** **

**SECURITIES AND 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 the quarterly period ended September 30,  2001** |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

 

**or**

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

 

**Commission file number:0-26994**

 

**ADVENT SOFTWARE, INC.**

(Exact name of Registrantas specified in its charter)

** **

| **Delaware**                                                    |   | **94-2901952**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (IRS Employer  Identification Number) |
|                                                            |   |                                  |
| **301 Brannan Street, San Francisco,  California**              |   | **94107**                             |
| (Address of principal  executive offices)                       |   | (zip code)                            |
|                                                            |   |                                  |
| **(415) 543-7696**                                              |
| (Registrant’s telephone  number, including area code)      |

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days.

 

Yes ý    No o

 

The number of shares of the Registrant’s Common Stockoutstanding as of October 31, 2001 was 33,815,336

 

 

**INDEX**

 
| **PART I.  FINANCIAL INFORMATION**   |
|--------------------------------------|
|                                 |   |   |
|                                 | **Item 1.** | **Financial Statements** |
|                                 |   |
|                                 | Condensed  Consolidated Balance Sheets |
|                                 |   |
|                                 | Condensed  Consolidated Statements of Income and Comprehensive Income |
|                                 |   |
|                                 | Condensed  Consolidated Statements of Cash Flows |
|                                 |   |
|                                 | Notes to the Condensed  Consolidated Financial Statements |
|                                 |   |
|                                 | **Item 2.** | ** Management’s Discussion and Analysis of Financial Condition and  Results of Operations** |
|                                 |   |   |
|                                 | **Item 3.** | **Quantitative and Qualitative  Disclosures About Market Risk** |
|                                 |   |
| **PART II.  OTHER INFORMATION** |
|                                 |   |   |
|                                 | **Item  1** | Legal Proceedings |
|                                 |   |   |
|                                 | **Item 2** | Changes in Securities and  Use of Proceeds |
|                                 |   |   |
|                                 | **Item 3** | Defaults Upon  Senior Securities |
|                                 |   |   |
|                                 | **Item  4.** | Submission  of Matters to a Vote of Security Holders |
|                                 |   |   |
|                                 | **Item  5** | Other Information |
|                                 |   |   |
|                                 | **Item 6.** | Exhibits and  Reports on Form 8-K |
|                                 |   |   |
|                                 | **Signatures** |   |
|                                      |  |  |  |  |

 

**PARTI.****FINANCIAL INFORMATION**

 

**Item 1****. FinancialStatements**

**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

** **
|                                       |   | **September  30,** |    | **December 31,** |   |
|--------------------------------------------|--------|--------------------|---------|------------------|--------|
|                                       |   | **2001**           |    | **2000**         |   |
| **(in thousands)**                         |   | **(unaudited)**    |    | **(audited)**    |   |
| **ASSETS**                                 |   |               |    |             |   |
|                                       |   |               |    |             |   |
| Current assets:                            |   |               |    |             |   |
| Cash and cash equivalents                  |   | $                  | 184,018 |             | $      | 96,987 |   |
| Short-term marketable securities           |   | 108,897            |    | 55,445           |   |
| Accounts receivable, net                   |   | 37,980             |    | 35,710           |   |
| Prepaid expenses and other                 |   | 10,976             |    | 4,462            |   |
| Deferred income taxes                      |   | 3,259              |    | 3,259            |   |
| Total current assets                       |   | 345,130            |    | 195,863          |   |
|                                       |   |               |    |             |   |
| Fixed assets, net                          |   | 24,993             |    | 22,351           |   |
| Other assets, net                          |   | 53,102             |    | 27,487           |   |
| Total assets                               |   | $                  | 423,225 |             | $      | 245,701 |   |
|                                       |   |               |    |             |   |
| **LIABILITIES  AND STOCKHOLDERS' EQUITY**  |   |               |    |             |   |
|                                       |   |               |    |             |   |
| Current liabilities:                       |   |               |    |             |   |
| Accounts payable                           |   | $                  | 1,196   |             | $      | 855 |   |
| Accrued liabilities                        |   | 9,904              |    | 10,224           |   |
| Deferred revenues                          |   | 24,050             |    | 21,078           |   |
| Income taxes payable                       |   | 10,527             |    | 2,712            |   |
| Total current liabilities                  |   | 45,677             |    | 34,869           |   |
| Long-term liabilities:                     |   |               |    |             |   |
| Other liabilities                          |   | 1,581              |    | 1,231            |   |
| Total liabilities                          |   | 47,258             |    | 36,100           |   |
| Stockholders' equity:                      |   |               |    |             |   |
| Common stock                               |   | 339                |    | 305              |   |
| Additional paid-in capital                 |   | 300,900            |    | 154,070          |   |
| Retained earnings                          |   | 74,318             |    | 55,156           |   |
| Cumulative other comprehensive income      |   | 410                |    | 70               |   |
| Total stockholders' equity                 |   | 375,967            |    | 209,601          |   |
| Total liabilities and stockholders' equity |   | $                  | 423,225 |             | $      | 245,701 |   |

 

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

 

**ADVENTSOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**ANDCOMPREHENSIVE INCOME**

** **
|                                       |   | **Three Months Ended September 30,** |         | **Nine Months Ended September 30,** |   |
|--------------------------------------------|--------|--------------------------------------|--------------|-------------------------------------|--------|
|                                       |   | **2001**                             |         | **2000**                            |   | **2001** |   | **2000** |   |
| **(in  thousands, except per share data)** |   | **(unaudited)**                      |         | **(unaudited)**                     |   |
| Revenues:                                  |   |                                 |         |                                |   |   |   |   |   |
| License and development fees               |   | $                                    |  17,563 |                                | $      |  16,572 |   | $ |  55,245 |   | $ |  45,050 |   |
| Maintenance and other recurring            |   | 17,416                               |         | 13,181                              |   | 48,691 |   | 36,402 |   |
| Professional services and other            |   | 4,226                                |         | 4,362                               |   | 13,897 |   | 12,949 |   |
| Net revenues                               |   | 39,205                               |         | 34,115                              |   | 117,833 |   | 94,401 |   |
| Cost of revenues:                          |   |                                 |         |                                |   |   |   |   |   |
| License and development fees               |   | 1,655                                |         | 1,243                               |   | 4,797 |   | 3,701 |   |
| Maintenance and other recurring            |   | 4,258                                |         | 3,444                               |   | 12,240 |   | 9,813 |   |
| Professional services and other            |   | 1,421                                |         | 1,423                               |   | 4,542 |   | 4,224 |   |
| Total cost of revenues                     |   | 7,334                                |         | 6,110                               |   | 21,579 |   | 17,738 |   |
| Gross margin                               |   | 31,871                               |         | 28,005                              |   | 96,254 |   | 76,663 |   |
| Operating expenses:                        |   |                                 |         |                                |   |   |   |   |   |
| Sales and marketing                        |   | 13,754                               |         | 10,489                              |   | 38,745 |   | 30,222 |   |
| Product development                        |   | 6,914                                |         | 5,414                               |   | 19,045 |   | 15,899 |   |
| General and administrative                 |   | 3,777                                |         | 2,778                               |   | 10,668 |   | 8,689 |   |
| Amortization of intangibles                |   | 1,472                                |         | 382                                 |   | 3,527 |   | 1,146 |   |
| Total operating expenses                   |   | 25,917                               |         | 19,063                              |   | 71,985 |   | 55,956 |   |
| Income from operations                     |   | 5,954                                |         | 8,942                               |   | 24,269 |   | 20,707 |   |
| Interest and other income, net             |   | 1,501                                |         | 1,879                               |   | 4,763 |   | 4,843 |   |
| Income before income taxes                 |   | 7,455                                |         | 10,821                              |   | 29,032 |   | 25,550 |   |
| Provision for income taxes                 |   | 2,535                                |         | 3,679                               |   | 9,870 |   | 8,687 |   |
| Net income                                 |   | $                                    |  4,920  |                                | $      |  7,142 |   | $ |  19,162 |   | $ | 16,863 |   |
|                                       |   |                                 |         |                                |   |   |   |   |   |
| Other comprehensive income, net of tax     |   |                                 |         |                                |   |   |   |   |   |
| Unrealized gain on marketable securities   |   | 416                                  |         | 0                                   |   | 405 |   | 0 |   |
| Foreign currency translations adjustment   |   | (36                                  | )            | (55                                 | )      | (65 | ) | (141 | ) |
| Comprehensive income                       |   | $                                    | 5,300        |                                | $      | 7,087 |   | $ | 19,502 |   | $ | 16,722 |   |
|                                       |   |                                 |         |                                |   |   |   |   |   |
| **NET INCOME   PER SHARE DATA**       |   |                                 |         |                                |   |   |   |   |   |
| **Diluted**                                |   |                                 |         |                                |   |   |   |   |   |
| Net income per share                       |   | $                                    |  0.14   |                                | $      |  0.21 |   | $ |  0.55 |   | $ |  0.49 |   |
| Shares used in per share calculations      |   | 36,163                               |         | 34,540                              |   | 34,724 |   | 34,174 |   |
|                                       |   |                                 |         |                                |   |   |   |   |   |
| **Basic**                                  |   |                                 |         |                                |   |   |   |   |   |
| Net income per share                       |   | $                                    |  0.15   |                                | $      |  0.24 |   | $ |  0.61 |   | $ |  0.56 |   |
| Shares used in per share calculations      |   | 32,768                               |         | 30,192                              |   | 31,548 |   | 29,847 |   |

 

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

 

**ADVENTSOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                               |   | **Nine Months Ended September 30,** |          |
|------------------------------------------------------------------------------------|--------|-------------------------------------|---------------|
|                                                                               |   | **2001**                            |          | **2000** |   |
| **(in  thousands)**                                                                |   | **(unaudited)**                     |          |
| Cash flows from operating activities:                                              |   |                                |          |   |   |
| Net income                                                                         |   | $                                   | 19,162        |   | $ |  16,863 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                                |          |   |   |
| Non-cash stock compensation                                                        |   | 111                                 |          | 99 |   |
| Loss on disposal of assets                                                         |   | 23                                  |          | 19 |   |
| Depreciation and amortization                                                      |   | 7,819                               |          | 4,576 |   |
| Provision for doubtful accounts                                                    |   | 4,015                               |          | 2,004 |   |
| Deferred rent                                                                      |   | 350                                 |          | 321 |   |
| Cash provided by (used in) operating assets and liabilities:                       |   |                                |          |   |   |
| Accounts receivable                                                                |   | (5,971                              | )             | (5,945 | ) |
| Prepaid and other current assets                                                   |   | (6,258                              | )             | (189 | ) |
| Accounts payable                                                                   |   | 208                                 |          | (223 | ) |
| Accrued liabilities                                                                |   | (347                                | )             | (56 | ) |
| Deferred revenues                                                                  |   | 994                                 |          | 1,568 |   |
| Income taxes payable                                                               |   | 7,815                               |          | 5,193 |   |
| Net cash provided by operating activities                                          |   | 27,921                              |          | 24,230 |   |
| Cash flows from investing activities:                                              |   |                                |          |   |   |
| Acquisition of fixed assets                                                        |   | (6,597                              | )             | (8,687 | ) |
| Purchases of other investments                                                     |   | (12,988                             | )             | - |   |
| Net cash used in acquisition of NPO Solutions, Inc.                                |   | (6,726                              | )             | - |   |
| Net cash used in acquisition of Rex Development Partners, L.P.                     |   | (8,455                              | )             | - |   |
| Purchases of short-term marketable securities                                      |   | (127,158                            | )             | (64,640 | ) |
| Sales of short-term marketable securities                                          |   | 74,110                              |          | 58,277 |   |
| Deposits and other                                                                 |   | 171                                 |          | (5,122 | ) |
| Net cash used in investing activities                                              |   | (87,643                             | )             | (20,172 | ) |
| Cash flows from financing activities:                                              |   |                                |          |   |   |
| Proceeds from issuance of common stock                                             |   | 152,253                             |          | 9,624 |   |
| Stock repurchase                                                                   |   | (10,500                             | )             | - |   |
| Proceeds from issuance of warrants                                                 |   | 5,000                               |          | - |   |
| Net cash provided by financing activities                                          |   | 146,753                             |          | 9,624 |   |
| Effect of exchange rate changes on cash and cash equivalents                       |   | -                                   |          | (72 | ) |
| Net increase in cash and cash equivalents                                          |   | 87,031                              |          | 13,610 |   |
| Cash and cash equivalents at beginning of period                                   |   | 96,987                              |          | 64,315 |   |
| Cash and cash equivalents at end of period                                         |   | $                                   |  184,018 |   | $ |  77,925 |   |
|                                                                               |   |                                |          |   |   |
| Supplemental disclosure of cash flow information:                                  |   |                                |          |   |   |
| Cash paid for income taxes                                                         |   | $                                   |  1,873   |   | $ |  3,389 |   |

 

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

 

**ADVENT SOFTWARE, INC.**

 

###### **NOTES TO THECONDENSED** CONSOLIDATED FINANCIAL STATEMENTS

**(Unaudited)**

 

**1. Basisof Presentation**

 

The condensed consolidated financial statementsinclude the accounts of Advent Software, Inc. (“Advent”) and its wholly-ownedsubsidiaries. We have eliminated all significant intercompany balances andtransactions.

 

We prepared the condensed consolidated financialstatements in accordance with the rules and regulations of the Securities andExchange Commission (“SEC”) applicable to interim financial information.Certain information and footnote disclosures included in financial statementsprepared in accordance with generally accepted accounting principles have beenomitted in these interim statements pursuant to such SEC rules and regulations.  Included in these interim financialstatements is the condensed consolidated balance sheet at December 31, 2000derived from the audited consolidated financial statements included in ourannual report in our 10K filed with the SEC. We recommend that these interim financial statements be read inconjunction with the audited financial statements and related notes included inour 2000 Annual Report on Form 10-K filed with the SEC. Interim results are notnecessarily indicative of the results to be expected for the full year.

 

In our opinion, the condensed consolidated financialstatements include all adjustments necessary to present fairly the financialposition and results of operations for each interim period shown.

