** **

** **

**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 June 30, 2003** |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|       |
| **or**     |
|       |   |                                                                                                                                      |
| **o**      |   | **Transition report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                             |

 

**Commission filenumber:  0-26994**

 

 

 

**ADVENT SOFTWARE, INC.**

(Exact name of Registrant as specified in its charter)

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

 

 

 

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes ý  No o

 

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act)

 

Yes ý  No o

 

Thenumber of shares of the Registrant’s Common Stock outstanding as of July 31,2003 was 32,473,500**.**

 

 

 

 

----

 

**INDEX**

 
| **PART I. FINANCIAL  INFORMATION** |
|------------------------------------|
| **Item 1.**                        | **Financial Statements** |
|                               | Condensed  Consolidated Balance Sheets |
|                               | Condensed  Consolidated Statements of Operations |
|                               | 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** |
| **Item 4.**                        | **Controls and  Procedures** |
| **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**                     |   |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(In thousands)

 
|                                            |   | **June 30,  2003** |    | **December  31, 2002** |   |
|-------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                            |   | **(unaudited)**    |    |
|                                            |   |               |    |                   |   |
| **ASSETS**                                      |   |               |    |                   |   |
| Current assets:                                 |   |               |    |                   |   |
| Cash and cash equivalents                       |   | $                  | 73,531  |                   | $      | 78,906 |   |
| Short-term marketable securities                |   | 79,991             |    | 94,923                 |   |
| Accounts receivable, net                        |   | 17,202             |    | 20,218                 |   |
| Prepaid expenses and other                      |   | 10,506             |    | 11,373                 |   |
| Income taxes receivable                         |   | 1,639              |    | 6,289                  |   |
| Deferred income taxes                           |   | 4,666              |    | 4,714                  |   |
| Total current assets                            |   | 187,535            |    | 216,423                |   |
| Property and equipment, net                     |   | 27,374             |    | 28,001                 |   |
| Goodwill                                        |   | 81,660             |    | 67,349                 |   |
| Intangibles, net                                |   | 37,225             |    | 41,157                 |   |
| Other assets, net                               |   | 80,241             |    | 80,980                 |   |
| Total assets                                    |   | $                  | 414,035 |                   | $      | 433,910 |   |
|                                            |   |               |    |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**   |   |               |    |                   |   |
| Current liabilities:                            |   |               |    |                   |   |
| Accounts payable                                |   | $                  | 3,024   |                   | $      | 2,637 |   |
| Accrued liabilities                             |   | 18,044             |    | 14,704                 |   |
| Deferred revenues                               |   | 34,247             |    | 31,918                 |   |
| Income taxes payable                            |   | 7,441              |    | 5,817                  |   |
| Total current liabilities                       |   | 62,756             |    | 55,076                 |   |
| Long-term liabilities                           |   | 2,199              |    | 5,479                  |   |
| Total liabilities                               |   | 64,955             |    | 60,555                 |   |
| Stockholders’ equity:                      |   |               |    |                   |   |
| Common stock                                    |   | 323                |    | 329                    |   |
| Additional paid-in capital                      |   | 293,063            |    | 302,649                |   |
| Retained earnings                               |   | 50,309             |    | 67,385                 |   |
| Cumulative other comprehensive income           |   | 5,385              |    | 2,992                  |   |
| Total stockholders’ equity                 |   | 349,080            |    | 373,355                |   |
| Total liabilities and stockholders’ equity |   | $                  | 414,035 |                   | $      | 433,910 |   |

 

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

 

3

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**ADVENT SOFTWARE, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(In thousands, except per share data)

 
|                                              |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|---------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                              |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                              |   | **(unaudited)**                  |   |
|                                              |   |                             |   |                           |   |   |   |   |   |
| **Revenues:**                                     |   |                             |   |                           |   |   |   |   |   |
| License and development fees                      |   | $                                | 6,470  |                           | $      | 10,230 |   | $ | 13,212 |   | $ | 31,287 |   |
| Maintenance and other recurring                   |   | 21,154                           |   | 20,474                         |   | 42,294 |   | 41,007 |   |
| Professional services and other                   |   | 5,134                            |   | 8,164                          |   | 10,296 |   | 15,771 |   |
| Net revenues                                      |   | 32,758                           |   | 38,868                         |   | 65,802 |   | 88,065 |   |
| **Cost of revenues:**                             |   |                             |   |                           |   |   |   |   |   |
| License and development fees                      |   | 703                              |   | 440                            |   | 1,257 |   | 876 |   |
| Maintenance and other recurring                   |   | 7,662                            |   | 6,160                          |   | 15,041 |   | 11,494 |   |
| Professional services and other                   |   | 4,740                            |   | 4,572                          |   | 8,547 |   | 9,155 |   |
| Total cost of revenues                            |   | 13,105                           |   | 11,172                         |   | 24,845 |   | 21,525 |   |
| Gross margin                                      |   | 19,653                           |   | 27,696                         |   | 40,957 |   | 66,540 |   |
| **Operating expenses:**                           |   |                             |   |                           |   |   |   |   |   |
| Sales and marketing                               |   | 11,263                           |   | 14,667                         |   | 22,718 |   | 28,168 |   |
| Product development                               |   | 9,692                            |   | 10,049                         |   | 19,059 |   | 19,324 |   |
| General and administrative                        |   | 6,602                            |   | 5,013                          |   | 11,914 |   | 9,801 |   |
| Amortization of intangibles                       |   | 3,402                            |   | 2,645                          |   | 6,762 |   | 4,512 |   |
| Restructuring expense                             |   | 2,671                            |   | —                         |   | 6,160 |   | — |   |
| Total operating expenses                          |   | 33,630                           |   | 32,374                         |   | 66,613 |   | 61,805 |   |
| Income  (loss) from operations               |   | (13,977                          | )      | (4,678                         | )      | (25,656 | ) | 4,735 |   |
| Interest income and other expense, net            |   | (3                               | )      | (7,930                         | )      | 169 |   | (6,269 | ) |
| Loss before income taxes                          |   | (13,980                          | )      | (12,608                        | )      | (25,487 | ) | (1,534 | ) |
| Provision for (benefit from) income taxes         |   | (4,384                           | )      | (496                           | )      | (8,411 | ) | 3,269 |   |
| **Net loss**                                      |   | $                                | (9,596 | )                              | $      | (12,112 | ) | $ | (17,076 | ) | $ | (4,803 | ) |
|                                              |   |                             |   |                           |   |   |   |   |   |
| **Other comprehensive income (loss), net of tax** |   |                             |   |                           |   |   |   |   |   |
| Unrealized gain on marketable securities          |   | 144                              |   | 784                            |   | 94 |   | 345 |   |
| Foreign currency translation adjustments          |   | 1,875                            |   | (251                           | )      | 2,299 |   | (260 | ) |
| Comprehensive loss                                |   | $                                | (7,577 | )                              | $      | (11,579 | ) | $ | (14,683 | ) | $ | (4,718 | ) |
|                                              |   |                             |   |                           |   |   |   |   |   |
| **Net loss per share data:**                      |   |                             |   |                           |   |   |   |   |   |
| *Basic:*                                          |   |                             |   |                           |   |   |   |   |   |
| Net loss per share                                |   | $                                | (0.30  | )                              | $      | (0.35 | ) | $ | (0.53 | ) | $ | (0.14 | ) |
| Shares used in per share calculations             |   | 32,123                           |   | 34,650                         |   | 32,266 |   | 34,503 |   |
| *Diluted:*                                        |   |                             |   |                           |   |   |   |   |   |
| Net loss per share                                |   | $                                | (0.30  | )                              | $      | (0.35 | ) | $ | (0.53 | ) | $ | (0.14 | ) |
| Shares used in per share calculations             |   | 32,123                           |   | 34,650                         |   | 32,266 |   | 34,503 |   |

 

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

 

4

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**ADVENTSOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(In thousands)

 
|                                                                               |   | **Six Months  Ended June 30,** |    |
|------------------------------------------------------------------------------------|--------|--------------------------------|---------|
|                                                                               |   | **2003**                       |    | **2002** |   |
|                                                                               |   | **(unaudited)**                |    |
|                                                                               |   |                           |    |   |   |
| **Cash flows from operating activities:**                                          |   |                           |    |   |   |
| Net loss                                                                           |   | $                              | (17,076 | ) | $ | (4,803 | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities:   |   |                           |    |   |   |
| Non-cash stock compensation                                                        |   | 171                            |    | (52 | ) |
| Depreciation and amortization                                                      |   | 11,099                         |    | 8,455 |   |
| Non-cash restructuring charge                                                      |   | 499                            |    | — |   |
| Provision for (recovery of) doubtful accounts                                      |   | (398                           | )       | 1,392 |   |
| Other than temporary loss on investments                                           |   | 1,732                          |    | 10,192 |   |
| Realized (gain) loss on investments                                                |   | 109                            |    | (190 | ) |
| Deferred income taxes                                                              |   | (6,715                         | )       | (244 | ) |
| Other                                                                              |   | 53                             |    | (430 | ) |
| Cash provided by (used in) operating assets and liabilities, net of  acquisitions: |   |                           |    |   |   |
| Accounts receivable                                                                |   | 3,490                          |    | 9,340 |   |
| Prepaid and other current assets                                                   |   | 2,339                          |    | 3,331 |   |
| Income taxes receivable                                                            |   | 4,650                          |    | — |   |
| Accounts payable                                                                   |   | (567                           | )       | (430 | ) |
| Accrued liabilities                                                                |   | (126                           | )       | (2,235 | ) |
| Deferred revenues                                                                  |   | 2,149                          |    | (1,012 | ) |
| Income taxes payable                                                               |   | 1,551                          |    | (1,108 | ) |
| Net cash provided by operating activities                                          |   | 2,960                          |    | 22,206 |   |
| **Cash flows provided by (used in) investing  activities:**                        |   |                           |    |   |   |
| Net cash used in acquisitions including payments of net assumed  liabilities       |   | (9,877                         | )       | (61,660 | ) |
| Acquisition of fixed assets                                                        |   | (4,082                         | )       | (2,907 | ) |
| Purchases of other investments                                                     |   | —                         |    | (10,060 | ) |
| Proceeds from sales of other investments                                           |   | —                         |    | 1,831 |   |
| Purchase of short-term marketable securities                                       |   | (95,091                        | )       | (66,248 | ) |
| Sales and maturities of short-term marketable securities                           |   | 110,195                        |    | 49,861 |   |
| Deposits and other                                                                 |   | —                         |    | (3,779 | ) |
| Net cash provided by (used in) investing activities                                |   | 1,145                          |    | (92,962 | ) |
| **Cash flows used in financing activities:**                                       |   |                           |    |   |   |
| Proceeds from exercise of warrants                                                 |   | —                         |    | 2 |   |
| Common stock repurchased                                                           |   | (14,308                        | )       | (33,331 | ) |
| Proceeds from issuance of common stock                                             |   | 4,455                          |    | 13,129 |   |
| Repayment of capital leases                                                        |   | (77                            | )       | — |   |
| Net cash used in financing activities                                              |   | (9,930                         | )       | (20,200 | ) |
| Effect of exchange rate changes on cash and cash equivalents                       |   | 450                            |    | 148 |   |
| **Net decrease in cash and cash equivalents**                                      |   | (5,375                         | )       | (90,808 | ) |
| **Cash and cash equivalents at beginning of period**                               |   | 78,906                         |    | 166,794 |   |
| **Cash and cash equivalents at end of period**                                     |   | $                              | 73,531  |   | $ | 75,986 |   |

 

Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

 

5

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**ADVENT SOFTWARE, INC.**

**NOTES TO THECONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

**1.  Basis of Presentation**

 

Thecondensed consolidated financial statements include the accounts of AdventSoftware, Inc. (“Advent”) and its wholly owned subsidiaries. Allsignificant intercompany balances and transactions have been eliminated.

 

We haveprepared the condensed consolidated financial statements in accordance with therules and regulations of the Securities and Exchange Commission (“SEC”)applicable to interim financial information. Certain information and footnotedisclosures included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen omitted in these interim statements pursuant to such SEC rules andregulations. We recommend that these interim financial statements be read in conjunctionwith the audited financial statements and related notes included in our 2002Annual Report on Form 10-K filed with the SEC. Interim results are notnecessarily indicative of the results to be expected for the full year and wemake no representation thereto.

 

In ouropinion, the condensed consolidated financial statements include alladjustments necessary to present fairly the financial position and results ofoperations for each interim period shown. All such adjustments occur in theordinary course of business and are of a normal, recurring nature.

 

**2. Accounting Policies**

 

**Use ofestimates **The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. These estimates are based oninformation available as of the date of the financial statements. Actualresults could differ from those estimates.

 

**Revenuerecognition and allowance for doubtful accounts **We license application software products and offer annualmaintenance programs which provide for technical support and updates to oursoftware products.  Developmentagreements for which we receive development fees generally provide for thedevelopment of technologies and products that are expected to become part ofour product offerings in the future.  Weoffer professional services that primarily include consulting, projectmanagement, custom report writing and training. We offer other recurringrevenue services that are either subscription-based or transaction-based, andprimarily include the provision of software interfaces to, and the capabilityto download securities information from, third party data providers.  Through our NASD brokerage subsidiary, weoffer clients the ability to pay for Advent and third party products using thecommissions from “soft dollar” security transactions. These fees are paid to usout of the trading commissions charged to our clients by our brokeragesubsidiary and its executing/clearing brokers.

