Table of Contents

 

 

 

**UNITED STATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x**                                                       | ** ** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**  |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                  |
| **for the quarterly period ended September 30,  2008** |
| ** **                                                  |
| **or**                                                      |
| ** **                                                  | ** ** | ** **                                                                                               |
| **o**                                                       | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |

 

**Commission file number:  0-26994**

 

**ADVENT SOFTWARE, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                     | ** ** | **94-2901952**                       |
|------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or  organization) |       | (IRS Employer Identification Number) |
| ** **                                                       |
| **600 Townsend Street, San Francisco,  California 94103**        |
| (Address of principal executive offices and  zip code)           |
|                                                             |
| **(415) 543-7696**                                          |
| (Registrant’s telephone number, including  area code)       |

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x  No o

 

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

 

| Large accelerated filer o                                               | Accelerated  filer x         |
|-------------------------------------------------------------------------|-----------------------------------|
|                                                                    |                              |
| Non-accelerated filer o

(Do not check if a smaller  reporting company) | Smaller  reporting company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o No x

 

The number of shares of the registrant’s Common Stock outstanding as ofOctober 31, 2008 was 26,926,881.

 

 

 

----

Table of Contents

 

**INDEX**

 
| **PART I. FINANCIAL INFORMATION** | 3                                                                                           |
|----------------------------------------|---------------------------------------------------------------------------------------------|
|                                   |                                                                                        |   |
| Item 1.                                | Financial Statements                                                                        | 3 |
|                                   | Condensed Consolidated Balance Sheets                                                       | 3 |
|                                   | Condensed Consolidated Statements of  Operations                                            | 4 |
|                                   | Condensed Consolidated Statements of Cash  Flows                                            | 5 |
|                                   | Notes to Condensed  Consolidated Financial Statements                                       | 6 |
| Item 2.                                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 17 |
| Item 3.                                | Quantitative and Qualitative Disclosures  About Market Risk                                 | 35 |
| Item 4.                                | Controls and Procedures                                                                     | 36 |
| ** **                             |                                                                                        |
| **PART II. OTHER INFORMATION**    | 36                                                                                          |
|                                   |                                                                                        |   |
| Item 1.                                | Legal Proceedings                                                                           | 36 |
| Item 1A.                               | Risk Factors                                                                                | 37 |
| Item 2.                                | Unregistered Sales of Equity Securities and  Use of Proceeds                                | 48 |
| Item 3.                                | Defaults Upon Senior Securities                                                             | 48 |
| Item 4.                                | Submission of Matters to a Vote of Security  Holders                                        | 48 |
| Item 5.                                | Other Information                                                                           | 48 |
| Item 6.                                | Exhibits                                                                                    | 48 |
| **Signatures**                         | ** **                                                                                  | 49 |

 

2

----

Table of Contents

 

**PART I.FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                      | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2008**              | ** ** | **2007**             | ** ** |
| **ASSETS**                                      | ** ** | ** **            | ** ** | ** **           | ** ** |
| Current assets:                                 |       |                  |       |                 |       |
| Cash and cash equivalents                       |       | $                     | 76,122     |                 | $          | 49,589 |   |
| Accounts receivable, net                        |       | 47,793                |       | 47,574               |       |
| Deferred taxes, current                         |       | 10,278                |       | 10,288               |       |
| Prepaid expenses and other                      |       | 19,664                |       | 19,577               |       |
| Total current assets                            |       | 153,857               |       | 127,028              |       |
| Property and equipment, net                     |       | 39,730                |       | 27,779               |       |
| Goodwill                                        |       | 104,745               |       | 106,520              |       |
| Other intangibles, net                          |       | 7,943                 |       | 9,376                |       |
| Deferred taxes, long-term                       |       | 70,981                |       | 70,981               |       |
| Other assets, net                               |       | 11,107                |       | 10,645               |       |
|                                            |       |                  |       |                 |       |
| Total assets                                    |       | $                     | 388,363    |                 | $          | 352,329 |   |
|                                            |       |                  |       |                 |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**   |       |                  |       |                 |       |
| Current liabilities:                            |       |                  |       |                 |       |
| Accounts payable                                |       | $                     | 10,298     |                 | $          | 4,382 |   |
| Accrued liabilities                             |       | 25,484                |       | 29,328               |       |
| Deferred revenues                               |       | 131,535               |       | 115,398              |       |
| Income taxes payable                            |       | 4,598                 |       | 1,086                |       |
| Total current liabilities                       |       | 171,915               |       | 150,194              |       |
| Deferred income taxes                           |       | 711                   |       | 998                  |       |
| Deferred revenues, long-term                    |       | 6,193                 |       | 4,939                |       |
| Other long-term liabilities                     |       | 15,935                |       | 16,352               |       |
|                                            |       |                  |       |                 |       |
| Total liabilities                               |       | 194,754               |       | 172,483              |       |
|                                            |       |                  |       |                 |       |
| Commitments and contingencies (See Note 10)     |       |                  |       |                 |       |
|                                            |       |                  |       |                 |       |
| Stockholders’ equity:                      |       |                  |       |                 |       |
| Common stock                                    |       | 265                   |       | 265                  |       |
| Additional paid-in capital                      |       | 340,905               |       | 326,964              |       |
| Accumulated deficit                             |       | (159,935              | )          | (161,685             | )          |
| Accumulated other comprehensive income          |       | 12,374                |       | 14,302               |       |
| Total stockholders’ equity                 |       | 193,609               |       | 179,846              |       |
|                                            |       |                  |       |                 |       |
| Total liabilities and stockholders’ equity |       | $                     | 388,363    |                 | $          | 352,329 |   |