 

**2.     RecentAccounting Pronouncements**

 

In July 2001, the FASBissued two Statements; Statement No. 141, Business Combinations (SFASNo. 141), and Statement No. 142, Goodwill and Other Intangible Assets(SFAS No. 142). SFAS No. 141 revises accounting treatment forbusiness combinations requiring the use of purchase accounting and prohibitingthe use of pooling–of–interests method for all businesscombinations initiated after June 30, 2001. SFAS No. 142 revises theaccounting for goodwill and intangible assets with indefinite lives by notallowing amortization of goodwill and establishing accounting for impairment ofgoodwill and intangible assets with indefinite lives. SFAS No. 142 will beeffective for fiscal years beginning after December 15, 2001 which is thebeginning of our fiscal year 2002. We have not yet evaluated the effects ofthese changes on our consolidated financial statements.

 

In October 2001, the FASB issued Statement of Financial AccountingStandards No. 144 ("SFAS 144"), "Accounting for the Impairmentor Disposal of Long-Lived Assets", which addresses financial accountingand reporting for the impairment or disposal of long-lived assets. ThisStatement supersedes FASB Statement No. 121, "Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be DisposedOf", and the accounting and reporting provisions of APB Opinion No. 30,"Reporting the Results of Operations- Reporting the Effects of Disposal ofa Segment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions", for the disposal of a segment of a business.This Statement also amends Accounting Research Bulletin No. 51,"Consolidated Financial Statements", to eliminate the exception toconsolidation for a subsidiary for which control is likely to be temporary. Theprovisions of SFAS 144 are required to be adopted during our fiscal yearbeginning March 1, 2002, however early adoption is acceptable. We are currentlyin the process of evaluating the potential impact the adoption of SFAS 144 willhave on our consolidated financial position or results of operations.

 

**3.     Acquisitionsand Investments**

 

On April 16, 2001, we acquired NPO Solutions, Inc.(“NPO”), a provider of integrated computer software solutions for nonprofitorganizations, through our wholly-owned subsidiary MicroEdge, Inc.  NPO Solutions was a privately held companybased in Loudon, New Hampshire. We paid approximately $6.5 million for all theshares of NPO Solutions, with an additional $1.5 million to potentially be distributedto NPO stockholders if NPO meets certain milestones. This business combinationwas accounted for as a purchase and is recorded in Other assets, net on ourCondensed Consolidated Balance Sheet.

 

InApril 2001, we joined with Accenture, Microsoft, Inc., Compaq Computer Corp.,and the Bank of New York to create Encompys, an independent company that isdeveloping an Internet–based straight–through–processingsolution for the global asset management community. We invested$8.8 million for an approximately 15% interest in this new venture, whichhas been accounted for using the cost method and is recorded in Other assets,net on our Condensed Consolidated Balance Sheet.

 

OnJanuary 31, 2001, we acquired all outstanding capital stock of RexDevelopment Partners, L.P., a limited partnership, for approximately$8.5 million in cash. This business combination was accounted for as apurchase and the results of operations are included in our financial statementsbeginning on the acquisition date. As a result, acquired technology of$8.5 million was recorded in connection with this transaction and is beingamortized over its estimated useful life of five years and is recorded in Otherassets, net on our Condensed Consolidated Balance Sheet.

 

**4.    Secondary Offering**

 

In August 2001, wecompleted a secondary public offering of 2,750,000 shares of common stock at$57.11 per share, excluding offering costs. Of the 2,750,000 shares offered, 200,000 were sold by a sellingstockholder.  The net proceeds of theoffering to us were approximately $138 million.

 

**5.    Common Stock Repurchase**

 

In September 2001, werepurchased 310,000 shares of our own common stock at an average price of$33.87 per share.  In October 2001, werepurchased an additional 120,000 at an average price of $35.91 per share.

 

**6.    Warrants**

 

On March 23, 2001, weissued warrants to purchase a total of 191,644 shares of Advent CommonStock.  These warrants were issued forcash compensation of $5 million, which was the estimated Black-Scholes fairvalue.  These warrants have an exerciseprice of $45.375 per shares, are immediately exercisable, and expire on March23, 2006.

 

**7.     NetIncome Per Share**
|                                                                                                                                                                                   |   | **Three  Months Ended** |                         | **Nine  Months Ended** |                         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------------------------|------------------------|------------------------------|
|                                                                                                                                                                                   |   | **September  30,**      |                         | **September  30,**     |                         |
| **(in thousands, except for per share  data)**                                                                                                                                         |   | **2001**                |                         | **2000**               |                         | **2001** |   | **2000** |   |
| Net income                                                                                                                                                                             |   | $                       |  4,920                  |                   | $                            |  7,142 |   | $ |  19,162 |   | $ |  16,863 |   |
| **Reconciliation  of shares used in basic and diluted per share calculations**                                                                                                         |   |                    |                    |                   |                    |   |      |   |      |
|                                                                                                                                                                                   |   |                    |                         |                   |                         |   |   |   |   |
| **Diluted**                                                                                                                                                                            |   |                    |                         |                   |                         |   |   |   |   |
| Weighted average  common shares outstanding                                                                                                                                            |   | 32,768                  |                         | 30,192                 |                         | 31,548 |   | 29,847 |   |
| Dilutive effect  of stock options and warrants                                                                                                                                         |   | 3,395                   |                         | 4,348                  |                         | 3,176 |   | 4,327 |   |
| Shares used in  diluted net income per share calculation                                                                                                                               |   | 36,163                  |                         | 34,540                 |                         | 34,724 |   | 34,174 |   |
| Diluted net  income per share                                                                                                                                                          |   | $                       |  0.14                   |                   | $                            |  0.21 |   | $ |  0.55 |   | $ |  0.49 |   |
|                                                                                                                                                                                   |   |                    |                         |                   |                         |   |   |   |   |
| **Basic**                                                                                                                                                                              |   |                    |                         |                   |                         |   |   |   |   |
| Weighted average  common shares outstanding                                                                                                                                            |   | 32,768                  |                         | 30,192                 |                         | 31,548 |   | 29,847 |   |
| Shares used in  basic net income per share calculation                                                                                                                                 |   | 32,768                  |                         | 30,192                 |                         | 31,548 |   | 29,847 |   |
| Basic net income  per share                                                                                                                                                            |   | $                       |  0.15                   |                   | $                            |  0.24 |   | $ |  0.61 |   | $ |  0.56 |   |
|                                                                                                                                                                                   |   |                    |                         |                   |                         |   |   |   |   |
| Weighted Average  Options outstanding at September 30, 2001 and 2000 not included in  computation of diluted EPS because the exercise price was greater than the  average market price |   | 956                     |          | -                      |          | 869 |          | 129 |          |
|                                                                                                                                                                                   |   |                    |                         |                   |                         |   |   |   |   |
| Price range of  options not used in diluted EPS calculation                                                                                                                            |   | $                       |  52.50 - 60.38          |                   | $                            |  - |   | $ |  52.50 - 60.38 |   | $ |  52.50 - 56.88 |   |

 

