additional acquisitions of companies and technologies. Inaddition, we also face competition from potential new entrants into our marketthat may develop innovative technologies or business models. We cannotguarantee that we will be able to compete successfully against current andfuture competitors or that competitive pressure will not result in pricereductions, reduced operating margins or loss of market share, any one of whichcould seriously harm our business.

 

**We Must Continue to Introduce New Productsand Product Enhancements.**

 

The market for our products is characterizedby rapid technological change, changes in customer demands and evolvingindustry standards. New products based on new technologies or new industrystandards can render existing products obsolete and unmarketable. As a result,our future success will continue to depend upon our ability to develop newproducts or product enhancements that address the future needs of our targetmarkets and to respond to these changing standards and practices, such as our APXproduct. We may not be successful in developing, introducing,  marketing and licensing our APX product orother new products or product enhancements on a timely and cost effectivebasis, or at all, and our new products and product enhancements may notadequately meet the requirements of the marketplace or achieve marketacceptance. Delays in the commencement of commercial shipments of new productsor enhancements may result in client dissatisfaction and delay or loss ofproduct revenues. In addition, clients may delay purchases in anticipation ofnew products or product enhancements. If we are unable, for technological orother reasons, to develop and introduce new products or enhancements ofexisting products in a timely manner in response to changing market conditionsor client requirements, or if new products or new versions of existing productsdo not achieve market acceptance, our business would be seriously harmed. In addition,our ability to develop new products and product enhancements is dependent uponthe products of other software vendors, including certain system softwarevendors, such as Microsoft Corporation, Sun Microsystems, database vendors anddevelopment tool vendors. If the products of such vendors have design defectsor flaws, are unexpectedly delayed in their introduction, or are unavailable onacceptable terms, our business could be seriously harmed. Our software productsare complex and may contain undetected defects or errors when first introducedor as new versions are released. Although we have not experienced adverseeffects resulting from any software errors, we cannot be sure that, despitetesting by us and our clients, defects or errors will not be found in newproducts after commencement of commercial shipments, resulting in loss of ordelay in market acceptance, which could seriously harm our business. 

 

**We Must Retain and Recruit Key Employees.**

 

We believe that our futuresuccess is dependent on the continued employment of our senior managementand our ability to identify, attract, motivate and retain qualifiedtechnical, sales and other personnel. We need technical resources such asour product development engineers to develop new products and enhance existingproducts and we rely upon sales personnel to sell our products and services andmaintain healthy business relationships. We therefore needto identify, attract, motivate and retain such employees with therequisite education, backgrounds and industry experience. If we are unableto do so, our business could be harmed. In addition, we must attract andretain financial and accounting personnel to comply with the requirements of Section 404of the Sarbanes-Oxley Act of 2002. 

 

We have relied on our ability to grant equitycompensation as one mechanism for recruiting and retaining such highly skilledpersonnel. Recently enacted accounting regulations requiring the expensing ofequity compensation may impair our ability to provide these incentives withoutincurring significant compensation costs. If we are unable to continue tosuccessfully attract and retain key personnel, our business may be harmed. 

 

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We may also choose to create additionalperformance and retention incentives in order to retain our employees,including the granting of additional stock options to employees or issuingincentive cash bonuses. Such incentives may either dilute our existingstockholder base or result in unforeseen operating expenses, which may causeour stock price to fall.

 

**We Face Challenges in Expanding OurInternational Operations.**

 

We market and sell our products in the UnitedStates and, to a lesser extent, internationally. In 1999, we entered into adistributor relationship with Advent Europe, an independent distributor of ourproducts in selected European markets. In November 2001, we acquired theNorwegian, Swedish, and Danish companies of this independent distributor. In September 2002,we purchased their Greek subsidiary; in May 2003, we purchased their Dutchsubsidiary; and in May 2004, we purchased their remaining subsidiaries inthe United Kingdom and Switzerland and certain assets of Advent Europe. Tofurther expand our international operations, we would need to establishadditional locations, acquire other businesses or enter into additionaldistribution relationships in other parts of the world. Any further expansionof our existing international operations and entry into new internationalmarkets could require significant management attention and financial resources.We cannot be certain that establishing businesses in other countries willproduce the desired levels of revenues. We currently have limited experience indeveloping localized versions of our products and marketing and distributingour products internationally. In addition, international operations are subjectto other inherent risks, including:

 

•                  the impact ofrecessions in economies outside the United States;

•                  greaterdifficulty in accounts receivable collection and longer collection periods;

•                  unexpectedchanges in regulatory requirements;

•                  difficulties insuccessfully adapting our products to the language, regulatory and technologystandards of other countries;

•                  difficulties inand costs of staffing and managing foreign operations;

•                  reducedprotection for intellectual property rights in some countries;

•                  potentiallyadverse tax consequences; and

•                  political andeconomic instability.