 

We recognize revenue from thelicensing of software when persuasive evidence of an arrangement exists, theproduct has been delivered, the fee is fixed and determinable and collection ofthe resulting receivable is reasonably assured. We use a signed licenseagreement as evidence of an arrangement. Sales through our distributors,primarily Advent Europe Holdings, our European distributor, are evidenced by amaster agreement governing the relationship together with binding order formsand signed contracts from the distributor’s customers.  Revenue is recognized upon shipment to thedistributor’s customer and when all other revenue recognition criteria havebeen met.  Delivery occurs when productis delivered to a common carrier F.O.B shipping point. Our arrangements do notgenerally include acceptance provisions, but if acceptance provisions areprovided, delivery is deemed to occur upon acceptance. We assess whether thefee is fixed and determinable based on the payment terms associated with thetransaction and the customer’s credit worthiness.  We assess credit worthiness based on a number of factors,including credit reports and our transaction history with the customer.  Software licenses are sold with maintenanceand, frequently, professional services. We allocate revenue to deliveredcomponents, normally the license component of the arrangement, using theresidual value method, based on objective evidence of the fair value of theundelivered elements, which is specific to us. Revenues for license developmentprojects are recognized using the percentage-of-completion method ofaccounting, based on costs incurred to date compared with the estimated cost ofcompletion. We offer term licenses as analternative to perpetual licenses and recognize revenue for term licensesratably over the period of the contract term. To date, revenue from termlicenses has not been material. Fair value for maintenance is based upon renewal rates stated in thecontracts or, in limited cases, separate sales of renewals to othercustomers.  We recognize revenue formaintenance ratably over the contract term. Fair value for professionalservices is based upon separate sales by us 

 

 

6

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of these services to other customers.  Our professional services are generallybilled based on hourly rates together with reimbursement for travel andaccommodation expenses. Our professional services and other revenue alsoincludes revenue from our semi-annual user conferences. We generally recognizerevenue as these professional services are performed.  Subscription-based revenues and any related set-up fees arerecognized ratably over the period of the contract.  Transaction-based revenues are generally recognized as thetransactions occur.  Revenues for softdollar transactions are recognized on a trade-date basis as securitiestransactions occur.  Revenues for soft dollar commissions onAdvent products are included in license and development fees, while revenuesfor soft dollar commissions on third party products are recognized inprofessional services and other revenue. When we receive soft dollarcommissions in advance of a client placing an order for Advent or third partyproducts, we accrue an appropriate cost of revenue and related liability.

 

We analyze specific accountsreceivable, historical bad debts, customer concentrations, customercredit-worthiness, current economic trends and changes in our customer paymentterms when evaluating the adequacy of the allowance for doubtful accounts.

 

**Accounting for intangible assets andgoodwill **Intangible assets are stated at cost less accumulated amortization andinclude goodwill, completed technology and non-compete and distributionagreements.  Goodwill is the excess ofcost over fair value of the net assets acquired.  As of June 30, 2003, the estimated lives of acquired intangiblesis as follows:

 

| Purchased  technologies |   | 2 to  7 years |
|-------------------------|--------|---------------|
| Customer  relationships |   | 1 to  7 years |
| Other                   |   | 1 to  7 years |

 

Wereview intangible assets, including goodwill, whenever events or changes incircumstances indicate that the carrying amount of these assets may have beenimpaired. In addition, in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, wetest goodwill annually for impairment using a two-step process. The first stepof the goodwill impairment test, used to identify potential impairment,compares the fair value of a reporting unit with its carrying amount, includinggoodwill. If the fair value of a reporting unit exceeds its carrying amount,goodwill of the reporting unit is considered not impaired, thus the second stepof the impairment test is unnecessary. The second step of the goodwillimpairment test, used to measure the amount of impairment loss, compares theimplied fair value of the reporting unit goodwill with the carrying amount ofthat goodwill. If the carrying amount of reporting unit goodwill exceeds theimplied fair value of that goodwill, an impairment loss shall be recognized inan amount equal to that excess. The implied fair value of goodwill shall bedetermined by allocating the fair value of a reporting unit to all of theassets and liabilities of that unit (including any unrecognized intangibleassets) as if the reporting unit had been acquired in a business combinationand the fair value of the reporting unit was the price paid to acquire thereporting unit.  We consider ourselvesto be a single reporting unit and therefore any impairment is measured based onthe fair value of the business as a whole. There were no events which triggered the evaluation of impairment duringthe three or six-month periods ended June 30, 2003.

 

**Accounting for long-lived assets     **We review property, equipmentand other long-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. Factorswe consider important which could trigger an impairment review include thefollowing (1) significant underperformance relative to expected historical orprojected future operating results; (2) significant changes in the manner ofour use of the acquired assets or the strategy for our overall business; (3)significant negative market or economic trends; (4) significant decline in ourstock price for a sustained period; and (5) our market capitalization relativeto net book value.  Recoverability ismeasured by comparison of the assets’ carrying amount to their expected futureundiscounted net cash flows. If such assets are considered to be impaired, theimpairment to be recognized is measured based on the amount by which thecarrying amount of the asset exceeds its expected future discounted cashflow.  There were no events whichtriggered the evaluation of impairment during the three or six-month periodsended June 30, 2003.

 

We hold minority interests inseveral privately held companies having operations or technology in areaswithin our strategic focus.  Most ofthese investments can be considered in the start-up or developing stages andare classified as “other assets” on our balance sheet. One of these investmentsis accounted for under the equity method of accounting. Our portion of netincome and losses for this investment has not been significant to date. Werecord an investment write-down when we believe an investment has experienced adecline in value that is other than temporary. Future adverse changes in marketconditions or poor operating results of underlying investments could result inlosses or an inability to recover the carrying value of the investments that maynot be reflected in an investment’s carrying value, thereby possibly requiringan impairment charge in the future.  Weestimate an investment’s carrying value based primarily on its revenue andimplied valuation based on revenue multiples for similar public companies,supplemented by any recent valuation events, such as an equity financing.

 

7

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**Stock-basedcompensation **We use the intrinsic value-based method to account for all of ourstock-based employee compensation plans and have adopted the disclosure-onlyalternative of SFAS No. 123 “Accounting for Stock-Based Compensation”, asamended by SFAS No. 148, “Accounting for Stock-Based Compensation”.  We are required to disclose the pro formaeffects on operating results as if we had elected to use the fair valueapproach to account for all our stock-based employee compensation plans.Stock-based compensation for non-employees is based on the fair value of therelated stock or options.

 

Thefair value of warrants, options or stock exchanged for services is expensedover the period benefited. The warrants and options are valued using theBlack-Scholes option pricing model.

 

If compensation had beendetermined based on the fair value at the grant date for awards in the threeand six month periods ended June 30, 2003 and 2002, respectively, consistentwith the provisions of SFAS No. 123, our net loss and net loss per share wouldhave been as follows (in thousands, except per share data):

 
|                                                                                                                                                     |   | **Three  Months  Ended June 30,** |    | **Six Months  Ended June 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|--------------------------------|--------|
|                                                                                                                                                     |   | **2003**                          |    | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                                                                                                     |   |                              |    |                           |   |   |   |   |   |
| Net loss — as reported                                                                                                                              |   | $                                 | (9,596  | )                              | $      | (12,112 | ) | $ | (17,076 | ) | $ | (4,803 | ) |
| Stock-based employee compensation expense included in reported net  loss, net of related tax effects                                                     |   | 180                               |    | 62                             |   | 175 |   | (43 | ) |
| Total stock based employee compensation expense determined under fair  value based method for all awards granted since 1996, net of related tax  effects |   | (2,372                            | )       | (5,001                         | )      | (4,020 | ) | (9,231 | ) |
|                                                                                                                                                     |   |                              |    |                           |   |   |   |   |   |
| Net loss  — pro forma                                                                                                                          |   | $                                 | (11,788 | )                              | $      | (17,051 | ) | $ | (20,921 | ) | $ | (14,077 | ) |
|                                                                                                                                                     |   |                              |    |                           |   |   |   |   |   |
| PER SHARE DATA                                                                                                                                           |   |                              |    |                           |   |   |   |   |   |
| *Basic*                                                                                                                                                  |   |                              |    |                           |   |   |   |   |   |
| Net loss — as reported                                                                                                                              |   | $                                 | (0.30   | )                              | $      | (0.35 | ) | $ | (0.53 | ) | $ | (0.14 | ) |
| Net loss — pro forma                                                                                                                                |   | $                                 | (0.37   | )                              | $      | (0.49 | ) | $ | (0.65 | ) | $ | (0.41 | ) |
| *Diluted*                                                                                                                                                |   |                              |    |                           |   |   |   |   |   |
| Net loss — as reported                                                                                                                              |   | $                                 | (0.30   | )                              | $      | (0.35 | ) | $ | (0.53 | ) | $ | (0.14 | ) |
| Net loss — pro forma                                                                                                                                |   | $                                 | (0.37   | )                              | $      | (0.49 | ) | $ | (0.65 | ) | $ | (0.41 | ) |

 

Such pro forma disclosuresmay not be representative of future compensation costs because options vestover several years and additional grants are made each year.

 

The weighted-average fairvalues of options granted, measured on the grant date using the Black-Scholesmodel, were $10.84 and $28.32 per share for the three months ended June 30,2003 and 2002, respectively. The weighted-average fair values of optionsgranted, measured on the grant date using the Black-Scholes model, were $10.51and $29.40 per share for the six months ended June 30, 2003 and 2002,respectively.

 

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholesvaluation model with the following weighted average assumptions:

 
|                    |   | **Three  Months Ended June 30, 2003** |   | **Three  Months Ended June 30, 2002** |   | **Six Months  Ended June 30, 2003** |   | **Six Months  Ended June 30, 2002** |   |
|-------------------------|--------|---------------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
| Risk-free interest rate |   | 2.5%                                  |   | 3.8%                                  |   | 2.6%                                |   | 3.8%                                |   |
| Volatility              |   | 72.0%                                 |   | 71.8%                                 |   | 72.1%                               |   | 71.8%                               |   |
| Expected life           |   | 5  years                              |   | 5  years                              |   | 5  years                            |   | 5  years                            |   |
| Expected dividends      |   | None                                  |   | None                                  |   | None                                |   | None                                |   |
| Average turnover rate   |   | 8%                                    |   | 8%                                    |   | 8%                                  |   | 8%                                  |   |

 

 

**Guarantees **FinancialAccounting Standards Board****(“FASB”) Interpretation No. 45 (“FIN 45”), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” requires that a liability be recorded inthe guarantor’s balance sheet upon issuance of a guarantee. Our softwarelicense agreements typically indemnify our clients for intellectual propertyinfringement claims. We also warrant to our clients that our software operatessubstantially in accordance with our specifications. Liabilities in connectionwith such guarantees have not been material.

 

8

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**Reclassifications **Certainprior year amounts have been reclassified to conform to current yearpresentation. Specifically, certain license and development fee revenue andmaintenance and other recurring revenue reported in prior comparative periodsand in the first quarter of 2003 have been reclassified to professionalservices and other, to better reflect our view of the current business.Additionally, the Company has reclassified certain amounts appearing in cost ofrevenues and operating expenses. On the balance sheets, related amounts havebeen reclassified amongst accounts receivable, prepaid expenses and other andaccrued liabilities.  These reclassificationsdo not affect net revenues, net income or loss or stockholders’ equity.