**Item2****. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

###### **SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

You should read the followingdiscussion in conjunction with our consolidated financial statements andrelated notes. The following discussion contains forward-looking statementswithin the meaning of Section 27a of the Securities Act of 1933 and Section 21eof the Securities Exchange Act of 1934. These forward-looking statementsinvolve risks and uncertainties, including, among other things, statementsregarding our anticipated product offerings, gross margins and operating costsand expenses. Our actual results may differ significantly from those projectedin the forward-looking statements. Factors that might cause future results to differ materially from thosediscussed in the forward-looking statements include, but are not limited to,those discussed in “Management’s Discussion and Analysis of Financial Conditionand Results of Operations“, “Risk Factors and Forward-Looking Statements” andelsewhere in this document as well as other information set forth in our FormS-3 filed July 27, 2001 and in our Form 10-K for the year ended December 31,2000, and other documents we file from time to time with the Securities andExchange Commission

 

##### ***Results ofOperations***

 

**REVENUES**

 

Our net revenues are made up of three components: licenseand development fees, maintenance and other recurring, and professionalservices and other. Our net revenues for the third quarter ended of 2001increased 15% to $39.2 million, compared with net revenues of $34.1 million forthe same period in 2000. Net revenues for the nine months ended September 30,2001 increased 25% to $117.8 million, compared with net revenues of $94.4million. These primarily reflect increases in license revenue and developmentfees as well as maintenance and other recurring revenue.   Although we show increases in net revenuesfor both the three and nine month periods ended September 30, 2001, ourbusiness was adversely impacted by the September 11, 2001 terrorist attacks.   Immediately after the terrorist attack, ourclients who were located in the World Trade Center area were concentrating ondisaster recovery rather than licensing additional software components, whilethe grounding of transportation impeded our ability to deliver professionalservice at client sites during the last part of the quarter.

 

***License revenue and development fees*.**   License revenue and development fees forthe third quarter of 2001 increased 6% to $17.6 million compared with licenserevenue and development fees of $16.6 million for the third quarter of 2000.License revenue and development fees for the nine months ended September 30,2001 increased 23% to $55.2 million, compared with $45.1 million from the sameperiod last year. The increases in license revenue and development fees wasprimarily due to increased revenue from the Advent Office suite and Genevaproduct.  The majority of our licenserevenue is typically closed in the third month of the quarter.  In the third quarter of 2001, someanticipated contracts from new and existing larger clients were not signed bythe end of the quarter as our clients focused their attention on the disruptionin their business caused by the September 11, 2001 terrorist attacks.

 

***Maintenance and other recurring revenue*.**  Maintenance and other recurring revenue forthe third quarter of 2001 increased 32% to $17.4 million, compared withmaintenance and other recurring revenue of $13.2 million for the third quarterof 2000.  Maintenance and otherrecurring revenue for the nine months ended September 30, 2001 increased 34% to$48.7 million, compared with maintenance and other recurring revenue of $36.4million for the same period last year. The increase was due primarily to alarger client base and higher average maintenance fees.  Higher average maintenance fees are primarilydue to clients selecting more components for a full feature, multi-productsolution and clients expanding the number of users and sites licensing oursoftware.  Additionally, increaseddemand for pricing data from Hubdata and revenues from newly acquired RexDevelopment Partners, L.P. contributed to the increase in maintenance and otherrecurring revenues.  Because marketswere closed immediately after the terrorist attacks, the revenue from our dataservices was negatively impacted for approximately one week of thequarter.   However, a majority of ourmaintenance and other recurring revenue is sold on a subscription basis and isrecognized ratably throughout the quarter rather than in the last month of thequarter; therefore, the terrorists attacks had a much smaller negative impacton this revenue for the three months ended September 30, 2001.

 

***Professional services and other revenue*.**  Professional services and other revenuedecreased 3% to $4.2 million in the third quarter 2001 from $4.4 million for thesame period last year.  Professionalservices and other revenue for the nine months ended September 30, 2001increased 7% to $13.9 million, compared with $12.9 million for the same periodlast year. The quarter over quarter decrease was primarily due to our inabilityto deliver services at client sites as a result of the terrorist attacks ofSeptember 11, 2001.  Clients in thelower Manhattan area were focused on disaster recovery while travel disruptionsprevented our consultants from visiting other client sites.  The increase for the nine months endedSeptember 30, 2001 over the same period last year was primarily due to higherproduct sales activity, which increased demand for our consulting services andhigher consulting fees from increasingly larger implementations at largerfinancial institutions partially offset by the use of distributors andindependent consulting organizations.

 

**COST OF REVENUES**

 

Our cost of revenues is made up of three components:cost of license and development fees, cost of maintenance and other recurringand cost of professional services and other. Our cost of revenues for the thirdquarter of 2001 increased 20% to $7.3 million, compared with cost of revenuesof $6.1 million for the third quarter of 2000. Cost of revenues for the nine months ended September 30, 2001 increased22% to $21.6 million, compared with $17.7 million for the same period lastyear. Cost of revenues as a percentage of net revenues increased byapproximately 1% for the three months ended September 30, 2001 compared withthe same period in 2000 due to lower than anticipated license revenue in thethird quarter 2001 as a result of the September 11, 2001 terroristattacks.  Cost of revenues as apercentage of net revenues decreased to 18% for the nine months ended September30, 2001 compared with 19% for the same period last year.

 

***Cost of license and development fees*.**  Cost of license and development feesincreased 33% to $1.7 million in the third quarter of 2001 compared with $1.2million in the third quarter of 2000. Cost of license and development feesincreased 30% to $4.8 million in the nine months ended September 30, 2001,compared with $3.7 million in the same period last year. The increase in costof license and development fees is directly related to the increase in licenseand development fees revenue. Cost of license and development fees as apercentage of the related revenues increased to 9% from 8% for the three andnine months ended September 30, 2001 compared with the same periods last year.  The change for both periods is due to themix of license and development fees revenue.

 

***Cost of maintenance and other recurring revenues***.  Cost of maintenance and other recurringrevenues increased 24% to $4.3 million for the third quarter of 2001 from $3.4million for the third quarter of 2000. Cost of maintenance and other recurringrevenues increased 25% to $12.2 million for the nine months ended September 30,2001, compared with $9.8 million for the same period last year. This increasewas due to additional staffing required to support a larger customer base andincreased royalties paid to third party subscription-based andtransaction-based vendors. Cost of maintenance and other recurring revenues asa percentage of the related revenues decreased to 24% from 26% for the thirdquarter 2001 compared with the third quarter of 2000. Cost of maintenance andother recurring revenues as a percentage of the related revenues decreased to25% from 27% for the nine months ended September 30, 2001 and 2000, respectively.   The decreases for the three and nine monthsare due to the economies of scale of a larger operation as well as the mix ofproducts.

 

***Cost of professional services and other revenue.***  Cost of professional services and otherrevenue remained relatively consistent at $1.4 million for both the threemonths ended September 30, 2001 and 2000. Cost of professional services andother revenue increased 8% to $4.5 million for the nine months ended September30, 2001 from $4.2 million for the same period last year. The increase wasprimarily due to higher product sales activity, which increased demand for ourconsulting services and higher consulting fees from increasingly largerimplementations at larger financial institutions partially offset by the use ofdistributors and independent consulting organizations. Cost of professionalservices and other revenue as a percentage of the related revenues remainedrelatively constant at 34% in the third quarter of 2001 compared with 33% forthe third quarter of 2000. Cost of professional services and other revenue as apercentage of the related revenues remained constant at 33% for the nine monthsended September 30, 2001and 2000, respectively.