 

The revenues, expenses, assets andliabilities of our international subsidiaries are primarily denominated inlocal currencies. We have not historically undertaken foreign exchange hedgingtransactions to cover potential foreign currency exposure. Future fluctuationsin currency exchange rates may adversely affect revenues and accountsreceivable from international sales and the U.S. dollar value of our foreignsubsidiaries’ revenues, expenses, assets and liabilities. Our internationalrevenues from our European subsidiaries are generally denominated in local foreigncurrencies, with the exception of our Geneva license transactions.

 

**Difficulties in Integrating Our Acquisitionsand Expanding Into New Business Areas Have Impacted and Could Continue toAdversely Impact Our Business and We Face Risks Associated with PotentialAcquisitions, Investments, Divestitures and Expansion.**

 

From 2001 through the middle of 2003, ourstrategy focused on growth through the acquisition of additional complementarybusinesses. During those years, we made five major acquisitions includingKinexus Corporation, Techfi Corporation and Advent Outsource Data ManagementLLC, and also acquired all of the common stock of five of our Europeandistributor’s subsidiaries. In addition, we purchased our European distributor’sremaining two subsidiaries in the United Kingdom and Switzerland in May 2004.

 

The complex process of integrating ouracquisitions 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 strainedand could continue to strain our managerial resources, resulting in thediversion of these resources from our core business objectives. Failure toachieve the anticipated benefits of these acquisitions or to successfullyintegrate the operations of these entities has harmed and could continue toharm our business, results of operations and cash flows. For example, in thefirst quarter of 2003, we closed our Australian subsidiary because it failed toperform at a satisfactory profit level. In addition, as we have expanded intonew business areas and offerings through strategic alliances and internal development,as well as acquisitions, some of this expansion has required significantmanagement time and resources without generating significant revenues. We havehad difficulty and may continue to have difficulty creating demand for suchofferings, and revenue growth for these newer business areas has suffered andmay continue to suffer. For example, demand for our Techfi product line wassignificantly lower than expected and thus we discontinued certain productswithin our Techfi product line in September 2004. As a result, we recordeda non-cash impairment charge of $3.4 million in the third quarter of 2004 towrite-off the carrying value of certain Techfi-related intangible assets.  

 

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We may not realize the anticipated benefitsfrom our acquisitions because of the following significant challenges:

 

•                  expected synergybenefits 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 andfacilities;

•                  potentiallyincompatible cultural differences between the companies;

•                  incorporatingthese companies’ technologies and products into our current and future productlines;

•                  geographicdispersion of operations and the complexities of international operations;

•                  integrating thetechnical teams of these companies with our engineering organizations;

•                  generatingmarket demand for an expanded product line;

•                  integrating theproducts of these companies with our business, because we do not havedistribution, manufacturing, marketing or support experience for theseproducts;

•                  the difficultyof leveraging our combined technologies and capabilities across all product linesand customer bases; and

•                  our inability toretain significant customers or key employees of these entities.

 

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

 

•                  integrating andreorganizing operations, including combining teams, facilities and processes invarious functional areas;

•                  identifyingduplicative or redundant resources and facilities, developing plans forresource consolidation and implementing those plans;

•                  fees andexpenses of professionals and consultants involved in completing theintegration process;

•                  settlingexisting liabilities of these companies;

•                  uncoveringthrough our audit process new issues reflected on the companies’ financialstatements;

•                  vacating,sub-leasing and closing facilities;

•                  employeerelocation, redeployment or severance costs;

•                  discontinuingcertain products and services;

•                  integratingtechnology and products; and

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

 

We may make additional acquisitions ofcomplementary companies, products or technologies in the future. In addition,we periodically evaluate the performance of all our products and services andmay sell or discontinue current products and services. Failure to achieve theanticipated benefits of any future acquisition or divestiture could harm ourbusiness, results of operations and cash flows. Furthermore, we may have toincur debt, write-off investments, infrastructure costs or other assets, incurseverance liabilities, write-off impaired goodwill or other intangible assetsor issue equity securities to pay for any future acquisitions. The issuance ofequity securities could dilute our existing stockholders’ ownership. Finally,we may not identify suitable businesses to acquire or negotiate acceptableterms for future acquisitions.