 

**3.  Net Loss Per Share**(in thousands, except per share data)

 
|                                                                                                                                       |   | **Three  Months Ended June 30,** |                | **Six Months  Ended June 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------------------|--------------------------------|--------|
|                                                                                                                                       |   | **2003**                         |                | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                                                                                       |   |                             |                |                           |   |   |   |   |   |
| **Net loss**                                                                                                                               |   | $                                | (9,596              | )                              | $      | (12,112 | ) | $ | (17,076 | ) | $ | (4,803 | ) |
|                                                                                                                                       |   |                             |                |                           |   |   |   |   |   |
| **Reconciliation of shares used in basic and diluted  earnings per share (“EPS”) calculations**                                  |   |                             |                |                           |   |   |   |   |   |
|                                                                                                                                       |   |                             |                |                           |   |   |   |   |   |
| **Basic**                                                                                                                                  |   |                             |                |                           |   |   |   |   |   |
| Weighted average common shares outstanding                                                                                                 |   | 32,123                           |                | 34,650                         |   | 32,266 |   | 34,503 |   |
| **Basic net loss per share**                                                                                                               |   | $                                | (0.30               | )                              | $      | (0.35 | ) | $ | (0.53 | ) | $ | (0.14 | ) |
|                                                                                                                                       |   |                             |                |                           |   |   |   |   |   |
| **Diluted**                                                                                                                                |   |                             |                |                           |   |   |   |   |   |
| Weighted average common shares outstanding                                                                                                 |   | 32,123                           |                | 34,650                         |   | 32,266 |   | 34,503 |   |
| Dilutive effect of stock options                                                                                                           |   | —                           |                | —                         |   | — |   | — |   |
| Shares used in diluted net loss per share calculation                                                                                      |   | 32,123                           |                | 34,650                         |   | 32,266 |   | 34,503 |   |
| **Diluted net loss per share**                                                                                                             |   | $                                | (0.30               | )                              | $      | (0.35 | ) | $ | (0.53 | ) | $ | (0.14 | ) |
|                                                                                                                                       |   |                             |                |                           |   |   |   |   |   |
| *Antidilutive options outstanding excluded from the  computation of EPS*                                                                   |   |                             |                |                           |   |   |   |   |   |
| Weighted average options outstanding at June 30, 2003 and 2002, not  included in computation of diluted EPS because they were antidilutive |   | 2,840                            |                | 4,308                          |   | 2,679 |   | 3,842 |   |
|                                                                                                                                       |   |                             |                |                           |   |   |   |   |   |
| Price range of anti-dilutive options not used in diluted EPS  calculation                                                                  |   | $                                | 0.33  – $60.38 |                           | $      | 0.33  – $60.38 |   | $ | 0.33  – $60.38 |   | $ | 0.33  – $60.38 |   |

 

 

**4.  Balance SheetDetail**

 

The following is a summaryof intangibles (dollars in thousands):

** **
|                   |   | **Weighted-Average  Amortization Period (Years)** |   | **Gross** |   | **Accumulated  Amortization as of June 30, 2003** |   | **Net as of  June 30, 2003** |   | **Net as of  December 31, 2002** |   |
|------------------------|--------|---------------------------------------------------|--------|-----------|--------|---------------------------------------------------|--------|------------------------------|--------|----------------------------------|--------|
|                   |   |                                              |   |      |   |                                              |   |                         |   |                             |   |
| Purchased technologies |   | 4.3                                               |   | $         | 22,355 |                                              | $      | (9,974                       | )      | $                                | 12,381 |   | $ | 15,243 |   |
| Customer relationships |   | 4.8                                               |   | 30,891    |   | (9,754                                            | )      | 21,137                       |   | 21,647                           |   |
| Other intangibles      |   | 5.0                                               |   | 6,597     |   | (2,890                                            | )      | 3,707                        |   | 4,267                            |   |
| Total intangibles      |   |                                              |   | $         | 59,843 |                                              | $      | (22,618                      | )      | $                                | 37,225 |   | $ | 41,157 |   |

 

 

9

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Thechanges in the carrying value of intangibles and goodwill for the six monthsended June 30, 2003 were as follows (in thousands):

** **
|                         |   |         |   | **Intangibles** |   |
|------------------------------|--------|--------------|--------|-----------------|--------|
|                         |   | **Goodwill** |   | **Gross**       |   | **Accumulated  Amortization** |   | **Net** |   |
|                         |   |         |   |            |   |   |   |   |   |
| Balance at December 31, 2002 |   | $            | 67,349 |            | $      | 56,737 |   | $ | (15,580 | ) | $ | 41,157 |   |
| Additions                    |   | 12,604       |   | 2,292           |   | 2,292 |   |   |   |
| Amortization                 |   | —       |   | —          |   | (6,761 | ) | (6,761 | ) |
| Other adjustments            |   | 1,707        |   | 814             |   | (277 | ) | 537 |   |
| Balance at June 30, 2003     |   | $            | 81,660 |            | $      | 59,843 |   | $ | (22,618 | ) | $ | 37,225 |   |
|                              |        |              |        |                 |        |  |  |  |  |  |  |  |  |  |

 

As ofJune 30, 2003, the estimated intangibles amortization expense for each calendaryear ended December 31 is: $13.6 million for 2003; $13.3 millionfor 2004; $8.3 million for 2005; $4.9 million for 2006; $2.2 millionfor 2007, $1.1 million for 2008 and $490,000 thereafter.

 

                Additionsto goodwill and intangible assets during the six months ended June 30, 2003reflect the acquisition of Advent Netherlands BV, and contingent considerationpaid to the former stockholders of Kinexus Corporation and NPO Solutions,Inc.  (See Note 5.)  Other adjustments primarily reflecttranslation adjustments.

 

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

** **
|                    |   | **June 30,  2003** |   | **December  31, 2002** |   |
|-------------------------|--------|--------------------|--------|------------------------|--------|
|                    |   |               |   |                   |   |
| Deferred income taxes   |   | $                  | 61,140 |                   | $      | 55,313 |   |
| Long-term investments   |   | 9,246              |   | 11,005                 |   |
| Other                   |   | 9,855              |   | 14,662                 |   |
| Total other assets, net |   | $                  | 80,241 |                   | $      | 80,980 |   |

 

 

**5. Acquisitions**

 

In May2003, we purchased all of the common stock of Advent Netherlands BV from ourindependent European distributor for a total purchase price of $9.6 million,which includes repayment of a loan and is net of approximately $180,000 cashacquired.  In addition, there is apotential earn-out distribution to the selling stockholders of up to$1.6 million through December 31, 2003 under a formula based on revenueresults for the eight months ended December 31, 2003, plus 50% of any operatingmargins which exceed 20% for the year ending December 31, 2004. We determinedthat the earn-out distribution will be allocated to additional purchase price,if earned.  The acquisition has beenaccounted for using the purchase method of accounting and accordingly, thepurchase price has been allocated to the tangible and identifiable intangibleassets and liabilities acquired on the basis of their respective fair values onthe acquisition date. The results of operations are included in theconsolidated financial statements beginning on the acquisition date. Weacquired our Dutch distributor’s operations at amounts exceeding the tangibleand identifiable intangible fair values of assets and liabilities in order toexpand our direct ownership of the European channels for products and services.The acquisition includes distribution rights in Belgium, The Netherlands andLuxembourg.  The allocation of theAdvent Netherlands BV purchase price was based on the estimated fair value ofthe net tangible liabilities of approximately $1.4 million (consisting of $1.9million of current assets, $51,000 of property plant and equipment, otherassets of $38,000, current liabilities of $2.6 million and net deferred taxliabilities of $800,000), goodwill of $8.9 million which is not deductible fortax purposes, and identifiable intangibles of $2.3 million which haveamortization periods from one to five years.

 

In thesecond quarter of 2003, we released $3.4 million of the $3.8 million contingent consideration held in escrowfor protection against undisclosed liabilities in connection with the Kinexusacquisition.  The payment was recordedas an increase to goodwill. The remaining $400,000 of contingent considerationwas returned to us as reimbursements for undisclosed liabilities.

 

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In thesecond quarter of 2003, we paid an additional $250,000 under the NPO Solutions,Inc. earn-out provisions.  The paymentwas recorded as an increase to goodwill.

 

Thefollowing pro forma supplemental information presents selected financialinformation as though the purchases of Kinexus, Techfi and Advent Outsource hadbeen completed at the beginning of the periods being reported on and aftergiving effect to purchase accounting adjustments. The pro forma consolidatednet loss amounts include certain pro forma adjustments, primarily theamortization of identifiable intangible assets, tax provision (benefit)adjustments on pro forma pre-tax income (loss) at a statutory tax rate of 41%and the elimination of interest income on cash used in the acquisition (inthousands, except per share data):

 

|                       |   | **Three  Months ended** |   | **Six Months  ended** |   |
|----------------------------|--------|-------------------------|--------|-----------------------|--------|
|                       |   | **June 30,**            |   | **June 30,**          |   |
|                       |   | **2003**                |   | **2002**              |   | **2003** |   | **2002** |   |
| Revenue                    |   | $                       | 32,758 |                  | $      | 40,099 |   | $ | 65,802 |   | $ | 90,883 |   |
| Net loss                   |   | $                       | (9,596 | )                     | $      | (8,340 | ) | $ | (17,076 | ) | $ | (4,914 | ) |
| Diluted net loss per share |   | $                       | (0.30  | )                     | $      | (0.24 | ) | $ | (0.53 | ) | $ | (0.14 | ) |
| Basic net loss per share   |   | $                       | (0.30  | )                     | $      | (0.24 | ) | $ | (0.53 | ) | $ | (0.14 | ) |

 

**6. Restructuring**

 

##### ***In response tothe downturn in the financial services industry and the decline in informationtechnology spending, we implemented restructuring plans in the first and secondquarters of 2003. These plans were implemented to reduce costs and improveoperating efficiencies by better aligning our resources. For the three monthsended June 30, 2003, we recorded a restructuring charge of approximately $2.7million, primarily for severance and benefits related to the termination ofapproximately 90 employees or 10% of our work force. These terminations werefrom functions all across the company.***

 

For the six months endedJune 30, 2003, our restructuring charges totaled $6.2 million consisting of thesecond quarter charge of $2.7 million described in the above paragraph and afirst quarter 2003 restructuring charge of approximately $3.5 million,primarily due to consolidating duplicative efforts resulting from integratingoperations from acquired businesses. The first quarter expense consists of $2.1million related to closing and consolidating excess office space, primarily inNew York and Australia, $979,000 related to the termination of 47 employeeslocated primarily in New York and Australia and $410,000 relating to theabandonment and write-off of certain equipment, furniture and leaseholdimprovements. All closed facilities were vacated prior to March 31, 2003.Restructuring charges were accounted for in accordance with SFAS 146,“Accounting for Costs Associated with Exit or Disposal Activities”.  We plan to further evaluate our business andto consolidate some of our real estate over the remainder of this year, whichmay result in further restructuring charges in the second half of this year.

 

The following table setsforth an analysis of the components of the restructuring charge and thepayments made against the accrual as of June 30, 2003 (thousands):

 
|                                                   |   | **Severance  and Benefits** |   | **Facility  Exit Costs** |   | **Property  and Equipment Abandoned** |   | **Total** |   |
|--------------------------------------------------------|--------|-----------------------------|--------|--------------------------|--------|---------------------------------------|--------|-----------|--------|
| Year to date restructuring expense                     |   | $                           | 3,650  |                     | $      | 2,100                                 |   | $         | 410    |   | $ | 6,160 |   |
| Reversal of deferred rent related to facilities exited |   | —                      |   | 151                      |   | —                                |   | 151       |   |
| Cash paid                                              |   | (1,888                      | )      | (742                     | )      | —                                |   | (2,630    | )      |
| Non-cash charges                                       |   | (89                         | )      | —                   |   | (410                                  | )      | (499      | )      |
| Accrued restructuring at June 30, 2003                 |   | $                           | 1,673  |                     | $      | 1,509                                 |   | $         | — |   | $ | 3,182 |   |

 

Theremaining excess facility costs are stated at estimated fair value, whichincludes estimated sublease income of approximately $1.1 million. We expect topay remaining obligations in connection with vacated facilities no later thanover the remaining lease terms, which expire on various dates through 2008, andremaining obligations related to severance and benefits in the third quarter of2003.

 

**7.  Stockholders’Equity**

 

In thefirst quarter of 2003, we repurchased and retired an additional 1,000,000shares of our Common Stock for an average price of $14.31 per share.

 

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In thesecond quarter of 2003, in connection with our voluntary stock option exchangeprogram initiated in the fourth quarter of 2002, we granted 1,770,786 optionsshares to employees at an exercise price equal to the fair market value of thestock on the date of grant, which was $18.88 per share.

 

In the second quarter of2003, Advent’s shareholders approved an amendment to our 1995 Employee StockPurchase Plan to increase the number of shares of Common Stock reserved forissuance by 600,000 shares.

 

 

#### **8. Commitments and Contingencies**

 

We lease office space andequipment under non-cancelable operating lease agreements, which expire atvarious dates through May 2012. As of June 30, 2003, our remaining operatinglease commitments through year 2012 are approximately $51 million,cumulatively.

 

AEuropean distributor, Advent Europe Holdings, and its subsidiaries that operatein certain European locations have the exclusive right to sell our software inEurope, excluding certain locations, until July 1, 2004. During thisperiod the distributor also has the contingent put right to require us topurchase any one or any group of their subsidiaries. Our requirement topurchase is contingent upon the distributor achieving specified operatingmargins greater than 20% and specified customer satisfaction criteria. Thebasis for calculating the purchase price is two times the preceding twelvemonths total revenue of the purchased subsidiaries, plus potential additional considerationequal to 50% of excess operating margins greater than 20%achieved in the twoyears subsequent to the acquisition. This purchase price may be varied bymutual agreement.  In addition, we havethe call right to purchase any one or any group of the distributor’ssubsidiaries under certain conditions. In the event that these rights areexercised by Advent or the distributor, the purchase of these subsidiarieswould principally result in an increase in intangible assets, goodwill andamortization of intangible assets.

 

Fromtime to time we are subject to various other legal proceedings, claims andlitigation arising in the ordinary course of business. We do not expect thatthe ultimate costs to resolve these matters will have a material adverse effecton our consolidated financial position, results of operations, or cash flows.