 

**OPERATING EXPENSES**

*** ***

***Sales and Marketing*.  **Our sales and marketing expenses forthe third quarter of 2001 increased 31% to $13.8 million, compared with $10.5million for the third quarter of 2000. Sales and marketing expenses for the nine months ended September 30,2001 increased 28% to $38.7 million, compared with $30.2 million in the sameperiod last year.  The increase inexpense for the three and nine months ended September 30, 2001 compared withthe same periods last year was primarily due to an increase in sales andmarketing personnel, increased sales and marketing in our core markets and ourefforts towards our internet initiatives, including Advent TrustedNetwork, aswell as additional sales reserves. Sales and marketing expenses as a percentageof net revenues increased to 35% in the third quarter 2001 compared with 31% forthe third quarter of 2000. This increase is due to the relatively smallincrease in license revenue for the quarter ended September 30, 2001 over thesame period last year as a result of the September 11, 2001 terrorist attacks.  As a result, total revenue didn’t increaseas quickly as sales and marketing expenses, which by September 11 had beensubstantially committed for the quarter. Sales and marketing expenses as a percentage of net revenues remainedrelatively stable at 33% and 32% for the nine months ended September 30, 2001and 2000.

 

***Product Development. ***Our product development expenses for the thirdquarter of 2001 increased 28% to $6.9 million, compared with productdevelopment expenses of $5.4 million for the third quarter of 2000. Product developmentexpenses for the nine months ended September 30, 2001 increased 20% to $19.0million, compared with $15.9 million in the same period last year. Productdevelopment expenses increased primarily due to growth in personnel as weincreased our product development efforts to accelerate the rate of productenhancements and new product introductions, such as Advent INXä.Product development expenses as a percentage of net revenues increased to 18%for the third quarter 2001 compared with 16% in the third quarter 2000.  The increase is due to the effect on netrevenues of the September 11 terrorist attacks as described above.  Product development expenses as a percentageof net revenues remained fairly consistent at 16% for the nine months endedSeptember 30, 2001, compared with 17% in the same period last year.

 

***General and Administrative****.*    Ourgeneral and administrative expenses for the third quarter of 2001 increased 36%to $3.8 million, compared with general and administrative expenses of $2.8million for the third quarter of 2000. General and administrative expensesincreased 23% to $10.7 million for the nine months ended September 30, 2001,compared with $8.7 million in the same period last year.  The increase was due to increased staffingand related costs to support our growth. General and administrative expenses asa percentage of net revenues increased to 10% in the third quarter of 2001,compared with 8% in the third quarter of 2000. The increase is due to theeffect on net revenues of the September 11 terrorist attacks as describedabove.  General and administrativeexpenses as a percentage of net revenues remained constant at 9% for in thenine months ended September 30, 2001 and 2000.

 

***Interest and Other Income, Net.* **Interest and other income, net was $1.5million in the third quarter of 2001 compared with $1.9 million for the thirdquarter 2000, a decrease of 20%.  Thedecrease was due to lower interest rates, partially offset by interest earnedon the proceeds from our secondary offering of common stock in August2001.   Interest and other income, netwas $4.8 million in the both the nine months ended September 30, 2001 and 2000.

 

***Provision for Income Taxes.* **For the three and nine months endedSeptember 30, 2001, we recorded a tax provision of $2.5 million and $9.9million, respectively, based on our pretax income using an effective tax rateof 34%, which is our anticipated effective tax rate for the fiscal year2001.  The actual effective tax rate forthe entire fiscal year could vary substantially depending on actual resultsachieved.  We had an effective tax rateof 34% for fiscal 2000.

 

##### ***Liquidity andCapital Resources***

 

Our cash and cashequivalents at September 30, 2001 were $184.0 million, increasing by $87.0million from $97.0 million at December 31, 2000. The increase was due to $27.9million generated by operating activities and $146.8 million provided byfinancing activities offset by $87.6 million used in investing activities.

 

The net cash of$27.9 million provided from operating activities for the nine months endedSeptember 30, 2001 was primarily due to net income and increases in incometaxes payable as well as depreciation and amortization, partially offset byincreases in accounts receivable and prepaid and other assets.  Net cash used in investing activities of$87.6 million for the nine months ended September 30, 2001 is primarilycomprised of the net acquisition of short-term marketable securities of $53.0,our $8.8 million investment in Encompys, $8.5 million acquisition of Rex DevelopmentPartners, L.P., $6.7 million acquisition of NPO Solutions, Inc. and a $4.2million investment in several strategic partners.  Financing activities provided $146.8 million for the nine monthsended September 30, 2001, primarily due to proceeds from our secondary offeringin August 2001, as well as exercises of common stock options, our employeestock purchase plan, and the issuance of stock warrants, partially offset byour repurchase of some outstanding shares of our common stock of $10.5 million.

 

At September 30,2001, we had $299.5 million in working capital. We currently have nosignificant capital commitments other than commitments under our operatingleases.  We believe that our availablesources of funds and anticipated cash flows from operations will be adequate tofinance current operations and anticipated capital expenditures through atleast fiscal 2002.

 

**Risk Factors**

 

**Our OperatingResults Fluctuate Significantly and We May Not Be Able to Maintain Our ExistingGrowth Rates.**

 

Licensesinto multi-user networked environments have increased both in individual sizeand number, and the timing and size of individual license transactions arebecoming increasingly important factors in quarterly operating results. Thesales cycles for these transactions are often lengthy and unpredictable. We maynot be successful in closing large license transactions such as these on atimely basis or at all. Accordingly, because revenues from large licenses areincreasing as a portion of our net revenues, the timing of such licenses couldcause additional variability in our quarterly operating results. Softwareproduct backlog at the beginning of any quarter typically represents only asmall portion of that quarter's expected revenues. Our expense levels are basedin significant part on our expectations of future revenues and therefore arerelatively fixed in the short term. Due to the fixed nature of these expensescombined with the relatively high gross margin historically achieved by us onproducts and services, an unanticipated decline in net revenues in anyparticular quarter is likely to disproportionately adversely affect ouroperating results.

 

We have generally realized lower revenues from license fees in thefirst quarter of the year than in the last quarter of the prior year. Webelieve that this has been due primarily to the concentration by some clientsof larger capital purchases in the fourth quarter of the calendar year andtheir lower purchasing activity during the subsequent first quarter. We believeour annual incentive compensation plans, which tend to produce increasedyear-end sales activity, compound this factor. Furthermore, we have oftenrecognized a substantial portion of each quarter's license revenues in the lastmonth, weeks or even days of that quarter. As a result, the magnitude ofquarterly fluctuations in revenue or earnings may not be evident until late inor after the close of a particular quarter and a disruption late in the quartermay have a disproportionately large negative impact on our quarterly results.

 

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

 

Our stock price has fluctuated significantly since our initial publicoffering in November 1995. 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 may beaffected by broader market trends unrelated to our performance.