 

**Writing Off Investments Could Harm OurResults of Operations.**

 

We have made investments in privately heldcompanies, which we classify as other assets on our condensed consolidatedbalance sheets. The value of these investments is influenced by many factors,including the operating effectiveness of these companies, the overall health ofthese companies’ industries, the strength of the private equity markets andgeneral market conditions. Due to these and other factors, we have previouslydetermined, and may in the future determine, that the value of theseinvestments is impaired, which has caused and would cause us to write down thecarrying value of these investments, such as the write-downs of our investmentsof $2.0 million and $13.5 million in fiscal 2003 and 2002, respectively.Furthermore, we cannot be sure that future investment, license, fixed asset orother asset write-downs will not happen. If future write-downs do occur, theycould harm our business and results of operations.

 

**Information We Provide to Investors IsAccurate Only as of the Date We Disseminate It.**

 

From time to time, we may publiclydisseminate forward-looking information or guidance in compliance withRegulation FD. This information or guidance represents our outlook only as ofthe date we disseminate it, and we do not undertake to update such informationor guidance.

 

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**Our Stock Price Has Fluctuated Significantly.**

 

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

 

**If Our Relationship with FinancialTimes/Interactive Data Is Terminated, Our Business May Be Harmed.**

 

Many of our clients use our proprietaryinterface to electronically retrieve pricing and other data from FinancialTimes/Interactive Data (FTID). FTID pays us a commission based on theirrevenues from providing this data to our clients. Our software products havebeen customized to be compatible with their system and this software would needto be redesigned if their services were unavailable for any reason. Terminationof our agreement with FTID would require at least two years notice by either usor them, or 90 days in the case of material breach. Our revenue could beadversely impacted if our relationship with FTID was terminated or theirservices were unavailable to our clients for any reason. 

 

**Potential Changes in Securities Laws and RegulationGoverning the Investment Industry’s Use of Soft Dollars May Reduce OurRevenues.**

 

Approximately 600 of our clients utilize softdollars to pay for software products and services, both through ourbroker/dealer subsidiary, Second Street Securities, and through otherindependent broker/dealers. During the nine months ended September 30,2005, the total value of Advent products and services paid with soft dollarswas approximately 6% of our total billings. In May of 2004, the SEC andthe National Association of Securities Dealers (the “NASD”) set up a task forceto consider soft dollar arrangements in the industry, and to provide the SECwith guidance on improving the transparency of fund transaction costs anddistribution arrangements. Phase I of the task force focused on soft dollarsand concluded with “The Report of the Mutual Fund Task Force on Soft Dollarsand Portfolio Transaction Costs”, delivered to the SEC in November 2004and recommending the SEC to:

 

****•********                 ********Narrowthe definition of “research” to items that principally benefit the fund’sclients rather than the manager;****

****•********                 ********Enhancedisclosure of expenses, soft dollar policies, and broker allocations to fundboards as well as clients and prospects; and****

****•********                 ********Considersoft-dollar issues raised by other managed advisory accounts.****

**** ****

****Phase II of the task force focused on distributionarrangements, including 12b-1 fees and revenue sharing, and its recommendationsare detailed in “Report of the Mutual Fund Task Force – Mutual FundDistribution”.****

**** ****

****Additionally, in March 2005, the UK Financial ServicesAgency (the “FSA”) published a consultation paper to address lack oftransparency and management of conflicts of interest regarding soft commissionsand bundled brokerage arrangements. The FSA focused on limiting commissions tothe purchase of execution and narrowing the definition of research servicesalong with enhancing disclosures regarding costs of execution and research.****

**** ****

****The SEC has proposed a rule on soft or bundledcommissions as it appears to be taking into consideration a wide range ofissues relating to mutual fund regulation. If additional rules are issuedthat narrow the definition of research, which results in our clients beingunable to use soft dollar arrangements to pay for Advent products and services,our revenues could decrease.****

 

**If We Are Unable to Protect Our IntellectualProperty We May Be Subject to Increased Competition that Could SeriouslyHarm Our Business.**

 