 

 

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

 

**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Youshould read the following discussion in conjunction with our consolidatedfinancial statements and related notes. The following discussion contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 as amended andSection 21E of the Securities Exchange Act of 1934 as amended. Forward-lookingstatements can be identified by the use of terminology such as “may”, “will”,“should”, “expect”, “plan” “anticipate”, “believe”, “estimate”, “predict”,“potential”, “continue” or other similar terms and the negative of such termsand include statements about our products and expected financial performance**.**Such forward-looking statements are basedon our current plans and expectations and involve known and unknown risks anduncertainties which may cause our actual results or performance to bematerially different from any results or performance expressed or implied bysuch forward-looking statements.  Suchfactors include, but are not limited to, the “Risk Factors” set forth below aswell as other risks identified from time to time in other SEC reports.  You should not place undue reliance on ourforward-looking statements, as they are not guarantees of future results,levels of activity or performance and represent our expectations only as of thedate they are made.

 

We area leading provider of Enterprise Investment Management solutions that automateand integrate mission-critical functions of investment management organizationsthrough software products, data integration, outsourced data management  and professional services.  Our solutions enable organizations of allsizes to run their business more effectively, enhance client service andperformance, and improve productivity and communication throughout the entireorganization.

 

**CriticalAccounting Policies and Estimates**

 

Our discussion and analysisof our financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. On an on-going basis,we evaluate our estimates and judgments, including those related to revenuerecognition, valuation of long-lived assets, intangible assets and goodwill andincome taxes. We base our estimates on historical experience and on variousother assumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

 

**Revenuerecognition and allowance for doubtful accounts **We license application software products and offerannual maintenance programs which provide for technical support and updates toour software products.  Developmentagreements for which we receive development fees generally provide for thedevelopment of technologies and products that are expected to become part ofour product offerings in the future.  Weoffer professional services that primarily include consulting, projectmanagement, custom report writing and training. We offer other recurringrevenue services that are either subscription-based or transaction-based, andprimarily include the provision of software interfaces to, and the capabilityto download securities information from, third party data providers.  Through our NASD brokerage subsidiary, weoffer clients the ability to pay for Advent and third party products using thecommissions from “soft dollar” security transactions. These fees are paid to usout of the trading commissions charged to our clients by our brokeragesubsidiary and its executing/clearing brokers.

 

We recognize revenue fromthe licensing of software when persuasive evidence of an arrangement exists,the product has been delivered, the fee is fixed and determinable andcollection of the resulting receivable is reasonably assured. We use a signedlicense agreement as evidence of an arrangement. Sales through our distributors,primarily Advent Europe Holdings, our European distributor, are evidenced by amaster 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 delivered to a common carrier F.O.Bshipping point. Our arrangements do not generally include acceptanceprovisions, but if acceptance provisions are provided, delivery is deemed tooccur upon acceptance. We assess whether the fee is fixed and determinablebased on the payment terms associated with the transaction and the customer’scredit worthiness.  We assess creditworthiness based on a number of factors, including credit reports and ourtransaction history with the customer. 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 value method,based on objective evidence of the fair value of the undelivered elements,which is specific to us. Revenues for license development projects arerecognized using the percentage-of-completion method of accounting, based oncosts incurred to date compared with the estimated cost of 

 

 

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completion. Weoffer term licenses as an alternative to perpetual licenses and recognizerevenue for term licenses ratably over the period of the contract term.  To date, revenue from term licenses has notbeen material.  Fair value formaintenance is based upon renewal rates stated in the contracts or, in limitedcases, separate sales of renewals to other customers.  We recognize revenue for maintenance ratably over the contractterm. Fair value for professional services is based upon separate sales by usof these services to other customers. Our professional services are generally billed based on hourly ratestogether with reimbursement for travel and accommodation expenses. Ourprofessional services and other revenue also includes revenue from oursemi-annual user conferences. We generally recognize revenue as theseprofessional services are performed. Subscription-based revenues and any related set-up fees are recognizedratably over the period of the contract. Transaction-based revenues are generally recognized as the transactionsoccur.  Revenues for soft dollartransactions are recognized on a trade-date basis as securities transactionsoccur. Revenues for soft dollar commissions on Advent products are included inlicense and development fees, while revenues for soft dollar commissions onthird party products are recognized in professional services and other revenue.When we receive soft dollar commissions in advance of a client placing an orderfor Advent or third party products, we accrue an appropriate cost of revenueand related liability.

 

We analyze specific accountsreceivable, historical bad debts, customer concentrations, customercredit-worthiness, current economic trends and changes in our customer paymentterms when evaluating the adequacy of the allowance for doubtful accounts.

 

**Accounting for intangible assets and goodwill **Wereview intangible assets, including goodwill, whenever events or changes incircumstances indicate that the carrying amount of these assets may have beenimpaired. In addition, in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, wetest goodwill annually for impairment using a two-step process. The first stepof the goodwill impairment test, used to identify potential impairment,compares the fair value of a reporting unit with its carrying amount, includinggoodwill. If the fair value of a reporting unit exceeds its carrying amount,goodwill of the reporting unit is considered not impaired, thus the second stepof the impairment test is unnecessary. The second step of the goodwillimpairment test, used to measure the amount of impairment loss, compares theimplied fair value of reporting unit goodwill with the carrying amount of thatgoodwill. If the carrying amount of the reporting unit goodwill exceeds theimplied fair value of that goodwill, an impairment loss shall be recognized inan amount equal to that excess. The implied fair value of goodwill shall bedetermined by allocating the fair value of a reporting unit to all of theassets and liabilities of that unit (including any unrecognized intangibleassets) as if the reporting unit had been acquired in a business combinationand the fair value of the reporting unit was the price paid to acquire thereporting unit.  We consider ourselvesto be a single reporting unit and therefore any impairment is measured based uponthe fair value of the business as a whole. There were no events which triggeredthe evaluation of impairment in the three or six-month periods ended June 30,2003.

 

**Accounting for long-lived assets     **We review property, equipmentand other long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Factors we consider important which could trigger an impairmentreview include the following (1) significant underperformance relative toexpected historical or projected future operating results; (2) significantchanges in the manner of our use of the acquired assets or the strategy for ouroverall business; (3) significant negative market or economic trends; (4)significant decline in our stock price for a sustained period; and (5) ourmarket capitalization relative to net book value.  Recoverability is measured by comparison of the assets’ carryingamount to their expected future undiscounted net cash flows. If such assets areconsidered to be impaired, the impairment to be recognized is measured based onthe amount by which the carrying amount of the asset exceeds its expectedfuture discounted cash flow. There were no events which triggered theevaluation of impairment in the three or six-month periods ended June 30, 2003.

 

We hold minority interests inseveral privately held companies having operations or technology in areaswithin our strategic focus.  Most ofthese investments can be considered in the start-up or developing stages andare classified as “other assets” on our balance sheet. One of these investmentsis accounted for under the equity method of accounting. Our portion of netincome and losses for this investment has not been significant to date. Werecord an investment write-down when we believe an investment has experienced adecline in value that is other than temporary. Future adverse changes in marketconditions or poor operating results of underlying investments could result inlosses or an inability to recover the carrying value of the investments thatmay not be reflected in an investment’s current carrying value, therebypossibly requiring an impairment charge in the future.  We estimate an investment’s carrying valuebased primarily on its revenue and implied valuation based on revenue multiplesfor similar public companies, supplemented by any recent valuation events, suchas an equity financing.

 

# **Income taxes** —Income tax expense includes U.S. and international income taxes. Weaccount for income taxes under the asset and liability method.  Deferred tax assets and liabilities arerecognized principally for the expected tax consequences of events that havebeen recognized in the financial statements or tax returns for temporarydifferences between the tax basis of the 

# ** **

# ** **

14

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# **assetsand liabilities and their reported amounts. A valuation allowance is then established to reduce the net deferred taxasset if it is more likely than not that the related tax benefit will not berealized.  Significant factorsconsidered by management in its determination of the probability of therealization include:  1) our historicaloperating results; 2) expectations of future earnings; and 3) the length oftime over which the differences will be paid.**

# ** **

# ** **

# **Overview**

 

***DistributorRelationship***

 

We relyon a number of strategic alliances to help us achieve market acceptance of ourproducts and to leverage our development, sales, and marketing resources. In1998 we established one such relationship with a company in Scandinavia todistribute our products throughout Scandinavia. In the third quarter of 1999,this distributor formed Advent Europe Holdings (“Advent Europe”). Advent Europeand its subsidiaries have the exclusive right to distribute our software inEurope, excluding certain locations, until July 1, 2004. Incorporated inThe Netherlands, Advent Europe is an independent entity and is not financiallybacked by us and is entirely capitalized by independent third party investors. Itmakes tax and language modifications to Advent Office to fit the various needsof the local jurisdictions and then markets and licenses the Advent Officesuite and related services. All transactions between Advent Europe and us aretransacted in U.S. dollars and are arms length transactions. Revenue from salesto this distributor is recognized on a sell-through basis when the distributorsubmits a signed contract from its customer, the product has been delivered,the fee is fixed and determinable, and collection of the resulting receivableis reasonably assured. Our revenues from this distributor in each of the twoyears ended December 31, 2002 and 2001 and in the six months ended June30, 2003, were less than 3% of our total net revenue.

 

Through July 1, 2004,Advent Europe has the contingent put right to require us to purchase any one orany group of their subsidiaries. Our requirement to purchase is contingent uponthe distributor achieving specified operating margins in excess of 20% andspecified customer satisfaction criteria. The basisfor calculating the purchase price is two times the preceding twelvemonths total revenue of the purchased subsidiary, plus potential additionalconsideration equal to 50% of operating margins that exceed 20%, achieved inthe two years subsequent to the acquisition. This purchase price may be variedby mutual agreement.  In addition, wehave the call right to purchase any one or any group of Advent Europe’ssubsidiaries under certain conditions. In the event these rights are exercisedby us or Advent Europe, the purchase of these subsidiaries would principallyresult in an increase in intangible assets, goodwill and amortization ofintangible assets. In November 2001, we acquired three of Advent Europe’scompanies located in Norway, Sweden, and Denmark, in September 2002, weacquired their Greek subsidiary and in May of 2003 we acquired their Dutchsubsidiary, Advent Netherlands.

 

***Acquisitions***

 

In May2003, we purchased all of the common stock of Advent Netherlands BV from ourindependent European distributor for a total purchase price of $9.6 million,which includes repayment of a loan and is net of approximately $180,000 cashacquired.  In addition, there is also apotential earn-out distribution to the selling members of up to$1.6 million through December 31, 2003 under a formula based on revenueresults for the eight months ending December 31, 2003 plus 50% of any operatingmargins which exceed 20% for the year ended December 31, 2004. We determinedthat the earn-out distribution will be allocated to additional purchase price,if earned.  The acquisition has beenaccounted for using the purchase method of accounting and accordingly, thepurchase price has been allocated to the tangible and intangible assets andliabilities acquired on the basis of their respective fair values on theacquisitions date. The results of operations are included in the consolidatedfinancial statements beginning on the acquisition date. We acquired our Dutchdistributor’s operations at amounts exceeding the tangible and identifiableintangible fair values of assets and liabilities in order to expand our directownership of the European channels for products and services. The acquisitionincludes distribution rights in Belgium, The Netherlands and Luxembourg.  The allocation of the Advent Netherlands BVpurchase price was based on the estimated fair value of the net tangibleliabilities of approximately $1.4 million (consisting of $1.9 million ofcurrent assets, $51,000 of property plant and equipment, other assets of$38,000, current liabilities of $2.6 million and net deferred tax liabilitiesof $800,000), goodwill of $8.9 million which is not deductible for taxpurposes, and identifiable intangibles for $2.3 million which have amortizationperiods from 1 to 5 years.

 

In thesecond quarter of 2003, we released $3.4 million of the $3.8 million contingent consideration held in escrowfor protection against undisclosed liabilities in connection with the Kinexusacquisition.  The payment was accountedfor as an increase to goodwill. The remaining $400,000 of contingentconsideration was returned to reimburse us for undisclosed liabilities.

 

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In thesecond quarter of 2003, we paid an additional $250,000 under the NPO Solutions,Inc. earn-out provisions.  The paymentwas accounted for as an increase to goodwill.

 

***Repurchase ofCommon Stock***

 

In thefirst quarter of 2003, we repurchased and retired 1,000,000 shares of ourCommon Stock for an average price of $14.31 per share.

 

***Restructuring***

 

##### ***In response tothe downturn in the financial services industry and the decline in informationtechnology spending, we implemented restructuring plans in the first and secondquarters of 2003. These plans were implemented to reduce costs and improveoperating efficiencies by better aligning our resources. We recorded totalrestructuring charges of  $6.2 millionconsisting of the first quarter charge of $3.5 million and second quarter of$2.7 million. The first quarter charge of $3.5 million was primarily due toconsolidating duplicative efforts resulting from integrating operations fromacquired businesses and consisted of $2.1 million related to closing andconsolidating excess office space, primarily in New York and Australia,$979,000 related to the termination of 47 employees located primarily in NewYork and Australia and $410,000 relating to the abandonment and write-off ofcertain equipment, furniture and leasehold improvements. The second quartercharge of $2.7 million consists primarily of severance and benefits related tothe termination of approximately 90 employees or 10% of our work force. Theseterminations were from all functions across the company.***

 

The following table setsforth an analysis of the components of the restructuring charge and thepayments made against the accrual as of June 30, 2003 (in thousands):

 
|                                                   |   | **Severance  and Benefits** |   | **Facility  Exit Costs** |   | **Property  and Equipment Abandoned** |   | **Total** |   |
|--------------------------------------------------------|--------|-----------------------------|--------|--------------------------|--------|---------------------------------------|--------|-----------|--------|
| Year to date restructuring expense                     |   | $                           | 3,650  |                     | $      | 2,100                                 |   | $         | 410    |   | $ | 6,160 |   |
| Reversal of deferred rent related to facilities exited |   | —                      |   | 151                      |   | —                                |   | 151       |   |
| Cash paid                                              |   | (1,888                      | )      | (742                     | )      | —                                |   | (2,630    | )      |
| Non-cash charges                                       |   | (89                         | )      | —                   |   | (410                                  | )      | (499      | )      |
| Accrued restructuring at June 30, 2003                 |   | $                           | 1,673  |                     | $      | 1,509                                 |   | $         | — |   | $ | 3,182 |   |

 

Theremaining excess facility costs are stated at estimated fair value, whichincludes estimated sublease income of approximately $1.1 million. We expect topay remaining obligations in connection with vacated facilities no later thanover the remaining lease terms, which expire on various dates through 2008, andremaining obligations related to severance and benefits in the third quarter of2003.