 

**Our Sales CycleIs Long and We Have Limited Ability to Forecast the Timing and Amount ofSpecific Sales.**

 

Because the purchase of our software products often requiressignificant, executive–level investment and systems architecturedecisions by prospective customers, we must generally engage in a relativelylengthy sales effort. These transactions may be delayed during the customerdecision process because we must provide a significant level of education toprospective customers regarding the use and benefit of our products. As aresult, the sales cycle associated with the purchase of our software productsis typically between two and twelve months depending upon the size of theclient, though it can be considerably longer, and is subject to a number ofsignificant risks over which we have little or no control, including customers'budgeting constraints and internal selection procedures, among other factors.As a result of a lengthy and unpredictable sales cycle, we have limited abilityto forecast the timing and amount of specific sales. The timing of largeindividual sales is especially difficult to forecast. As a result, there can beno assurance that we will be successful in closing large license transactionson a timely basis or at all. In addition, customers may postpone theirpurchases of our existing products or product enhancements in advance of theanticipated introduction of new products or product enhancements by us or ourcompetitors. Because our expenses are generally relatively fixed in the nearterm, any shortfall from anticipated revenues could result in significantvariations in our operating results from quarter to quarter.

 

The implementation of our solutions involves a significant commitmentof resources by customers and by us and our service partners over an extendedperiod of time. Also, the size and complexity of any particular implementationproject can cause delays in the sales cycle that precedes it. Any such delayscould seriously harm our business.

 

**We DependHeavily on Our Product, Axys®.**

 

In 2000, 1999 and 1998, we derived a substantial majority of our netrevenues from the licensing of Axys, part of our Advent Office suite, andrelated products and services. In addition, many of our other products, such asMoxy®, Qube® and various datainterfaces were designed to operate with Axys to provide an integratedsolution. As a result, we believe that a majority of our net revenues, for theforeseeable future, will depend upon continued market acceptance of Axys,enhancements or upgrades to Axys and related products and services.

 

**We Depend uponFinancial Markets.**

 

The target clients for our products include a range of organizationsthat manage investment portfolios, including investment advisors, brokeragefirms, banks and hedge funds. 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 products could be disproportionately affected by fluctuations,disruptions, instability or downturns in the financial markets which may causeclients and potential clients to exit the industry or delay, cancel or reduceany planned expenditures for investment management systems and softwareproducts. In addition, a slowdown in formation of new investment firms or adecline in the growth of assets under management would cause a decline indemand for our products. Any resulting decline in demand for our products couldhave a material adverse effect on our business and results of operations.

 

**GeneralEconomic Conditions May Reduce Our Revenues.**

 

We believe that the market for large management software systems may benegatively impacted by a number of factors, including:

 
|   | • | reductions  in capital expenditures by large customers; |
|--------|--------|---------------------------------------------------------|
|   |   |                                                    |
|   | • | poor  performance of major financial markets; and       |
|   |   |                                                    |
|   | • | increasing  competition.                                |

 

 

The above factors may, in turn, give rise to a number of market trendsthat may slow revenue growth across the industry, including:

 
|   | • | longer  sales cycles;                                                                                                            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                             |
|   | • | deferral  or delay of information technology projects and generally reduced  expenditures for software and related services; and |
|   |   |                                                                                                                             |
|   | • | increased  price competition.                                                                                                    |

 

 

If the current economic slowdown continues, the presence of thesefactors in the market for large management software systems could materiallyadversely affect our business and results of operations.

 

**We AreContinuing to Expand Our Internet Initiative.**

 

To take advantage of the Internet, we are continuing to expand anInternet Initiative under which we are developing services, both announced andunannounced, to bring Internet–based products and services toclients.  As we develop new products andservices under our Internet Initiative, we have entered, and will continue toenter, into development agreements with information providers, clients or othercompanies in order to accelerate the delivery of new products and services. Wemay not be successful in marketing our Internet services or in developing otherInternet services. Our failure to do so could seriously harm our business. Inaddition, we cannot assure you that there will not be disruptions in Internetservices beyond our control or that of our third party vendors. Any suchdisruptions could harm our business.

 

**Security Risksand Concerns May Deter the Use of the Internet for Conducting Business.**

 

A significant barrier to commerce and communications over publicnetworks is the secure transmission of confidential information. Advances incomputer capabilities, new discoveries in the field of cryptography or otherevents or developments could result in compromises or breaches of our securitysystems or those of other web sites to protect proprietary information. If anywell-publicized compromises of security were to occur, it could have the effectof substantially reducing the use of the Internet for commerce andcommunications. Anyone who circumvents our security measures couldmisappropriate proprietary information or cause interruptions in our servicesor operations. The Internet is a public network, and data is sent over thisnetwork from many sources. In the past, computer viruses, software programsthat disable or impair computers, have been distributed and have rapidly spreadover the Internet. Computer viruses could be introduced into our systems orthose of our customers or other third parties, which could disrupt or make itinaccessible to customers. We may be required to expend significant capital andother resources to protect against the threat of security breaches or toalleviate problems caused by breaches. To the extent that our activities mayinvolve the storage and transmission of proprietary information, securitybreaches could expose us to a risk of loss or litigation and possibleliability. Our security measures may be inadequate to prevent securitybreaches, and our business would be harmed if we do not prevent them.

 

**We Face RisksRelated to Our New Business Areas.**

 

We have expanded in recent periods into a number of new business areasto foster long-term growth including international operations, strategicalliances, and Advent TrustedNetwork. These areas are relatively new to ourproduct development and sales personnel. New business areas require significantmanagement time and resources prior to generating significant revenues and maydivert management from our core business. There is no assurance that we willcompete effectively or will generate significant revenues in these areas. Thesuccess of our Internet Initiative, in particular, is difficult to predictbecause it represents a new area of business for our entire industry.Additionally, to help manage our growth, we will need to continually improveour operational, financial, management and information systems and controls.

 

**We Expect OurGross and Operating Margins May Fluctuate over Time.**

 

We expect that our gross and operating margins may fluctuate fromperiod to period as we continue to introduce new products, expand our professionalservices organization and associated revenue, continue to hire additionalpersonnel and increase other expenses to support our business. We plan ourexpense levels based primarily on forecasted revenue levels. Because theseexpenses are relatively fixed in the short term, a fluctuation in revenue couldlead to operating results differing from expectations.

 

**We MustContinue to Introduce New Products and Product Enhancements.**

 

The market for our products is characterized by rapid technological change,changes in customer demands and evolving industry standards. As a result, ourfuture success will continue to depend upon our ability to develop new productsor product enhancements that address the future needs of our target markets andto respond to these changing standards and practices. We may not be successfulin developing, introducing and marketing new products or product enhancementson a timely and cost effective basis, or at all, and our new products andproduct enhancements may not adequately meet the requirements of themarketplace or achieve market acceptance. Delays in the commencement ofcommercial shipments of new products or enhancements may result in clientdissatisfaction and delay or loss of product revenues. If we are unable, for technologicalor other 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. Inaddition, our ability to develop new products and product enhancements isdependent upon the products of other software vendors, including certain systemsoftware vendors, such as Microsoft Corporation, database vendors anddevelopment tool vendors. If the products of such vendors have design defectsor flaws, or if such products are unexpectedly delayed in their introduction,our business could be seriously harmed. Software products as complex as thoseoffered by us may contain undetected defects or errors when first introduced oras new versions are released. Although we have not experienced adverse effectsresulting from any software errors, we cannot assure you that, despite testingby us and our clients, defects or errors will not be found in new productsafter commencement of commercial shipments, resulting in loss of or delay inmarket acceptance, which could seriously harm our business.