Our success depends significantly upon ourproprietary technology. We currently rely on a combination of copyright andtrademark laws, trade secrets, confidentiality procedures and contractualprovisions to protect our proprietary rights. We have registered trademarks formany of our products and services and will continue to evaluate theregistration of additional trademarks as appropriate. We generally enter intoconfidentiality agreements with our employees and with our resellers andcustomers. We seek to protect our software, documentation and other writtenmaterials under trade secret and copyright laws, which afford only limitedprotection. Despite these efforts, it may be possible for unauthorized thirdparties to copy certain portions of our products or to reverse engineer orotherwise obtain and use our proprietary information. We do not have anypatents, and existing copyright and trade secret laws afford only limitedprotection. In addition, we cannot be certain that others will not developsubstantially

 

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equivalent or superseding proprietary technology, or that equivalentproducts will not be marketed in competition with our products, therebysubstantially reducing the value of our proprietary rights. We cannot be surethat we will develop proprietary products or technologies that are patentable,that any patent, if issued, would provide us with any competitive advantages orwould not be challenged by third parties, or that the patents of others willnot adversely affect our ability to do business. Litigation may be necessary toprotect our proprietary technology which may be time-consuming and expensive.Despite our efforts to protect our proprietary rights, unauthorized parties mayattempt to copy aspects of our products or to obtain and use information thatwe regard as proprietary. In addition, the laws of some foreign countries donot protect proprietary rights to as great an extent as do the laws of theUnited States. We cannot be sure that our means of protecting our proprietaryrights will be adequate or that our competitors will not independently developsimilar technology, duplicate our products or design around any patent that maybe issued to us or other intellectual property rights of ours.

 

**If We Infringe the Intellectual PropertyRights of Others, We May Incur Additional Costs or Be Prevented fromSelling Our Products and Services.**

 

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

 

**Business Disruptions Could Adversely AffectOur Business.**

 

Our operations are exposed to potentialdisruption by fire, earthquake, power loss, telecommunications failure, andother events beyond our control. Additionally, we are vulnerable tointerruption caused by political and terrorist incidents. For example, ourfacilities in New York were temporarily closed due to the September 11,2001 terrorist attacks. Immediately after the terrorist attacks, our clientswho were located in the World Trade Center area were concentrating on disasterrecovery rather than licensing additional software components, while thegrounding of transportation impeded our ability to deliver professionalservices at client sites. Additionally, during the temporary closure of theU.S. stock markets, our clients did not use our market data services. Ourcorporate headquarters are located in the San Francisco Bay Area, which is aregion with significant seismic activity. Earthquakes such as that experiencedin 1989 could disrupt our business. Such disruptions could affect our abilityto sell and deliver products and services and other critical functions of ourbusiness and could seriously harm us. Further, such disruptions could causeinstability in the financial markets upon which we depend.

 

**Undetected Software Errors or Failures Foundin New Products May Result in Loss of or Delay in Market Acceptance of OurProducts that Could Seriously Harm Our Business.**

 

Our products may contain undetected softwareerrors or failures or scalability limitations at any point in the life of theproduct, but particularly when first introduced or as new versions arereleased. Despite testing by us and by current and potential customers, errorsmay not be found in new products until after commencement of commercialshipments, resulting in a loss of or a delay in market acceptance, damage toour reputation, customer dissatisfaction and reductions in revenues and margins,any of which could seriously harm our business. Additionally, our agreementswith customers that attempt to limit our exposure to liability claims may notbe enforceable in jurisdictions where we operate.

 

**Recently Enacted and Proposed Changes in SecuritiesLaws and Regulations Will Increase Our Costs.**

 

The Sarbanes-Oxley Act (“the Act”) of 2002,which became law in July 2002, required changes in some of our corporategovernance and securities disclosure and/or compliance practices. As part ofthe Act’s requirements, the SEC has enacted new rules on a variety ofsubjects, and the NASDAQ Stock Market has enacted new corporate governancelisting requirements. These developments have increased and may in the futureincrease our accounting and legal compliance costs and could also expose us toadditional liability if we fail to comply with these new rules andreporting requirements. In fiscal 2004, we incurred approximately $2.1 millionin Sarbanes-Oxley related expenses. In addition, such developments may makeretention and recruitment of qualified persons to serve on our board ofdirectors or in executive management positions more difficult. We continue toevaluate and monitor regulatory and legislative developments and cannotreliably estimate the timing or magnitude of all costs we may incur as a resultof the Act or other related legislation or regulation.