 

***Reclassifications***

 

Certainprior year amounts, as detailed below, have been reclassified to conform tocurrent year presentation to better reflect our view of the current business.These reclassifications do not affect net revenues, net income or loss orstockholders’ equity.

 

## **Revenue**

 

We had previously classifiedall soft dollar fees from our NASD brokerage subsidiary as license anddevelopment fees. These soft dollar fees reflect transactions relating tolicenses of Advent’s products as well as soft dollars fees relating to thirdparty products. Because soft dollar fees from third party products have beenincreasing as a percentage of total soft dollar fees, and license anddevelopment revenues have declined from previous levels, we believe it is moreappropriate to exclude soft dollar fees related to third party products fromlicense and development fee revenue. These fees have been reclassified to professional service and otherrevenue as follows: $1,386,000 for the first quarter of 2003 and $1,953,000 and$1,805,000 for the first and second quarters of 2002, respectively.  The soft dollar fees from third partyproducts recorded in the second quarter of 2003 in professional services andother revenue was $1,159,000.  Softdollar revenues relating to Advent products remain in license and developmentfees revenue and accounted for less than 5% of total license and developmentfees revenues for all periods presented.

 

Revenue from our projectmanagement team had previously been classified in maintenance and otherrecurring revenue.  We have determinedthis revenue is better classified as professional services revenue, because theproject 

 

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management and consulting teams often workclosely together and the nature of the projects is typically notrecurring.  The amounts reclassifiedwere $734,000 for the first quarter of 2003 and $975,000 and $1,215,000 for thefirst and second quarter of 2002, respectively.  The project management revenue recorded in professional servicesand other revenue in the second quarter of 2003 was $564,000.

 

# **Expenses**

 

We reclassified the expensesrelating to soft dollar fees for third party products from cost of license tocost of professional services and other. In addition, other reclassifications were made to cost of revenue andoperating expenses.  In the past,employees in product development, maintenance and professional services weretypically called on to assist in the sales process. As a result, a certainproportion of these expenses were allocated to sales and marketing.  As our organizational structure matured, thefunctional groups became more distinct. Our current view of the business is based on a stricter delineationbetween the functional groups.  Overall,cost of revenue increased and operating expenses decreased as a result of thesereclassifications by $1,484,000 in the first quarter of 2003 and by $ 1,685,000and $2,051,000 in the first and second quarters of 2002, respectively.  Under our old allocation methodology, costof revenue would have been $1,258,000 lower and operating expenses $1,258,000higher in the second quarter of 2003.

 

                Inaddition to our revenue and expense reclassifications described above,reclassifications were also made on our balance sheet and statements of cashflows.

 

 

***Results ofOperations***

 

# **REVENUES**

 

We license applicationsoftware products and offer annual maintenance programs which provide fortechnical support and updates to our software products.  We offer professional services thatprimarily include consulting, project management, custom report writing andtraining. We offer other recurring revenue services that are eithersubscription-based or transaction-based, and primarily include the provision ofsoftware interfaces to, and the capability to download securities informationfrom, third party data providers. Development agreements generally provide for the development oftechnologies and products that are expected to become part of our product orproduct offerings in the future. Through our NASD brokerage subsidiary, we offer clients the ability to payfor Advent and third party products using “soft dollar” security transactions,which are paid to us out of the trading commissions charged to our clients byour brokerage subsidiary and its executing/clearing brokers.

 

Net revenues for the threemonths ended June 30, 2003, decreased 16% to $32.8 million compared with netrevenues of $38.9 million for the three months ended June 30, 2002. Netrevenues for the six months ended June 30, 2003, decreased 25% to $65.8 millioncompared with net revenues of $88.1 million for the six months ended June 30,2002. The decline in both periods primarily resulted from a decline in licenseand development fees and, to a lesser extent, professional services revenues.The target clients for our products include a range of financial servicesorganizations that manage investment portfolios, including asset managers,investment advisors, brokerage firms, banks, family offices, hedge funds andothers. In addition, we target corporations, public funds, universities andnon-profit organizations, which also manage investment portfolios and have thesame needs.  Axys and its relatedproducts and services accounted for the majority of net revenues in the threeand six months ended June 30, 2003 and 2002. The success of many of our clientsis intrinsically linked to the health of the financial markets. We believe thatthe demand for our products was negatively affected by the current economicenvironment, political climate and downturns in the financial markets andinformation technology spending, and by pending and proposed regulatoryactivity in the financial services market. These factors have resulted inreduced revenue growth across the industry, longer sales cycles, deferral anddelay of information technology projects and generally reduced expenditure forsoftware related services. In addition, our acquisitions of Kinexus and Techfisubstantially increased our expenses and did not contribute significantly torevenues.  We expect a continueddifficult environment for the near term.

 

Each of the major revenuecategories has historically varied as a percentage of net revenues and weexpect this variability to continue in future periods.  This variability is partially due to thetiming of the introduction of new products, the relative size and timing ofindividual software licenses, as well as the size of the implementation, theresulting proportion of the maintenance and professional services components ofthese license transactions and the amount of client use of pricing and relateddata.

 

*License Revenue and Development Fees*.  License and development fees revenue for thethree months ended June 30, 2003, decreased 37% to $6.5 million compared withlicense and development fees revenue of $10.2 million for the three 

 

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months ended June 30, 2002. License anddevelopment fees revenue for the six months ended June 30, 2003, decreased 58%to $13.2 million compared with license and development fees revenue of $31.3million for the six months ended June 30, 2002.  The decrease in license and development fees for both periods wasprimarily due to decreased sales of the Advent Office suite of products, aswell as Geneva, compared to the same periods in 2002 and a decline in thenumber of large license transactions. Sales of these products decreasedprincipally due to the impact of current economic conditions on our clients.License and development fee revenues as a percentage of net revenues were 20%for the three months ended June 30, 2003 and 26% for the three months endedJune 30, 2002. License and development fee revenue as a percentage of netrevenues was 20% for the six months ended June 30, 2003 and 36% for the sixmonths ended June 30, 2002. The decrease in license and development feesrevenue as a percentage of net revenues for the above periods is primarily dueto the decline in license revenue compared to the same periods in 2002 whilemaintenance and other recurring revenues have increased approximately 3% duringthe same year-over-year periods. We typically license our products on a perserver, per user basis with the price per customer varying based on theselection of the products licensed, the number of site installations and thenumber of authorized users.  We earndevelopment fees when we provide product solutions, which are not part of ourstandard product offering.  For thethree and six months ended June 30, 2003 and 2002, revenue from developmentfees has been less than 10% of total license and development fees revenue**. **Forthe three and six months ended June 30, 2003 and 2002, soft dollar revenuesgenerated from licenses paid for through soft dollar transactions haverepresented less than 5% of total license and development revenues.

 

*Maintenance and Other Recurring Revenues*.  Maintenance and other recurring revenues forthe three months ended June 30, 2003, increased slightly to $21.2 million,compared with $20.5 million for the three months ended June 30, 2002.Maintenance and other recurring revenues for the six months ended June 30,2003, increased slightly to $42.3 million, compared with $41 million for thesix months ended June 30, 2002. The slight increase in maintenance and otherrecurring revenues was primarily attributed to increased revenue from ouracquisition of Techfi Corporation in July 2002 and Advent Outsource in Novemberof 2002, increased revenues associated with Advent Custodial Data services andother data feed revenue sources and increased demand for pricing data and otherdata services associated with our Wealth Management Solutions.  These increases were partially offset by aslight decrease in maintenance revenue related to a small number of customers,who either cancelled contracts or who have downgraded their maintenance servicelevel and a decrease in recurring revenue caused by a significant customermoving from a non-standard pricing model to a standard pricing model.  Maintenanceand other recurring revenues as a percentage of net revenues for the threemonths ended June 30, 2003, were 65% compared with 53%, for the same period in2002. Maintenance and other recurring revenues as a percentage of net revenuesfor the six months ended June 30, 2003, were 64% compared with 47%, for the sixmonths ended June 30, 2002. The increase in maintenance and other recurringrevenues as a percentage of net revenue is primarily due to the decrease inlicense revenue and, to lesser extent, the decrease in professional servicesrevenue for the same three and six month periods in 2002.  Maintenance revenues comprised approximately65% to 70% of total maintenance and recurring revenues during the three andsix-month periods ended June 30, 2003 and 2002.

 

*Professional Services and Other Revenues*.  Professional services and other revenuesdecreased 37% to $5.1 million for the three months ended June 30, 2003, comparedto $8.2 million for the three months ended June 30, 2002.  Professional services and other revenuesdecreased 35% to $10.3 million for the six months ended June 30, 2003, comparedto $15.8 million for the six months ended June 30, 2002.  These decreases were due to a decline indemand resulting from the impact of current economic conditions on our clients.The reduction in large license transactions previously noted had a significantimpact on our professional services revenue, as these large transactionstypically involve significant professional services projects. Professionalservices and other revenues, as a percentage of net revenues for the threemonths ended June 30, 2003 decreased to 16% for the three months ended June 30,2003 from 21% for the three months ended June 30, 2002.  Professional services and other revenues, asa percentage of net revenues for the six months ended June 30, 2003 decreasedto 16% from 18% for the six months ended June 30, 2002. For the three and sixmonths ended June 30, 2003 and three and six months ended June 30, 2002,revenues for third party products paid for through soft dollar transactionshave represented less than 25% of professional services and other revenues.

### ** **

### **COSTOF REVENUES**

 

Our cost of revenues is madeup of three components: cost of license and development fees; cost ofmaintenance and other recurring; and cost of professional services and other.Our cost of revenues for the three months ended June 30, 2003, increased 17% to$13.1 million compared with $11.2 million for the three months ended June 30,2002.  Our cost of revenues for the sixmonths ended June 30, 2003, increased 15% to $24.8 million compared with $21.5million for the six months ended June 30, 2002. This increase was primarily dueto the acquisitions of Techfi, Kinexus and Advent Outsource during 2002.

 

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*Cost of License and Development Fees*.  Cost of license and development fees revenueconsists primarily of royalties and other fees paid to third parties, the fixeddirect labor involved in producing and distributing our software,

labor costs associated with generatingdevelopment fees and cost of product media including duplication, manuals andpackaging materials.  Cost of licenseand development fees revenues for the three months ended June 30, 2003increased 60% to $703,000 compared with $440,000 for the three months endedJune 30, 2002. Cost of license and development fees revenues for the six monthsended June 30, 2003 increased 43% to $1.3 million, compared with $876,000 forthe six months ended June 30, 2002.  Theincrease in cost of license and development fees is directly related to anincrease in payments to third parties resulting from a change in product mix.

 

Cost of license and developmentfees as a percentage of the related revenues for the three months ended June30, 2003 was 11% compared with 4% for the three months ended June 30, 2002.Cost of license and development fees as a percentage of the related revenuesfor the six months ended June 30, 2003 was 10% compared with 3% for the sixmonths ended June 30, 2002.  Theincrease as a percentage of related revenue is primarily due to the decrease inrevenues compared to the relatively fixed costs associated with our productdistribution.

 

*Cost of Maintenance and Other Recurring*.  Cost of maintenance and other recurringrevenues is primarily comprised of the direct costs of providing technicalsupport and other services for recurring revenues and royalties paid to thirdparty subscription-based and transaction-based vendors.  Cost of maintenance and other recurringrevenues increased 24% to $7.7 million for the three months ended June 30, 2003compared with $6.2 million for the three months ended June 30, 2002. Cost ofmaintenance and other recurring revenues increased 31% to $15 million for thesix months ended June 30, 2003 compared with $11.5 million for the six monthsended June 30, 2002. The increase in both periods was primarily due to theacquisitions of Techfi, Kinexus and Advent Outsource.  Cost of maintenance and other recurring revenues as a percentageof the related revenues for the three months ended June 30, 2003, increased to36% from 30% for the three months ended June 30, 2002. Cost of maintenance andother recurring revenues as a percentage of the related revenues for the sixmonths ended June 30, 2003, increased to 36% from 28% for the six months endedJune 30, 2002. The increases in both periods are primarily related to theincrease in expenses over relatively flat revenues.