 

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

 

3

----

Table of Contents

 

**ADVENT SOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(In thousands, except per share data)**

**(Unaudited)**

 
| ** **                                                     | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net revenues:**                                              |       |                                                    |       |                                                   |       |   |   |   |   |
| Term license, maintenance and other  recurring                 |       | $                                                       | 51,736     |                                                   | $          | 43,046 |   | $ | 151,713 |   | $ | 122,782 |   |
| Perpetual license fees                                         |       | 4,565                                                   |       | 6,054                                                  |       | 15,432 |   | 17,670 |   |
| Professional services and other                                |       | 8,619                                                   |       | 6,449                                                  |       | 23,275 |   | 15,452 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total net revenues                                             |       | 64,920                                                  |       | 55,549                                                 |       | 190,420 |   | 155,904 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Cost of revenues:**                                          |       |                                                    |       |                                                   |       |   |   |   |   |
| Term license, maintenance and other  recurring                 |       | 11,950                                                  |       | 9,757                                                  |       | 34,263 |   | 27,837 |   |
| Perpetual license fees                                         |       | 225                                                     |       | 218                                                    |       | 766 |   | 632 |   |
| Professional services and other                                |       | 11,056                                                  |       | 7,662                                                  |       | 27,301 |   | 19,950 |   |
| Amortization of developed technology                           |       | 725                                                     |       | 332                                                    |       | 2,179 |   | 1,018 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total cost of revenues                                         |       | 23,956                                                  |       | 17,969                                                 |       | 64,509 |   | 49,437 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Gross margin                                                   |       | 40,964                                                  |       | 37,580                                                 |       | 125,911 |   | 106,467 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Operating expenses:**                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Sales and marketing                                            |       | 15,452                                                  |       | 13,482                                                 |       | 46,468 |   | 40,356 |   |
| Product development                                            |       | 11,077                                                  |       | 9,334                                                  |       | 36,975 |   | 30,006 |   |
| General and administrative                                     |       | 9,527                                                   |       | 8,393                                                  |       | 27,986 |   | 25,014 |   |
| Amortization of other intangibles                              |       | 141                                                     |       | 463                                                    |       | 870 |   | 1,403 |   |
| Restructuring charges                                          |       | 41                                                      |       | 113                                                    |       | 96 |   | 902 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total operating expenses                                       |       | 36,238                                                  |       | 31,785                                                 |       | 112,395 |   | 97,681 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Income from operations                                         |       | 4,726                                                   |       | 5,795                                                  |       | 13,516 |   | 8,786 |   |
| Interest and other income (expense), net                       |       | (167                                                    | )          | (138                                                   | )          | 3,619 |   | 4,248 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Income before income taxes                                     |       | 4,559                                                   |       | 5,657                                                  |       | 17,135 |   | 13,034 |   |
| Provision for income taxes                                     |       | 1,847                                                   |       | 2,361                                                  |       | 4,433 |   | 4,204 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Net income**                                                 |       | $                                                       | 2,712      |                                                   | $          | 3,296 |   | $ | 12,702 |   | $ | 8,830 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Net income per share:                                          |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                          |       | $                                                       | 0.10       |                                                   | $          | 0.13 |   | $ | 0.48 |   | $ | 0.33 |   |
| Diluted                                                        |       | $                                                       | 0.10       |                                                   | $          | 0.12 |   | $ | 0.45 |   | $ | 0.32 |   |
|                                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Weighted average shares used to compute net  income per share: |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                          |       | 26,788                                                  |       | 25,781                                                 |       | 26,690 |   | 26,541 |   |
| Diluted                                                        |       | 28,198                                                  |       | 27,401                                                 |       | 28,199 |   | 27,911 |   |