 

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**Our Financial Results Will be Affected byChanges in the Accounting Rules Governing the Recognition of Stock-basedCompensation Expense.**

 

We measure compensation expense for ouremployee stock compensation plans under the intrinsic value method ofaccounting prescribed by APB Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”). In December 2004, the FASB issued SFAS No. 123R,which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”)and supercedes APB 25. SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values, beginning with the firstinterim or annual period after June 15, 2005, with early adoptionencouraged. The pro forma disclosures previously permitted under SFAS 123 nolonger will be an alternative to financial statement recognition. In April 2005,the SEC subsequently adopted a new rule delaying compliance with SFAS 123Runtil the beginning of the Company’s next fiscal year, instead of the nextreporting period, that begins after June 15, 2005. Under the SEC’s recentrule, we are required to adopt SFAS 123R in our first quarter of fiscal2006, beginning January 1, 2006. Under SFAS 123R, we must determinethe appropriate fair value model to be used for valuing share-based payments,the amortization method for compensation cost and the transition method to beused at date of adoption. The transition method includes prospective andretroactive adoption methods. Under the retroactive method, prior periods maybe restated either as of the beginning of the year of adoption or for allperiods presented. The prospective method requires that compensation expense berecorded for all unvested stock options and restricted stock at the beginningof the first quarter of adoption of SFAS 123R, while the retroactivemethod would record compensation expense for all unvested stock options andrestricted stock beginning with the first period restated. We are evaluatingthe requirements of SFAS 123R and we expect that the adoption ofSFAS 123R will have a material impact on our consolidated results ofoperations and earnings per share. We have not yet determined the method ofadoption or the effect of adopting SFAS 123R, and we have not determinedwhether the adoption will result in amounts that are similar to the current proforma disclosures under SFAS 123.

 

**Security Risks May Harm Our Business.**

 

The secure transmission of confidentialinformation over public networks is essential to commerce and communications,particularly in the market in which Advent operates. Advances in computercapabilities, new discoveries in the field of cryptography or other events ordevelopments could result in compromises or breaches of our security systems.Anyone who circumvents our security measures could misappropriate proprietaryinformation or cause interruptions in our services or operations. In addition,computer viruses or software programs that disable or impair computers could beintroduced into our systems or those of our customers or other third parties,which could disrupt or make our systems inaccessible to customers. Our securitymeasures may be inadequate to prevent security breaches, which could harm ourbusiness, exposing us to a risk of loss, litigation and other possibleliabilities, as well as possibly requiring us to expend significant capital andother resources to protect against the threat of security breaches or toalleviate problems caused by such breaches. 

 

**If We Fail to Maintain an Effective System ofInternal Control, We May Not be Able to Accurately Report Our FinancialResults. As a Result, Current and Potential Stockholders Could Lose Confidencein Our Financial Reporting, Which Would Harm Our Business and the Trading Priceof Our Stock. **

 

Effective internal control is necessary for us toprovide reliable financial reports. If we can not provide reliable financialreports, our business and operating results could be harmed. We have in thepast discovered, and may in the future discover, areas of our internal controlthat need improvement including control deficiencies that may constitutematerial weaknesses. For example, as of December 31, 2004, the Company didnot maintain effective controls over the valuation of its property andequipment accounts, including the related restructuring provision. Specifically,the Company’s impairment analysis of its property and equipment accountsrelated to our decision to vacate a facility failed to identify and include allapplicable assets. This control deficiency resulted in a restatement of theCompany’s financial statements for the quarters ended June 30, 2004 and September 30,2004 and an adjustment to the fourth quarter 2004 financial statements. 

 

TheCompany also did not maintain effective controls over the accounting for incometaxes, including the determination of income taxes payable, deferred income taxassets and liabilities and the related income tax provision as of December 31,2004. Specifically, the Company did not have controls to identify that deferredincome tax assets and related deferred income tax valuation allowances had beeninappropriately recorded. Further, the Company did not have controls in placeto include all state income tax liabilities in its income taxes payableaccount. These control deficiencies resulted in a restatement of the Company’sfinancial statements for the year ended December 31, 2003, the quartersended March 31, 2004, June 30, 2004 and September 30, 2004, andan adjustment to the fourth quarter 2004 financial statements.

 

Managementhas determined that these control deficiencies constituted material weaknessesas of December 31, 2004. Consequently, management concluded that theCompany’s internal control over financial reporting was not effective as of December 31,2004 based on criteria set forth by the Committee of Sponsoring Organizationsof the Treadway Commission in *InternalControl-Integrated Framework*. The Company has begun executing on aremediation plan, as discussed in

 

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“Management’s Report onInternal Control over Financial Reporting” included in Item 8 of our AnnualReport on Form 10-K for the year ended December 31, 2004 (“2004 10-K”),and has implemented the new control procedures and has hired additional taxaccounting resources as of the end of the third quarter of 2005. 