 

*Cost of Professional Services and Other.*  Cost of professional services revenueprimarily consists of personnel related costs associated with the clientservices and support organization in providing consulting, custom reportwriting and conversions of data from clients’ previous systems. Also includedare direct costs associated with third-party consultants, travel expenses andsoft dollar transactions for third party products. Cost of professionalservices and other revenues for the three months ended June 30, 2003 increased4% to $4.7 million from $4.6 million for the three months ended June 30, 2002,due to an increased use of third-party consultants partially offset by adecrease in headcount. Cost of professional services and other revenues for thesix months ended June 30, 2003 decreased 7% to $8.5 million, compared with $9.2million for the six months ended June 30, 2002 primarily due to a decline inheadcount. Cost of professional services as a percentage of related revenuesfor the three months ended June 30, 2003 increased to 92% compared to 56% forthe three months ended June 30, 2002. Cost of professional services as apercentage of related revenues for the six months ended June 30, 2003 increasedto 83% compared to 58% for the six months ended June 30, 2002.  These increases as a percentage of relatedrevenues were primarily due to a decline in related revenues and an increaseduse of third-party consultants compared to the same periods in 2002.

 

### **OPERATINGEXPENSES**

 

*Sales and Marketing*.  Sales and marketing expenses consist primarily of the costs ofpersonnel involved in the sales and marketing process, sales commissions,advertising and promotional materials, sales facilities expense, trade shows,and seminars.  Our sales and marketingexpenses for the three months ended June 30, 2003, decreased 23% to $11.3million compared with $14.7 million for the three months ended June 30, 2002.Our sales and marketing expenses for the six months ended June 30, 2003decreased 19% to $22.7 million compared with $28.2 million for the six monthsended June 30, 2002. The decrease in expense for both the three and six monthperiods was primarily due to a decrease in commissions and bonuses expense,lower program marketing expenses, partially offset by higher costs due to thebusinesses acquired during 2002. Sales and marketing expenses, as a percentageof net revenues, decreased to 34% for the three months ended June 30, 2003,from 38% for the three months ended June 30, 2002 primarily because sales and marketingexpense decreased 23% while revenues only decreased 16% over these sameperiods.  Sales and marketing expenses,as a percentage of net revenues, increased to 35% for the six months ended June30, 2003 compared with 32% for the six months ended June 30, 2002, primarilydue to a proportionally larger decline in net revenues of 25% compared to a 19%decline in expenses for the same periods.

 

*Product Development*.  Product development expenses consist primarily of salary andbenefits for our development staff as well as contractors’ fees and other costsassociated with the enhancements of existing products and services and 

 

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development of new products andservices.  Product development expensesfor the three months ended June 30, 2003 decreased slightly to $9.7 millioncompared with $10 million for the three months ended June 30, 2002. Productdevelopment expenses for the six months ended June 30, 2003 remained flat at$19.1 million compared with $19.3 million for the six months ended June 30,2002. Product development expenses, as a percentage of net revenues, increasedto 30% for the three months ended June 30, 2003, compared with 26% for thethree months ended June 30, 2002. Product development expenses, as a percentage of net revenues, increasedto 29% for the six months ended June 30, 2003 compared with 22% for the sixmonths ended June 30, 2002 primarily due to the decrease in net revenuescompared to the same three and six month periods in 2002.

 

*General and Administrative*.  General and administrative expenses consistprimarily of personnel costs for finance, administration, operations andgeneral management, as well as legal and accounting expenses. General andadministrative expenses increased 32% to $6.6 million for the three monthsended June 30, 2003 compared with $5 million for the three months ended June30, 2002. General and administrative expenses increased 22% to $11.9 millionfor the six months ended June 30, 2003 compared with $9.8 million for the threemonths ended June 30, 2002. The increase in the above periods is primarilyrelated to a $1.3 million settlement and legal expenses related to a claimbrought by a former employee as well as increases in headcount to supportcompanies recently acquired.  Generaland administrative expenses, as a percentage of net revenues, increased to 20%for the three months ended June 30, 2003 from 13% for the three months endedJune 30, 2002. General and administrative expenses, as a percentage of net revenues,increased to 18% for the six months ended June 30, 2003 from 11% for the sixmonths ended June 30, 2002. These increases as a percentage of net revenueswere primarily due to the decrease in net revenues compared to the same periodsin 2002 and the significant non-recurring legal expense described above.

 

*Amortization of Intangibles.*  We record goodwill and other intangiblesbased on the application of established valuation techniques using ourestimates of market potential, product introductions, technology trends, andother relevant cash flow assumptions. We periodically assess our estimatesrelated to the valuation model to determine if goodwill and other intangibleassets acquired have been impaired.  Noimpairment charge was necessary during the three or six-month periods endedJune 30, 2003 and 2002.  Amortization ofother intangibles increased to $3.4 million for the three months ended

June 30, 2003 compared with $2.6 million forthe same period in 2002. Amortization of other intangibles increased to $6.8million for the six months ended June 30, 2003 compared with $4.5 million forthe same period in 2002. The increase in both year-over-year periods is due tothe acquisitions of Kinexus, Techfi, Advent Outsource and Advent Hellas during2002 and Advent Netherlands, BV in 2003.

 

##### ***RESTRUCTURING EXPENSE***

 

##### ***In response tothe downturn in the financial services industry and the decline in informationtechnology spending, we implemented restructuring plans in the first and secondquarters of 2003. These plans were implemented to reduce costs and improveoperating efficiencies by better aligning our resources. For the three monthsended June 30, 2003, we recorded a restructuring charge of approximately $2.7million. The expense consists primarily of severance and benefits related tothe termination of approximately 90 employees or 10% of the company’s workforce. These terminations were from functions all across the Company.***

 

For the six months endedJune 30, 2003, we recorded total restructuring charges of $6.2 millionconsisting of the first quarter charge of $3.5 million and second quartercharge of $2.7 million. The first quarter expense of $3.5 million consists of$2.1 million related to closing and consolidating excess office space,primarily in New York and Australia, $979,000 related to the termination of 47employees located primarily in New York and Australia and $410,000 relating tothe abandonment and write-off of certain equipment, furniture and leaseholdimprovements.  This restructuring wasprimarily due to consolidating duplicative efforts in parts of our business asa result of the integration of our various acquired businesses. We expect to pay remaining obligations inconnection with vacated facilities no later than over the remaining lease terms,which expire on various dates through 2008, and remaining obligations relatedto severance and benefits in the third quarter of 2003. We expect toincur further restructuring charges in the second half of this year as wecontinue to evaluate potential consolidation of our facilities and considerfurther reductions in headcount related to operational efficiencies.

##### *** ***

### **INTERESTINCOME AND OTHER EXPENSE, NET**

 

Interest income and otherexpense, net, consists primarily of interest income, other-than-temporary losseson our investments in privately held companies, realized gains and losses onshort-term investments and miscellaneous non-operating income and expenseitems.  Interest income and otherexpense, net was a net expense of $3,000 and $7.9 million in the three monthsended June 30, 2003 and 2002, respectively, and was a net income of $169,000 inthe six months ended June 30, 2003 compared to a net expense of $6.3 million inthe six months ended June 30, 2002.  Thereason for the change 

 

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in both periods is primarily due to a declinein other-than-temporary losses from our long-term investments, partially offsetby lower interest income and an increase in other non-operating income.  The decline in other-than-temporary lossesis primarily due to the write-off of long-term investments of $9.2 million inthe second quarter of 2002, primarily related to our write-off of ourinvestment in Encompys.  The decrease ininterest income in both periods is due to lower average cash and short-terminvestment balances and lower interest rates, and the increase in othernon-operating income related to the recognition of approximately $800,000 inthe second quarter of 2003 in connection with a lease buy-out related to a vacantfacility assumed in our acquisition of Kinexus.

### ** **

### **PROVISIONFOR (BENEFITS FROM) INCOME TAXES**

 

For the six months endedJune 30, 2003, we recorded a tax benefit of $8.4 million based on our pre taxloss using an effective tax rate of 33%, which is our anticipated effective taxrate for the fiscal year 2003. Our effective tax rate in 2003 differs from thestatutory rate of 35% due to valuation allowances established in 2003 andutilization of tax credits. The actual effective tax rate for the entire fiscalyear could vary substantially depending upon actual results achieved. We had aneffective tax rate of 17.1% for our fiscal year 2002. Our effective tax rate in2002 differed from the statutory rate of 35% due to capital losses incurredduring fiscal 2002, valuation allowances established in 2002 related toacquired companies and our utilization of tax credits.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

 

Our cash, cash equivalentsand short-term marketable securities of $153.5 million at June 30, 2003,decreased  $20.3 million from $173.8million at December 31, 2002. The decreasewas primarily due to $14.3 million paid for the repurchase of our common stock,$9.6 million paid for the acquisition of Advent Netherlands BV, andapproximately $4 million paid in connection with the exit from one of our NewYork facility leases, partially offset by the receipt of an $8 million incometax refund.

 

The net cash of $3.0 millionprovided by operating activities for the six months ended June 30, 2003, wasprimarily due to decreases in income taxes receivable, accounts receivable andprepaid and other assets and an increase in deferred revenue.  The net increase in cash was partiallyoffset by a net loss, excluding non-cash items such as depreciation andamortization, the increase in deferred income tax assets resulting from therecognition of a tax benefit for the same period and the other-than-temporarylosses on investments, and by decreases in accounts payable and accruedliabilities. Net cash provided by operating activities decreased $19.2 millionin the six months ended June 30, 2003 compared to the same period in 2002.  The decrease primarily resulted from anadjusted net loss of $10.5 million, after excluding non-cash items such asdepreciation and amortization, other-than-temporary losses on investments anddeferred income taxes, compared to a adjusted net income of $14.3 million forthe comparable period in 2002, and was partially offset by a decline in the netdecrease in accounts receivable for the six months ended June 30, 2003 comparedto the same period in 2002.

 

The net cash of $1.1 millionprovided by investing activities for the six months ended June 30, 2003, isprimarily due to net cash provided from investments in short-term marketablesecurities, offset in part by the acquisition of Advent Netherlands BV and theacquisition of fixed assets. Net cash provided by investing activities for thesix months ended June 30, 2003 increased $94.1 million compared to net cashused in investing activities for the same period in 2002.  This increase was primarily due to a declinein cash used for acquisitions of businesses in the first half of 2003 comparedto the same period in 2002 and cash generated from short-term investment activityin the first half of 2003 compared to cash utilized for the same period in2002, partially offset by an increase in acquisition of fixed assets in thefirst six months of 2003 compared to the same prior year period.

 

The net cash of $9.9 millionused in financing activities for the six months ended June 30, 2003, wasprimarily for the repurchase of our own Common Stock partially offset byproceeds from stock option exercises and stock issued under the employee stockpurchase program and declined $10.3 million compared to the same period in 2002.  The decline in net cash used in financingactivities was primarily due to a decrease in common stock repurchased in thefirst half of 2003 compared to the first half of 2002, partially offset by adecrease in proceeds from the issuance of common stock under employee benefitprograms for the same periods.

 

At June 30, 2003, we had$124.8 million in working capital, down from $161.3 million at December 31,2002.  Our significant capital commitments are our operating leasecommitments through 2012 of approximately $51 million. Operating leasecommitments decreased significantly from December 31, 2002 primarily due to thebuy-out of a lease for vacant facility located in downtown Manhattan within afew blocks of the World Trade Center.

 

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At June30, 2003, 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.

 

Our principal source ofliquidity is our operating cash flows, which is dependent upon continued marketacceptance of our products and services. We believe that our available sources of funds and anticipated cash flowsfrom operations will be adequate to finance current operations and anticipatedcapital expenditures for at least the next twelve months.

 

 

***Risk Factors***

 

*Investors should carefully consider therisks described below before making an investment decision. In addition, theserisks are not the only ones we face. Additional risks we are not presentlyaware of or that we currently believe are immaterial may also impair ourbusiness operations. Our business could be harmed by any of these risks. Thetrading price of our common stock could decline due to any of these risks.*

 

**We May Not Be Able to Maintain Our Historical Growth Ratesand Our Operating Results May Fluctuate Significantly**

 

Licenses into multi-usernetworked environments have varied both in individual size and number, and thetiming and size of individual license transactions have become increasinglyimportant factors in quarterly operating results. The sales cycles for thesetransactions are often lengthy and unpredictable. We may not be successful inclosing large license transactions such as these on a timely basis or at all.Accordingly, because revenues from large licenses may vary as a portion of ournet revenues, the timing of such licenses could cause additional variability inour quarterly operating results. Software product backlog at the beginning ofany quarter typically represents only a small portion of that quarter’sexpected revenues. Our expense levels are based in significant part on ourexpectations of future revenues and therefore are relatively fixed in the shortterm. Due to the fixed nature of these expenses combined with the relativelyhigh gross margin historically achieved on products and services anunanticipated decline in net revenues in any particular quarter is likely todisproportionately adversely affect our operating results. 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.These factors have impacted and may continue to impact our results.

 

Becauseof the above factors, we believe that period-to-period comparisons of ouroperating results are not necessarily meaningful and that these comparisonscannot be relied upon as indicators of future performance.