 

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

 

4

----

Tableof Contents

 

**ADVENTSOFTWARE, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                               | ** ** | **2007** | ** ** |
| **Cash flows from operating activities:**                                          |       |                                                   |       |   |   |
| Net income                                                                         |       | $                                                      | 12,702     |   | $ | 8,830 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                                   |       |   |   |
| Stock-based compensation                                                           |       | 12,306                                                 |       | 10,047 |   |
| Depreciation and amortization                                                      |       | 9,544                                                  |       | 8,170 |   |
| Loss on dispositions of fixed assets                                               |       | 4                                                      |       | 444 |   |
| Provision for doubtful accounts                                                    |       | 529                                                    |       | 121 |   |
| Provision for (reduction of) sales returns                                         |       | 61                                                     |       | (67 | ) |
| Gain on investments                                                                |       | (3,393                                                 | )          | (4,265 | ) |
| Other-than-temporary loss on private equity  investments                           |       | —                                                 |       | 585 |   |
| Deferred income taxes                                                              |       | (278                                                   | )          | (195 | ) |
| Other                                                                              |       | 197                                                    |       | 54 |   |
| Effect of statement of operations  adjustments                                     |       | 18,970                                                 |       | 14,894 |   |
| Changes in operating assets and  liabilities:                                      |       |                                                   |       |   |   |
| Accounts receivable                                                                |       | (748                                                   | )          | 685 |   |
| Prepaid and other assets                                                           |       | 746                                                    |       | (3,385 | ) |
| Accounts payable                                                                   |       | 5,915                                                  |       | (1,017 | ) |
| Accrued liabilities                                                                |       | (4,473                                                 | )          | (116 | ) |
| Deferred revenues                                                                  |       | 17,328                                                 |       | 14,582 |   |
| Income taxes payable                                                               |       | 3,726                                                  |       | 3,763 |   |
| Effect of changes in operating assets and  liabilities                             |       | 22,494                                                 |       | 14,512 |   |
|                                                                               |       |                                                   |       |   |   |
| Net cash provided by operating activities                                          | ** ** | **54,166**                                             | ** ** | **38,236** | ** ** |
|                                                                               |       |                                                   |       |   |   |
| **Cash flows from investing activities:**                                          |       |                                                   |       |   |   |
| Net cash used in acquisitions                                                      |       | (1,000                                                 | )          | (1,022 | ) |
| Purchases of property and equipment                                                |       | (18,381                                                | )          | (7,138 | ) |
| Capitalized software development costs                                             |       | (1,703                                                 | )          | (2,447 | ) |
| Proceeds from sale of private equity  investments                                  |       | 3,393                                                  |       | 11,621 |   |
| Sales and maturities of marketable  securities                                     |       | —                                                 |       | 24,921 |   |
| Change in restricted cash                                                          |       | (248                                                   | )          | (372 | ) |
|                                                                               |       |                                                   |       |   |   |
| Net cash provided by (used in) investing  activities                               | ** ** | **(17,939**                                            | **)**      | **25,563** | ** ** |
|                                                                               |       |                                                   |       |   |   |
| **Cash flows from financing activities:**                                          |       |                                                   |       |   |   |
| Proceeds from common stock issued from  exercises of stock options                 |       | 4,892                                                  |       | 17,961 |   |
| Withholding taxes related to equity award  net share settlement                    |       | (2,000                                                 | )          | (57 | ) |
| Proceeds from common stock issued under the  employee stock purchase plan          |       | 2,576                                                  |       | 1,829 |   |
| Repurchase of common stock                                                         |       | (15,032                                                | )          | (91,157 | ) |
| Proceeds from long-term borrowing                                                  |       | —                                                 |       | 25,000 |   |
| Repayment of long-term borrowing                                                   |       | —                                                 |       | (5,000 | ) |
|                                                                               |       |                                                   |       |   |   |
| Net cash used in financing activities                                              | ** ** | **(9,564**                                             | **)**      | **(51,424** | **)** |
|                                                                               |       |                                                   |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                      | ** ** | **(130**                                               | **)**      | **241** | ** ** |
|                                                                               |       |                                                   |       |   |   |
| **Net change in cash and cash equivalents**                                        | ** ** | **26,533**                                             | ** ** | **12,616** | ** ** |
| **Cash and cash equivalents at beginning of  period**                              | ** ** | **49,589**                                             | ** ** | **30,187** | ** ** |
|                                                                               |       |                                                   |       |   |   |
| **Cash and cash equivalents at end of period**                                     | ** ** | **$**                                                  | **76,122** | ** ** | **$** | **42,803** | ** ** |

 

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

 

5

----

Tableof Contents

 

**ADVENT SOFTWARE, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1—Basis ofPresentation**

 

The condensed consolidated financial statements include the accounts ofAdvent Software, Inc. (“Advent” or the “Company”) and its wholly ownedsubsidiaries. All inter-company balances and transactions have been eliminated.