 

TheCompany also did not maintain effective controls over its disclosure forstock-based employee compensation expense under SFAS 123, as amended by SFAS148, including the calculation of the effect of a stock option exchange programthat took place on December 4, 2002, and the overall determination of thetax treatment of the pro forma option expense. This control deficiency willresult in a restatement of the disclosure for stock-based employee compensationexpense for fiscal 2002, 2003 and 2004 included in Note 1 to the previouslyissued financial statements contained in our 2004 10-K together with theassociated disclosure for the first three quarters of fiscal 2003 and 2004.Management has determined that this control deficiency also constituted amaterial weakness as of December 31, 2004, March 31, 2005, June 30,2005 and September 30, 2005. The Company has added an additional item toits remediation plan to improve controls over its disclosure of stock-basedemployee compensation expense based on this deficiency and expects to haveimplemented these control procedures by the end of fiscal 2005.

 

Anyfailure to implement or maintain the improvements in our internal control overfinancial reporting, or difficulties encountered in the implementation of theseimprovements in our controls, could cause us to fail to meet our reportingobligations. Any failure to improve our internal control to address theseidentified weaknesses could also cause investors to lose confidence in ourreported financial information, which could have a negative impact on thetrading price of our stock.

 

**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 the recent acquisitionsof Advent Europe’s remaining distributors in the United Kingdom andSwitzerland, whose revenues, with the exception of Geneva transactions andcapital spending, are transacted in local country currencies, we have greaterexposure to foreign currency fluctuations. Because the results of operationsfrom these territories are not material to our operating results, ahypothetical 10% change in foreign currency exchange rates would not have amaterially adverse effect on our consolidated financial position, results ofoperations or cash flows.

 

Our interest rate risk relates primarily toour investment portfolio, which consisted of $48.9 million in cashequivalents and $91.0 million in marketable securities as of September 30,2005. An immediate sharp increase in interest rates could have a materialadverse affect on the fair value of our investment portfolio. Conversely,immediate sharp declines in interest rates could seriously harm interestearnings of our investment portfolio. We do not currently use derivative financialinstruments in our investment portfolio, nor hedge for these interest rateexposures.

 

By policy, we limit our exposure tolonger-term investments, and a majority of our investment portfolio at September 30,2005 and December 31, 2004 had maturities of less than one year. As aresult of the relatively short duration of our portfolio, an immediatehypothetical parallel shift to the yield curve of plus 25 basis points (BPS),50 BPS and 100 BPS would result in a reduction of 0.15% ($211,000), 0.30% ($423,000)and 0.60% ($846,000), respectively, in the market value of our investmentportfolio as of September 30, 2005.

 

We have also invested in severalprivately-held companies, most of which can still be considered in the start-upor development stages. These non-marketable investments are classified as otherassets on our balance sheet. Our investments in privately-held companies couldbe affected by an adverse movement in the financial markets for publicly-tradedequity securities, although the impact cannot be directly quantified. Theseinvestments are inherently risky as the market for the technologies or productsthese privately-held companies have under development are typically in theearly stages and may never materialize. The value of these investments is alsoinfluenced by factors including the operating effectiveness of these companies,the overall health of the companies’ industries and the strength of the privateequity markets. We could lose our entire investment in these companies. At September 30,2005 our net investments in privately-held companies totaled $8.5 million. 

 

**Item 4****.  Controls andProcedures**

 

**Evaluation of disclosure controls and procedures.**

 

The Company’s management evaluated, with theparticipation of the Chief Executive Officer and Chief Financial Officer, theeffectiveness of the Company’s disclosure controls and procedures, as such termis defined under Rule 13a-15(f) of the Securities and Exchange Act of1934, as of the end of the period covered by this Quarterly Report on Form 10-Q.Based on this evaluation, the Chief Executive Officer and Chief FinancialOfficer have concluded that because the material weakness in

 

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internalcontrol over financial reporting relating to the accounting for income taxes whichwas previously identified in “Management’s Report on Internal Control overFinancial Reporting” included in Item 8 of our Annual Report on Form 10-Kfor the year ended December 31, 2004 (“2004 10-K”) has not yet beenremediated, and because of the additional material weakness relating to thedisclosure for stock-based employee compensation as previously described in “Evaluationof disclosure controls and procedures” included in Item 4 of our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2005, ourdisclosure controls and procedures were ineffective as of September 30,2005 to ensure that information we are required to disclose in reports that wefile or submit under the Securities Exchange Act of 1934 (i) is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms and (ii) isaccumulated and communicated to Advent’s management, including our ChiefExecutive Officer and our Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure.