 

**We Expect Our Gross and Operating Margins May Fluctuate OverTime.**

 

Weexpect that our gross and operating margins may fluctuate from period to periodas we continue to introduce new products, change our professional servicesorganization and associated revenue, continue to hire and acquire additionalpersonnel and increase other expenses to support our business. Because theseexpenses are relatively fixed in the short term, a fluctuation in revenue couldlead to operating results differing from expectations.

 

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

 

Becausethe purchase of our software products often requires significant,executive-level investment and systems architecture decisions by prospectivecustomers, we must generally engage in a relatively lengthy sales effort. Thesetransactions may be delayed during the customer decision process because wemust provide a significant level of education to prospective customersregarding the use and benefit of our products. As a result, the sales cycleassociated with the purchase of our software products is typically between twoand twelve months depending upon the size of the client, and it can beconsiderably longer, and is subject to a number of significant risks over whichwe have little or no control, including customers’ budgeting constraints andinternal selection procedures, among others. As a result of a lengthy andunpredictable sales cycle, we have limited ability to forecast the timing andamount of specific sales. The timing of large individual sales is especiallydifficult to forecast. Therefore there can be no assurance that we will 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 or due to economic conditions.Because our expenses are generally relatively fixed in the near term, anyshortfall from anticipated revenues could result in a significant variation inour operating results from quarter to quarter.

 

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**We Depend upon Financial Markets.**

 

The target clients for ourproducts include a range of financial services organizations that manageinvestment portfolios, including asset managers, investment advisors, brokeragefirms, banks, family offices, hedge funds and others. In addition, we target corporations, public funds, universities andnon-profit organizations, which also manage investment portfolios and have manyof the same needs. The success of many of our clients is intrinsically linkedto the health of the financial markets. We believe that demand for our productshas been and could continue to be disproportionately affected by fluctuations,disruptions, instability or downturns in the financial services industry whichmay cause clients and potential clients to exit the industry or delay, cancelor reduce any planned expenditures for investment management systems andsoftware products. In addition, a slowdown in formation of new investment firmsor a decline in the growth of assets under management would cause a decline indemand for our products. We believe that the downturn in the financialservices industry and the decline in information technology spending negatively impacted the demand for our productsin the past year and that a continuing downturn could have a material adverseeffect on our business and results of operations.

 

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

 

Historically,we derived a majority of our net revenues from the licensing of Axys, part ofour Advent Office suite, and related applications and services. In addition,many of our other applications, such as Moxy, Qube and various data interfaceswere designed to operate with Axys to provide an integrated solution. As aresult, we believe that a majority of our net revenues, for the foreseeablefuture will depend upon continued market acceptance of Axys, enhancements orupgrades to Axys and related products and services. As our clients include arange of organizations including asset managers, investmentadvisors, brokerage firms, banks, family offices, hedge funds and others, the degree of continued market acceptance willalso depend on the number of firms within each of the categories and the degreeto which Axys previously penetrated those firms.

 

**General Economic Conditions May Reduce Our Revenues.**

 

Webelieve that the market for large investment management software systems may benegatively impacted by a number of factors, including reductions in capitalexpenditures by large customers; poor performance of major financial markets,and increasing competition. Those factors may, in turn, give rise to a numberof market trends which we have experienced in the past year that have slowedrevenue growth across the industry, including longer sales cycles, deferral ordelay of information technology projects and generally reduced expenditures forsoftware and related services, and increased price competition. If the downturn in thefinancial services industry and information technology spending continues, the presence of these factors in themarket for large investment management software systems will likely materiallyadversely affect our business and results of operations.

 

**We Face Intense Competition.**

 

Themarket for investment management software is intensely competitive and highlyfragmented, is subject to rapid change and is extremely sensitive to newproduct introductions and marketing efforts by industry participants. Weexperience significant competition from proprietary systems competingindirectly with 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 oftimeshare services, and include some of the following vendors: Financial ModelsCompany, Inc., CheckFree Corporation, Schwab PerformanceTechnologies, StatementOne, Inc., Eagle, asubsidiary of Mellon Financial, Thomson Financial, MacgregorFinancial Technologies, Charles RiverDevelopment, Reuters Group PLC, Bloomberg Tradebrook LLC, Siebel Systems, Inc.and Sungard Data Systems, Inc.

 

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

 

**Difficulties in Integrating Our Acquisitions Has and CouldContinue to Adversely Impact Our Business and We Face Risks Associated WithPotential Acquisitions, Investments or Divestitures.**

 

In2002, we completed the acquisition of Kinexus Corporation, Techfi Corporation,our Greek distributor Advent 

 

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Hellas and AdventOutsource Data Management, LLC and in May of 2003 we purchased our Dutchdistributor, Advent Netherlands BV. The number of acquisitions recentlycompleted was unprecedented.

 

Thecomplex process of integrating Kinexus and our other acquisitions has requiredand will continue to require significant resources, particularly in light ofour relative inexperience in integrating acquisitions. Integrating theseacquisitions has been and will continue to be time consuming, expensive and disruptiveto our business. This integration process has strained our managerial controls,and has resulted in the diversion of management and financial resources fromour core business objectives. Failure to achieve the anticipated benefits ofthese acquisitions or to successfully integrate the operations of theseentities has and could continue to harm our business, results of operations andcash flows. We may not realize the benefits we anticipate from theseacquisitions because of the following significant challenges:

 

•                                          expected synergy benefits from these acquisitions, such as lower costsor increased revenues, may not be realized or may be realized more slowly thananticipated, particularly with regard to costs associated with a reduction inheadcount and facilities;

 

•                                          potentially incompatible cultural differences between the companies;

 

•                                          incorporating these companies’ technologies and products into ourcurrent and future product lines;

 

•                                          geographic dispersion of operations and the complexities of internationaloperations;

 

•                                          integrating the technical teams of these companies with our engineeringorganizations;

 

•                                          generating market demand for an expanded product line;

 

•                                          integrating the products of these companies with our business, becausewe do not have distribution, manufacturing, marketing or support experience forthese products;

 

•                                          the difficulty of leveraging our combined technologies and capabilitiesacross all product lines and customer bases; and

 

•                                          our inability to retain previous customers or employees of theseentities.

 

We haveincurred and expect to continue to incur significant costs and commitsignificant management time in integrating the operations, technology,development programs, products, information systems, customers and personnel ofthese acquisitions. These costs have been and will likely continue to besubstantial and include costs for:

 

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

 

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

 

•                                          fees and expenses of professionals and consultants involved incompleting the integration process;

 

•                                          settling existing liabilities of these companies;

 

•                                          uncovering through our audit process new issues reflected on thecompanies’ financial statements;

 

•                                          costs associated with vacating, subleasing and closing facilities;

 

•                                          employee relocation, redeployment or severance costs;

 

•                                          integrating technology and products; and

 

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

 

We maymake additional acquisitions of complementary companies, products or technologiesin the future. In addition, 

 

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we continually evaluatethe performance of all our products and product lines and may sell ordiscontinue current products or product lines. Failure to achieve the anticipatedbenefits of any future acquisition or divestiture could also harm our business,results of operations and cash flows. Furthermore, we may have to incur debt,write-off investments, infrastructure costs or other assets, incur severanceliabilities, write-off impaired goodwill or other intangible assets or issueequity securities to pay for any future acquisitions. The issuance of equitysecurities could dilute our existing stockholders’ ownership. Finally, we maynot identify suitable businesses to acquire or negotiate acceptable terms foracquisitions.

 

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

 

Our business has experiencedyears of rapid growth through both internal expansion and acquisitions followedby downsizing of our business, particularly in the most recent quarter, andthose changes have caused and may continue to cause a significant strain on ourinfrastructure, internal systems and managerial resources. During the currentyear, we took steps to better align our resources with our operatingrequirements in order to increase our efficiency.  Through these steps, we reduced our headcount and incurredcharges for employee severance and excess facility capacity.  While we believe that these steps help usachieve greater operating efficiency, we have limited history with suchmeasures and the results of these measures are less than predictable.  Additional restructuring efforts may berequired. To manage our business effectively, we must continue to improve ourinfrastructure, including operating and administrative systems and controls,and continue managing headcount, capital and processes in an efficient manner.Our productivity and the quality of our products may be adversely affected ifwe do not integrate and train our employees quickly and effectively andcoordinate among our executive, engineering, finance, marketing, sales,operations and customer support organizations, all of which add to thecomplexity of our organization.  Webelieve workforce reductions, management changes and facility consolidationcreate anxiety and uncertainty and may adversely affect employee morale.  These measures could adversely affect ouremployees that we wish to retain and may also adversely affect our ability tohire new personnel.  They may alsoaffect customers. In addition, our revenues may not grow in alignment with ourheadcount. Integrating our recent acquisitions will complicate these tasks.

 

**We Face Risks Related to Our New Business Areas.**

 

We haveexpanded in recent periods into a number of new business areas to fosterlong-term growth, for example international operations, strategic alliances,and Advent TrustedNetwork. These areas are still relatively new to our productdevelopment 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 ability to develop and market new internet based products andservices, such as Advent TrustedNetwork and WealthLine, is difficult to predictbecause it represents a new area of business for our entire industry. While ourtraditional offerings are marketed to investment managers and advisors, certainof our new offerings are also targeted for use by our clients’ customers. Wemay have difficulty creating demand from our client’s customers as we market tothem indirectly through our clients. Revenue growth may suffer if we cannotcreate demand among our clients’ customers. Also, we have recently entered intonew markets through our acquisitions, and we may not be successful in competingin those areas. Additionally, to help manage our business, we will need tocontinually improve our operational, financial, management and informationsystems and controls.

 

**We Face Challenges in Expanding Our International Operations.**

 

Wemarket and sell our products in the United States and, to a lesser extent,internationally.  In 1999, we enteredinto a distributor relationship with Advent Europe, an independent distributorof our products in selected European markets. In November 2001, weacquired the Norwegian, Swedish, and Danish companies of this independentdistributor, in September 2002, we purchased their Greek subsidiary and inMay 2003, we purchased their Dutch subsidiary. If we were to further expand ourinternational operations, we would need to continue to establish additionallocations, acquire other businesses or enter into additional distributionrelationships in other parts of the world. Any further expansion of ourexisting international operations and entry into additional internationalmarkets could require significant management attention and financial resources.We cannot be certain that establishing new businesses in other countries willproduce the desired levels of revenue. 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 of recessions in economies outside the United States;

 

•                                          Greater difficulty in accounts receivable collection and longercollection periods;

 

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•                                          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.

 

 

Therevenues, expenses, assets and liabilities of our international subsidiariesare primarily denominated in local currencies. We have not historicallyundertaken foreign exchange hedging transactions to cover potential foreigncurrency exposure. Future fluctuations in currency exchange rates may adverselyaffect revenues and accounts receivable from international sales and the U.S.dollar value of our foreign subsidiaries’ revenues, expenses, assets andliabilities. Our international revenues from our distributors are generallydenominated in local foreign currencies.

 

**Writing Off Investments Could Harm Our Results of Operations.**

 

We havemade investments in privately held companies, which we classify as “otherassets” on our balance sheet. The value of these investments is influenced bymany factors, including the operating effectiveness of these companies, theoverall health of these companies’ industries, the strength of the privateequity markets and general market conditions. Due to these and other factors,we have previously determined, and may in the future determine, that the valueof these investments is impaired, which has caused and would cause us to writedown the stated value of these investments such as the write-off of ourinvestments in Encompys and MyCFO during 2002. Furthermore, we cannot be surethat future investment, license, fixed asset or other asset write-downs willnot happen, particularly if the downturn in the financialservices industry and the decline in information technology spending continues. If future write-downs do occur, theycould harm our business and results of operations.

 

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

 

From time to time, we maypublicly disseminate forward-looking information or guidance in compliance withRegulation FD promulgated by the Securities and Exchange Commission. Thisinformation or guidance represents our outlook only as of the date wedisseminate it.

 

**Our Stock Price has Fluctuated Significantly Since OurInitial Public Offering in November 1995.**

 

Likemany companies in the technology and emerging growth sector, our stock pricemay be subject to wide fluctuations, particularly during times of high marketvolatility. If net revenues or earnings in any quarter fail to meet theinvestment community’s expectations, our stock price is likely to decline. Inaddition, our stock price is affected by trends in the financial servicessector and by broader market trends unrelated to our performance.

 

**We Are Continuing to Expand Our Internet-Based Solutions,such as Advent TrustedNetwork and WealthLine.**

 

To takeadvantage of the internet, we are continuing to develop solutions to bringinternet-based products and services to our clients. As we develop these newproducts and services, we have entered, and will continue to enter, intodevelopment agreements and other agreements with information providers, clientsor other companies in order to accelerate the delivery of new products andservices, such as our relationship with Microsoft for WealthLine. We may not besuccessful in marketing our internet services or in developing other internetservices or maintaining these relationships. Internet-based products containcertain unique technical challenges, such as scalability and latencyrequirements, that we may not be successful in solving, and if we cannotsuccessfully overcome such challenges our products may fail. Additionally, wemay not be successful in being able to replace our current technology with newtechnology. 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.