 

**If OurRelationship with Interactive Data Is Terminated, Our Business May Be Harmed.**

 

Many of our clients use our proprietary interface to electronicallyretrieve pricing and other data from Interactive Data. Interactive Data pays usa commission based on their revenues from providing this data to our clients.Our software products have been customized to be compatible with their systemand this software would need to be redesigned if their services wereunavailable for any reason. Termination of our agreement with Interactive Datawould require at least two years notice by either us or them, or 90 daysin the case of material breach. If our relationship with Interactive Data wereterminated or their services were unavailable to our clients for any reason,replacing these services could be costly and time consuming.

 

**We Face IntenseCompetition.**

 

The market for investment management software is intensely competitiveand highly fragmented, subject to rapid change and highly sensitive to newproduct introductions and marketing efforts by industry participants. Ourcompetitors include providers of software and related services as well asproviders of timeshare services.

 

Our competitors vary in size, scope of services offered and platformssupported. In addition, we compete indirectly with existing and potentialclients, many of whom develop their own software for their particular needs andtherefore may be reluctant to license software products offered by independentvendors like us. Many of our competitors have longer operating histories andgreater financial, technical, sales and marketing resources than we do. Inaddition, we also face competition from potential new entrants into our marketwho may develop innovative technologies or business models. We cannot guaranteethat we will be able to compete successfully against current and futurecompetitors or that competitive pressures will not result in price reductions,reduced operating margins and loss of market share, any one of which couldseriously harm our business.

 

**We FaceChallenges in Expanding Our International Operations.**

 

We market and sell our products in the United States and, to a lesserextent, internationally. We have established a subsidiary located in Australia,Advent Australia Pty. Ltd., to market and license our products in Australia. Inaddition, we entered into a distributor relationship in 1999 with AdventEurope, an independent distributor of our products in selected Europeanmarkets. In order to further expand our international operations, we would needto continue to establish additional facilities, acquire other businesses orenter into additional distribution relationships in other parts of the world.The expansion of our existing international operations and entry intoadditional international markets will require significant management attentionand financial resources. We cannot be certain that our investments inestablishing facilities in other countries will produce desired levels ofrevenue. We currently have limited experience in developing localized versionsof our products and marketing and distributing our products internationally. Inaddition, international operations are subject to other inherent risks,including:

 

 

| • | The  impact of recessions in economies outside the United States;                                                             |
|--------|-------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                          |
| • | Greater  difficulty in accounts receivable collection and longer collection periods;                                          |
|   |                                                                                                                          |
| • | Unexpected  changes in regulatory requirements;                                                                               |
|   |                                                                                                                          |
| • | Difficulties  in successfully adapting our products to the language, regulatory and  technology standards of other countries; |
|   |                                                                                                                          |
| • | Difficulties  and costs of staffing and managing foreign operations;                                                          |
|   |                                                                                                                          |
| • | Reduced  protection for intellectual property rights in some countries;                                                       |
|   |                                                                                                                          |
| • | Potentially  adverse tax consequences; and                                                                                    |
|   |                                                                                                                          |
| • | Political  and economic instability.                                                                                          |

 

 

Our international revenues are generally denominated in U.S. dollars,with the exception of our Australian subsidiary. The revenues, expenses, assetsand liabilities of Advent Australia are primarily denominated in Australiandollars. We have not historically undertaken foreign exchange hedgingtransactions to cover potential foreign currency exposure. Future fluctuationsin currency exchange rates may adversely affect revenues from internationalsales and the U.S. dollar value of Advent Australia's revenues, expenses,assets and liabilities.

 

**UndetectedSoftware Errors or Failures Found in New Products May Result in Loss of orDelay in Market Acceptance of Our Products That Could Seriously Harm OurBusiness.**

 

Our products may contain undetected software errors or failures whenfirst introduced or as new versions are released. Despite testing by us and bycurrent and potential customers, errors may not be found in new products untilafter commencement of commercial shipments, resulting in loss of or a delay inmarket acceptance, which could seriously harm our business.

 

**If We AreUnable to Protect Our Intellectual Property We May Be Subject to IncreasedCompetition That Could Seriously Harm Our Business.**

 

Our success depends significantly upon our proprietary technology. Wecurrently rely on a combination of copyright and trademark laws, trade secrets,confidentiality procedures and contractual provisions to protect ourproprietary rights. We have registered trademarks for many of our products andservices and will continue to evaluate the registration of additionaltrademarks as appropriate. We generally enter into confidentiality agreementswith our employees and with our resellers and customers. We seek to protect oursoftware, documentation and other written materials under trade secret and copyrightlaws, which afford only limited protection. Despite these efforts, it may bepossible for unauthorized third parties to copy certain portions of ourproducts or to reverse engineer or otherwise obtain and use our proprietaryinformation. We do not have any patents, and existing copyright laws affordonly limited protection. In addition, we cannot be certain that others will notdevelop substantially equivalent or superseding proprietary technology, or thatequivalent products will not be marketed in competition with our products,thereby substantially reducing the value of our proprietary rights. We cannotassure you that we will develop proprietary products or technologies that arepatentable, that any patent, if issued, would provide us with any competitiveadvantages or would not be challenged by third parties, or that the patents ofothers will not adversely affect our ability to do business.

 

Litigation may be necessary to protect our proprietary technology. Thislitigation may be time-consuming and expensive. Despite our efforts to protectour proprietary rights, unauthorized parties may attempt to copy aspects of ourproducts or to obtain and use information that we regard as proprietary. Inaddition, the laws of some foreign countries do not protect proprietary rightsto as great an extent as do the laws of the United States. We cannot assure youthat our means of protecting our proprietary rights will be adequate or thatour competitors will not independently develop similar technology, duplicateour products or design around any patent that may be issued to us or otherintellectual property rights of ours.

 

**We Face RisksAssociated with Potential Acquisitions, Investments or Divestitures.**

 

We have acquired and made, and in the future may acquire or make,investments in complementary companies, products or technologies. In addition,we continually evaluate the performance of all our products and product linesand may sell or discontinue current products or product lines. If we buy acompany, we could have difficulty in integrating that company's personnel andoperations. In addition, the key personnel of the acquired company may decidenot to work for us. If we make other types of acquisitions, we could havedifficulty in assimilating the acquired technology or products into ouroperations. These difficulties could disrupt our ongoing business, distract ourmanagement and employees and increase our expenses. Furthermore, we may have toincur debt, write-off software development costs or other assets, incurseverance liabilities, amortize expenses related to goodwill and otherintangible assets, write-off impaired intangible assets or issue equitysecurities to pay for any future acquisitions. The issuance of equitysecurities could dilute our existing stockholders' ownership.