 

**Changes in internal controlover financial reporting.**

 

Management has implemented the following changes inour internal control over financial reporting during the third quarter ended September 30,2005 that has materially affected, or is reasonably likely to materiallyaffect, Advent’s internal control over financial reporting. Management continuesto work on its remediation plan to address the material weakness relating to theaccounting for income taxes identified in our 2004 10-K and the materialweakness relating to the disclosure for stock-based employee compensationexpense identified on May 6, 2005 described in our Quarterly Report on Form 10-Qfor the quarter ended March 31, 2005. During the third quarter of 2005, Adventhired additional tax personnel and is also utilizing the services of an outsidetax consultant. Advent intends to complete the remediation of its materialweakness related to the disclosure for stock-based employee compensationexpense during the fourth quarter of 2005. During the quarter, Advent utilizedthe services of outside consultants to assist in completing remedial work onour employee options database and applied internal resources to preparing thecalculations for the tax impact of employee option exercises. However, becausethe requirement of PricewaterhouseCoopers LLP, our independent registeredpublic accounting firm, to perform an evaluation of management’s assessment andtheir own audit of the Company’s internal control over financial reporting isan annual one, there is a risk that PricewaterhouseCoopers LLP will not concurwith management’s assessment that the material weaknesses related to theaccounting for income taxes and the disclosure for stock-based employeecompensation expense have been remediated, nor may they concur with our opinionthat the material weakness relating to the valuation of its property andequipment accounts, including the related restructuring provision was remediatedduring the second quarter of 2005, when they perform their audit work for theyear ending December 31, 2005. 

 

**PART II. OTHER INFORMATION**

 

**Item 1.****           Legal Proceedings**

 

On March 8, 2005, certain of the formershareholders of Kinexus and the shareholders’ representative filed suit againstAdvent in the Delaware Chancery Court. The complaint alleges that Adventbreached the Agreement and Plan of Merger dated as of December 31, 2001pursuant to which Advent acquired all of the outstanding shares of Kinexus dueprincipally to the fact that no amount was paid by Advent on an earn-out of upto $115 million. The earn-out, which was payable in cash or stock at theelection of Advent, was based upon Kinexus meeting certain revenue targets inboth 2002 and 2003. The complaint seeks unspecified compensatory damages, anaccounting and restitution for unjust enrichment. Advent advised theshareholders’ representative in January 2003 that the earn-out terms hadnot been met in 2002 and accordingly no earn-out was payable for 2002 and wouldnot be payable for 2003. Advent disputes the plaintiffs’ claims and believesthat it has meritorious defenses and intends to vigorously defend this action.Management believes that any potential loss associated with this litigation isneither probable nor reasonably estimable at this time and accordingly has notaccrued any amounts for any potential loss. 

 

On May 26, 2005, certain of the formermembers of Advent Outsource Data Management LLC (“plaintiffs”) filed suitagainst Advent in San Francisco Superior Court. The complaint asserts claimsfor breach of contract, breach of the covenant of good faith and fair dealing,fraud, conversion, declaratory relief and accounting relating to allegedbreaches of the Agreement and Plan of Merger dated October 31, 2002 (“Agreement”).Pursuant to the Agreement, in addition to cash compensation, Advent agreed topay plaintiffs an “earn-out” payment based on “2003 Net Revenues” and “2004 NetRevenues” from sales of “Relevant Products” as defined by the Agreement with amaximum earn-out payment of $5 million. Advent has made earn-out payments toplaintiffs totaling approximately $3.9 million. However, plaintiffs claim thatthe earn-out payment should have been the maximum amount of $5 million. Based onthese allegations, plaintiffs seek compensatory damages of approximately $1.1million and other special damages including attorneys’ fees. Advent disputesthe plaintiffs’ claims and believes that it has meritorious defenses andintends to vigorously defend this action. In addition, on September 12,2005 and September 19, 2005, a total of four former employees of AdventOutsource Data Management, LLC filed suits against Advent in San FranciscoSuperior Court.  Each of the complaintsalleges substantially the same causes of action, including breach of contract,breach of the covenant of good faith and fair dealing, conversion, andviolations of various labor codes relating to alleged breaches of the