 

**We Must Continue to Introduce New Products and ProductEnhancements.**

 

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Themarket for our products is characterized by rapid technological change, changesin customer demands and evolving industry standards. New products based on newtechnologies or new industry standards can render existing products obsoleteand unmarketable.  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, fortechnological or other reasons, to develop and introduce new products orenhancements of existing products in a timely manner in response to changingmarket conditions or client requirements, or if new products or new versions ofexisting products do not achieve market acceptance, our business would beseriously harmed. In addition, our ability to develop new products and productenhancements is dependent upon the products of other software vendors,including certain system software vendors, such as Microsoft Corporation,database vendors and development tool vendors. If the products of such vendorshave design defects or flaws, or if such products are unexpectedly delayed intheir introduction, our business could be seriously harmed. Our softwareproducts are complex and may contain undetected defects or errors when firstintroduced or as new versions are released. Although we have not experiencedadverse effects resulting from any software errors, we cannot be sure that,despite testing by us and our clients, defects or errors will not be found innew products after commencement of commercial shipments, resulting in loss ofor delay in market acceptance, which could seriously harm our business.

 

**We Must Retain Key Employees and Recruit Qualified Technicaland Sales Personnel.**

 

We believe that our successwill depend on the continued employment of our senior management and keytechnical personnel, none of whom has an employment agreement with us. Additionally,our continued success depends, in part, on our ability to identify, attract,motivate and retain qualified technical, sales and other personnel. Because ourfuture success is dependent on our ability to continue to enhance and introducenew products, we are particularly dependent on our ability to identify,attract, motivate and retain qualified engineers with the requisite education,backgrounds and industry experience. The loss of the services of a significantnumber of our engineers or sales people could be disruptive to our developmentefforts or business relationships and could seriously harm our business. We mayalso be required to create additional performance and retention incentives inorder to retain our employees, including the granting of additional stockoptions to employees at current prices or issuing incentive cash bonuses. Suchincentives may either dilute our existing stockholder base or result inunforeseen operating expenses, which may cause our stock price to fall.

 

**If Our Relationship with Interactive Data Corporation IsTerminated, Our Business May Be Harmed.**

 

Many ofour clients use our proprietary interface to electronically retrieve pricingand other data from Interactive Data Corporation. Interactive Data Corporationpays us a commission based on their revenues from providing this data to ourclients. Our software products have been customized to be compatible with theirsystem and this software would need to be redesigned if their services wereunavailable for any reason. Termination of our agreement with Interactive DataCorporation would require at least two years notice by either us or them, or90 days in the case of material breach. Our revenue could be adverselyimpacted if our relationship with Interactive Data Corporation were terminatedor their services were unavailable to our clients for any reason.

 

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

 

Oursuccess depends significantly upon our proprietary technology. We currentlyrely 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 andcopyright laws, which afford only limited protection. Despite these efforts, itmay be possible 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 cannotbe sure 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 benecessary to protect our proprietary technology. This litigation may betime-consuming and 

 

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expensive. Despite ourefforts to protect our proprietary rights, unauthorized parties may attempt tocopy aspects of our products or to obtain and use information that we regard asproprietary. In addition, the laws of some foreign countries do not protectproprietary rights to as great an extent as do the laws of the United States.We cannot be sure that our means of protecting our proprietary rights will beadequate or that our competitors will not independently develop similartechnology, duplicate our products or design around any patent that may beissued to us or other intellectual property rights of ours.

 

 

**Business Interruptions Could Adversely Affect Our Business.**

 

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

 

**Undetected Software Errors or Failures Found in New ProductsMay Result in Loss of or Delay in Market Acceptance of Our Products That CouldSeriously Harm Our Business.**

 

Ourproducts may contain undetected software errors or failures or scalabilitylimitations at any point in the life of the product, but particularly 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, damage to our reputation, customer dissatisfaction andreductions in revenues and margins, any of which could seriously harm ourbusiness.  Additionally, our agreementswith customers that attempt to limit our exposure to liability claims may notbe enforceable in jurisdictions where we operate.

 

## **Recently Enacted andProposed Changes in Securities Laws and Regulations Will Increase Our Costs**

 

                The Sarbanes-Oxley Act (“the Act”) of 2002 thatbecame law in July 2002 requires changes in some of our corporate governanceand securities disclosure and/or compliance practices.  The Act also requires the Securities andExchange Commission to promulgate new rules on a variety of subjects, inaddition to rule proposals already made, and The NASDAQ National Market hasenacted revisions to their requirements. We believe these developments will increase our accounting and legalcompliance costs and could also expose us to additional liability.  We are presently evaluating and monitoringregulatory developments and cannot reliably estimate the timing or magnitude ofadditional cost we will incur as a result of the Act or other relatedlegislation.

 

**Security Risks and Concerns May Deter the Use of the Internetfor Conducting Business.**

 

Asignificant barrier to commerce and communications over public networks is thesecure transmission of confidential information. Advances in computercapabilities, new discoveries in the field of cryptography or other events ordevelopments could result in compromises or breaches of our security systems orthose 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 our security were breached.

 

 

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

 

We areexposed to financial market risks, including changes in foreign currencyexchange rates and interest rates. Much of our revenue and capital spending istransacted in U.S. dollars. However, since the acquisitions of Advent Denmark,Advent Norway, Advent Sweden, Advent Hellas, and Advent Netherlands BV, whoserevenues and capital spending are transacted in local country currencies, wehave greater exposure to foreign currency fluctuations. Results of operationsfrom Advent Australia, Advent Denmark, Advent Norway, Advent Sweden, AdventHellas and Advent Netherlands BV are not material to our operating results;therefore, we believe that foreign currency exchange rates should notmaterially adversely affect our overall financial position, results ofoperations or cash flows.

 

Webelieve that the fair value of our investment portfolio or related income wouldnot be significantly impacted by increases or decreases in interest rates duemainly to the short-term nature of our investment portfolio. However, immediatesharp increases in interest rates could have a material adverse affect on thefair value of our investment portfolio. Conversely, immediate sharp declines ininterest rates could seriously harm interest earnings of our investmentportfolio.

 

Thetable below presents principal amounts by expected maturity (in U.S. dollars)and related weighted average interest rates by year of maturity for ourinvestment portfolio (in thousands):

 
|                                          |   | **Estimated  Fair Value at June 30, 2003** |   |
|-----------------------------------------------|--------|--------------------------------------------|--------|
|                                          |   | **Maturing  in**                           |   |
|                                          |   | **2003**                                   |   | **2004** |   | **2005** |   | **2006** |   | **Total** |   |
|                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Federal Instruments                           |   | $                                          | 8,555  |   | $ | 4,067 |   | $ | 2,160 |   | $ | — |   | $ | 14,782 |   |
| Weighted Average Interest Rate                |   | 2.66                                       | %      | 3.65 | % | 5.48 | % | 3.33 | % |   |   |
| Commercial Paper & Short-Term Obligations |   | 46,124                                     |   | 5,725 |   | — |   | — |   | 51,849 |   |
| Weighted Average Interest Rate                |   | 1.22                                       | %      | 1.18 | % | 1.22 | % |   |   |   |   |
| Corporate Notes & Bonds                   |   | 8,008                                      |   | 13,358 |   | 27,281 |   | 5,444 |   | 54,091 |   |
| Weighted Average Interest Rate                |   | 5.98                                       | %      | 6.07 | % | 6.41 | % | 3.61 | % | 5.97 | % |
| Municipal Notes & Bonds                   |   | 4,573                                      |   | 2,680 |   | 893 |   | — |   | 8,146 |   |
| Weighted Average Interest Rate                |   | 2.98                                       | %      | 4.81 | % | 5.70 | % | 3.87 | % |   |   |
| Corporate Equity Securities                   |   | 472                                        |   | — |   | — |   | — |   | 472 |   |
|                                          |   |                                       |   |   |   |   |   |   |   |   |   |
| Total Portfolio                               |   | $                                          | 67,732 |   | $ | 25,830 |   | $ | 30,334 |   | $ | 5,444 |   | $ | 129,340 |   |

 

At June 30, 2003, cash, cashequivalents and short-term marketable securities totaled approximately$153.5 million, which is comprised of the $129.3 million in our investmentportfolio, presented above, and $24.2 million in other cash and cashequivalents.

 

We also invested in severalprivately held companies, most of which can still be considered in the start-upor development stages and are classified as “other assets” on our balancesheet. In 2002 we purchased approximately 15% of the outstanding stock ofLatentZero Limited (“LatentZero”), a privately held company located in England. Our investment in LatentZero totaledapproximately $7 million and is accounted for under the equity method ofaccounting because our Chief Executive Officer, President and Chairman of ourBoard of Directors is a member of LatentZero’s Board of Directors. Our portionof the net income or losses for this investment has not been significant todate. At June 30, 2003 our net investments in privately held companiesincluding LatentZero were approximately $9.2 million. These investments areinherently risky as the market for the technologies or products they have underdevelopment are typically in the early stages and may never materialize. Thevalue of these investments is influenced by many factors, including theoperating effectiveness of these companies, the overall health of thecompanies’ industries, the strength of the private equity markets and generalmarket conditions. We could lose our entire initial investment in thesecompanies.

 

 

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

 

**Evaluation of disclosurecontrols and procedures.**

Our managementevaluated, with the participation of our Chief Executive Officer and our ChiefFinancial Officer, the effectiveness of our disclosure controls and proceduresas of the end of the period covered by this Quarterly Report on Form 10-Q.Based on this evaluation, our Chief Executive Officer and our Chief FinancialOfficer have concluded that our disclosure controls and procedures areeffective to ensure that information we are required to disclose in reportsthat we file or submit under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

**Changes in internal controlover financial reporting.**

There was no change inour internal control over financial reporting that occurred during the periodcovered by this Quarterly Report on Form 10-Q that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

 

**PART II.  OTHERINFORMATION**

 

**Item 1.    Legal Proceedings**

 

From time to time we areinvolved in litigation incidental to the conduct of our business. We are notparty to any lawsuit or proceeding that, in our opinion, is likely to seriouslyharm our business.

 

**Item 2.    Changes in Securities and Use ofProceeds**

 

None.

 

**Item 3.    Defaults Upon Senior Securities**

 

None.

 

**Item 4.    Submission of Matters to a Vote ofSecurity Holders**

 

At our Annual Meeting ofStockholders, held May 14, 2003, the following matters were voted upon bystockholders pursuant to proxies solicited pursuant to Regulation 14A of theSecurities Exchange Act of 1934:

 

The following individualswere elected to the Board of Directors:

 

**NOMINEE**

 
|                      |   | **FOR**    |   | **ABSTAIN** |
|---------------------------|--------|------------|--------|-------------|
| Ms.  Stephanie G. DiMarco |   | 26,755,470 |   | 50,271      |
| Ms.  Terry H. Carlitz     |   | 26,738,531 |   | 67,210      |
| Mr.  Wendell G. VanAuken  |   | 21,117,849 |   | 5,687,892   |
| Mr.  William F. Zuendt    |   | 21,114,958 |   | 5,690,783   |
| Mr.  Monte Zweben         |   | 21,113,606 |   | 5,692,135   |

 
| Mr.  Peter M. Caswell* |   | 26,699,345 |   | 106,396 |
|------------------------|--------|------------|--------|---------|

 

* Mr. Caswell resignedeffective May 13, 2003.

 

The vote for the approval ofand reservation of shares under the Company’s Employee Stock Purchase Plan wasas follows:

 

 

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| **FOR**    |   | **AGAINST** |   | **ABSTAIN** |   | **BROKER NON-VOTES** |
|------------|--------|-------------|--------|-------------|--------|----------------------|
| 26,013,714 |   | 768,926     |   | 23,100      |   | 1                    |

 

 

The vote for theratification of the appointment of PricewaterhouseCoopers LLP was as follows:

** **
| **FOR**    |   | **AGAINST** |   | **ABSTAIN** |   | **BROKER NON-VOTES** |
|------------|--------|-------------|--------|-------------|--------|----------------------|
| 20,491,191 |   | 6,295,844   |   | 18,705      |   | 1                    |

 

 

**Item 5.    Other Information**

 

None.

 

**Item 6.    Exhibits and Reports On Form 8-K**

 

(a)           Exhibits

 

3.2Amended and Restated Bylaws of Registrant

 

31.1Certification by Stephanie G. DiMarco pursuant to Rule 13a-14(a)

 

31.2Certification by Graham V. Smith pursuant to Rule 13a-14(a)

 

32.1Certifications Pursuant to 18 U.S.C. Section 1350

 

(b)           Reports on Form 8-K

 

Pursuantto the requirement of Item 12 of Form 8-K, the Company filed reports on Form8-K on April 3, 2003 and April 15, 2003 containing the Company’s press releasesfor their anticipated and actual results, respectively, for the three monthsended March 31, 2003, and on July 24, 2003 containing the Company’s pressrelease for their actual result for the three and six months ended June 30,2003.

 

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|   |                   | ADVENT  SOFTWARE, INC. |
|--------|------------------------|------------------------|
|   |                   |                   |   |
|   | Dated:  August 7, 2003 | By:                    | /s/  Graham V. Smith |
|   |                   |                   | Graham  V. Smith *Executive Vice President,  Chief Financial Officer**and Secretary  (Principal Financial Officer, Principal  Accounting Officer)* |

 

 

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