 

Potential acquisition candidates targeted by us may not have auditedfinancial statements, detailed financial information or any degree of internalcontrols. There can be no assurance that an audit subsequent to any successful completionof an acquisition will not reveal matters of significance, including issuesregarding revenues, expenses, liabilities, contingent or otherwise, technology,products, services or intellectual property. There can be no assurance that wewould be successful in overcoming these or any other significant risksencountered and the failure to do so could have a material adverse effect uponour business, operating results and financial condition. In addition, we maynot identify suitable businesses to acquire or negotiate acceptable terms foracquisitions.

 

**We Must RetainKey Employees and Recruit Qualified Technical and Sales Personnel.**

 

We believe that our success will depend on the continued employment ofour senior management and key technical personnel, none of whom has anemployment agreement with us. Additionally, our continued success depends, inpart, on our ability to identify, attract, motivate and retain qualifiedtechnical, sales and other personnel. Because our future success is dependenton our ability to continue to enhance and introduce new products, we areparticularly dependent on our ability to identify, attract, motivate and retainqualified engineers with the requisite education, backgrounds and industryexperience. Competition for qualified engineers, particularly in NorthernCalifornia and the San Francisco Bay Area, is intense. The loss of the servicesof a significant number of our engineers or sales people could be disruptive toour development efforts or business relationships and could seriously harm ourbusiness.

 

**BusinessInterruptions Could Adversely Affect Our Business.**

 

Our operations are vulnerable to interruption by fire, earthquake,power loss, telecommunications failure, political disturbances, and otherevents beyond our control. For example, our facilities in California have beensubject to electrical blackouts in the last year and our facilities in New Yorkwere temporarily closed due to the September 11, 2001 terrorist attacks.  Such interruptions could affect our abilityto sell and deliver products and services and other critical functions of ourbusiness and could seriously harm us.

 

**Item 3****.Quantitative and Qualitative Disclosures About Market Risk**

 

We considered the provision ofFinancial Reporting Release No. 48 "Disclosure of Accounting Policies forDerivative Financial Instruments and Derivative Commodity Instruments, andDisclosure of Quantitative and Qualitative Information about Market RiskInherent in Derivative Financial Instruments, Other Financial Instruments andDerivative Commodity Instruments". We are exposed to financial marketrisks, including changes in foreign currency exchange rates and interestrates.  Much of our revenue and capitalspending is transacted in U.S. dollars. However, since the formation of AdventAustralia whose revenues and capital spending are transacted in Australiandollars, we have greater exposure to foreign currency fluctuations.  Results of operations from Advent Australiaare not material to our operating results, therefore, we believe that foreigncurrency exchange rates should not materially adversely affect our overallfinancial position, results of operations or cash flows.  We believe that the fair value of ourinvestment portfolio or related income would not be significantly impacted byincreases or decreases in interest rates due mainly to the short-term nature ofour investment portfolio. However, a sharp increase in interest rates couldhave a material adverse affect on the fair value of our investment portfolio.  Conversely, sharp declines in interest ratescould seriously harm interest earnings of our investment portfolio.

 

Thefollowing table presents principal amounts by expected maturity (in U.S.dollars) and related weighted average interest rates by year of maturity forour investment portfolio.

 
|                                                 |   |           |       |           |       |           |       | **Estimated  Fair Value** |       |     |       |           |       |
|------------------------------------------------------|--------|----------------|------------|----------------|------------|----------------|------------|---------------------------|------------|----------|------------|----------------|------------|
|                                                 |   |           |       |           |       |           |       | **at  September 30**      |       |     |       |           |       |
|                                                 |   | **2001**       |       | **2002**       |       | **2003**       |       | **2004**                  |       | **2005** |       | **Thereafter** |       | **Total** |   |
| Federal  Instruments                                 |   | 9,715,000      |       | 8,250,000      |       | 12,150,000     |       |                      |       |     |       |           |       | 30,115,000 |   |
| Weighted Average  Interest Rate                      |   | 3.53           |       | 4.02           |       | 4.60           |       |                      |       |     |       |           |       | 4.10 |   |
|                                                 |   |           |       |           |       |           |       |                      |       |     |       |           |       |   |   |
| Commercial Paper  &  Short-term obligations |   | 22,024,000     |       | 13,500,000     |       |           |       |                      |       |     |       |           |       | 35,524,000 |   |
| Weighted Average  Interest Rate                      |   | 2.78           |       | 3.74           |       |           |       |                      |       |     |       |           |       | 3.14 |   |
|                                                 |   |           |       |           |       |           |       |                      |       |     |       |           |       |   |   |
| Corporate Notes  & Bonds                         |   | 2,500,000      |       | 26,240,000     |       | 15,100,000     |       |                      |       |     |       |           |       | 43,840,000 |   |
| Weighted Average  Interest Rate                      |   | 6.57           |       | 5.62           |       | 6.01           |       |                      |       |     |       |           |       | 5.81 |   |
|                                                 |   |           |       |           |       |           |       |                      |       |     |       |           |       |   |   |
| Municipal Notes  & Bonds                         |   | 49,735,000     |       | 6,125,000      |       | 13,360,000     |       |                      |       |     |       |           |       | 69,220,000 |   |
| Weighted Average  Interest Rate                      |   | 3.16           |       | 5.28           |       | 5.67           |       |                      |       |     |       |           |       | 3.83 |   |
|                                                 |   |           |       |           |       |           |       |                      |       |     |       |           |       |   |   |
| **Total  Portfolio, excluding equity securities**    |   | **83,974,000** | ** ** | **54,115,000** | ** ** | **40,610,000** | ** ** | **-**                     | ** ** | **-**    | ** ** | **-**          | ** ** | **178,699,000** | ** ** |

 

At September 30, 2001, cash,cash equivalents and short-term marketable securities totaled approximately$292.9 million, which is comprised of the $178.7 million in our investmentportfolio presented above and $114.2 million in other cash and cashequivalents.

 

 

#### **PARTII**. OTHER INFORMATION

 

**Item 1.Legal Proceedings**

 

From time to time we are involved in litigationincidental to the conduct of our business. We are not party to any lawsuit orproceeding that, in our opinion, is likely to seriously harm our business.

 

**Item2.Changes in Securities**

 

   None.

 

**Item3.Defaults Upon Senior Securities**

 

None.

 

**Item4.Submission of Matters to a Vote ofSecurity Holders**

 

       None

 

**Item 5.Other Information**

 

None.

 

**Item 6.ExhibitsAnd Reports On Form 8-K**

 

(a)   Exhibits

 

 (b) Reports on Form 8-K

 

On July 27, 2001 we filedan 8-K which included sections of our June 30, 2001 earnings announcementincluding associated unaudited condensed financial statements.

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                         | .      | ADVENT SOFTWARE, INC. |
|------------------------------|--------|-----------------------|
|                         |   |                  |
| **Dated:**  November 8, 2001 |   | By:                   | /s/            IRV H. LICHTENWALD |
|                         |   |                  | Irv H. Lichtenwald

*Executive Vice President of  Finance,*

*Chief Financial Officer and Secretary*

*(Principal FinancialOfficer)* |
|                         |   |                  |   |   |  
**Dated:**  November 8, 2001

 

By: 

/s/                PATRICIA VOLL

 

 
 

 

 

*Patricia Voll*

 *Vice President of Finance*

* (Principal Accounting Officer)*

 
  |