 

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respectiveemployment agreements in place with Advent. Pursuant to the employees'employment agreements, each of which was for a term ending December 31,2004, Advent agreed to pay an incentive compensation based on amounts receivedfor customer contracts for certain products, with a maximum incentivecompensation of $100,000 per employee for calendar year 2003 and 2004. Adventhas made the incentive compensation payments to these employees totaling$121,000; however, the employees claim that the incentive commission is notlimited by the term of the employment agreement and should have been themaximum amount of $100,000 per calendar year during the existence of therelevant customer contracts. Based on these allegations, the employees areseeking compensatory damages and other special damages, including attorney’sfees and costs of suit. Advent disputes the employee’s claims and believes thatit has meritorious defenses and intends to vigorously defend these actions. Managementbelieves that any potential loss associated with these lawsuits is neitherprobable nor reasonably estimable at this time and accordingly has not accruedany amounts for any potential loss. 

 

From time to time, we are involved in claims andlegal proceedings that arise in the ordinary course of business activitiesincluding commercial, employment and other matters. Based on currentlyavailable information, management does not believe that the ultimate outcome ofthese unresolved matters, individually and in the aggregate, is likely to havea material adverse effect on the Company’s financial position or results ofoperations. However, litigation is subject to inherent uncertainties and ourview of these matters may change in the future. Were an unfavorable outcome tooccur, there exists the possibility of a material adverse impact on ourfinancial position and results of operations for the period in which theunfavorable outcome occurs, and potentially in future periods.

 

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

 

**IssuerPurchases of Equity Securities**

 

In May 2004, the Board of Directorsapproved a plan to repurchase up to an additional 1.2 million shares of Advent’scommon stock in the open market. In September 2004, February 2005 andMay 2005, the Board authorized extensions of this stock repurchase programto cover the repurchase of an additional 0.8 million, 1.8 million and 1.0million shares of outstanding common stock, respectively. 

 

The following table provides a month-to-monthsummary of the repurchase activity under the current stock repurchase programduring the three months ended September 30, 2005:

 
| ** **          | ** ** | ** **                | ** ** | ** **    | ** ** | **Maximum**                   | ** ** |
|---------------------|------------|---------------------------|------------|---------------|------------|-------------------------------|------------|
| ** **          | ** ** | **Total**                 | ** ** | **Average**   | ** ** | **Number of Shares That**     | ** ** |
| ** **          | ** ** | **Number**                | ** ** | **Price**     | ** ** | **May Yet Be Purchased** | ** ** |
| ** **          | ** ** | **of Shares**             | ** ** | **Paid**      | ** ** | **Under Our Share**           | ** ** |
| ** **          | ** ** | **Purchased (1)**         | ** ** | **Per Share** | ** ** | **Repurchase Programs**       | ** ** |
| ** **          | ** ** | **(shares in thousands)** | ** ** |
| ** **          | ** ** | ** **                | ** ** | ** **    | ** ** | ** **                    | ** ** |
| July 2005      |       | —                    |       | $             | —     |                          | 1,377      |   |
| August 2005    |       | 156                       |       | 24.65         |       | 1,221                         |       |
| September 2005 |       | —                    |       | —        |       | 1,221                         |       |
|                |       |                      |       |          |       |                          |       |
| Total               |       | 156                       |       | $             | 24.65      |                          | 1,221      |   |

 

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

 

**Item 3.****           Defaults Upon SeniorSecurities**

 

None.

 

**Item 4.****           Submission of Mattersto a Vote of Security Holders**

 

None.

 

**Item5.****           OtherInformation**

 

None.

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**Item6.  Exhibits**

 

31.1               Certification ofChief Executive Officer under Section 302 of the Sarbanes-Oxley Act of2002

 

31.2               Certification ofChief Financial Officer under Section 302 of the Sarbanes-Oxley Act of2002

 

32.1               Certification ofChief Executive Officer under Section 906 of the Sarbanes-Oxley Act of2002

 

32.2               Certification ofChief Financial Officer under Section 906 of the Sarbanes-Oxley Act of2002

 

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**SIGNATURES**

 

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

 

 
|   |                         | ADVENT SOFTWARE, INC. |
|--------|------------------------------|-----------------------|
|   |                         |                  |   |
|   | Dated: November 9, 2005 | 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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