 

Advent has prepared these condensed consolidated financial statementsin accordance with the rules and regulations of the Securities andExchange Commission (“SEC”) applicable to interim financial information.Certain information and footnote disclosures included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been omitted in these interim statements pursuantto such SEC rules and regulations. These interim financial statementsshould be read in conjunction with the audited financial statements and relatednotes included in Advent’s Annual Report on Form 10-K for the year ended December 31,2007. Interim results are not necessarily indicative of the results to beexpected for the full year, and no representation is made thereto.

 

These condensed consolidated financial statements include alladjustments necessary to state 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.

 

**Note 2—RecentAccounting Pronouncements**

 

With the exception of those discussed below, there have been no recentaccounting pronouncements or changes in accounting pronouncements during thenine months ended September 30, 2008, as compared to the recent accountingpronouncements described in Advent’s Annual Report on Form 10-K for thefiscal year ended December 31, 2007, that are of significance, orpotential significance, to the Company.

 

In April 2008, the Financial Accounting Standards Board (“FASB”) issuedFASB Staff Position (“FSP”) No. 142-3, “Determination of the Useful Lifeof Intangible Assets”. FSP 142-3 amends the factors an entity should considerin developing renewal or extension assumptions used in determining the usefullife or recognized intangible assets under FASB Statement No. 142, “Goodwilland Other Intangible Assets”. This new guidance applies prospectively tointangible assets that are acquired individually or with a group of otherassets in business combinations and asset acquisitions. FSP 142-3 is effectivefor financial statements issued for fiscal years and interim periods beginningafter December 15, 2008. Early adoption is prohibited. The Company iscurrently evaluating the impact, if any, that FSP 142-3 will have on itsconsolidated financial statements.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy ofGenerally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies thesources of accounting principles and the framework for selecting the principlesto be used in the preparation of financial statements that are presented inconformity with generally accepted accounting principles in the United States.This statement is effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples.” The Company does not expect SFAS 162 to have a material impact onits consolidated financial statements.

 

6

----

Table of Contents

 

**Note 3—Stock-Based Compensation**

 

**Equity Award Activity**

 

Asummary of the status of the Company’s stock option and stock appreciationright (“SAR”) activity for the period presented follows:

 
| ** **                             | ** ** | ** **              | ** ** | ** **   | ** ** | **Weighted**              | ** ** | ** **              | ** ** |
|----------------------------------------|------------|-------------------------|------------|--------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | ** **              | ** ** | **Weighted** | ** ** | **Average**               | ** ** | **Aggregate**           | ** ** |
| ** **                             | ** ** | **Number of**      | ** ** | **Average**  | ** ** | **Remaining**             | ** ** | **Intrinsic**           | ** ** |
| ** **                             | ** ** | **Shares**              | ** ** | **Exercise** | ** ** | **Contractual Life** | ** ** | **Value**               | ** ** |
| ** **                             | ** ** | **(in thousands)** | ** ** | **Price**    | ** ** | **(in years)**       | ** ** | **(in thousands)** | ** ** |
| ** **                             | ** ** | ** **              | ** ** | ** **   | ** ** | ** **                | ** ** | ** **              | ** ** |
| Outstanding at December 31, 2007  |       | 3,818                   |       | $            | 24.61      |                      |       |                    |       |   |
| Options & SARs granted        |       | 812                     |       | $            | 42.99      |                      |       |                    |       |   |
| Options & SARs exercised      |       | (298                    | )          | $            | 21.51      |                      |       |                    |       |   |
| Options & SARs canceled       |       | (207                    | )          | $            | 41.23      |                      |       |                    |       |   |
| Outstanding at September 30, 2008 |       | 4,125                   |       | $            | 27.62      |                      | 6.25       |                    | $          | 39,450 |   |
| Exercisable at September 30, 2008 |       | 2,388                   |       | $            | 22.94      |                      | 4.86       |                    | $          | 31,078 |   |

 

The aggregate intrinsicvalue is calculated as the difference between the exercise price of theunderlying awards and the Company’s closing stock price of $35.23 as of September 30,2008 for options that were in-the-money as of that date.

 

The weighted average grantdate fair value of options and SARs granted during the nine months ended September 30,2008 was $18.35 per share. The total intrinsic value of options exercisedduring the nine months ended September 30, 2008 and 2007 was $7.2 millionand $16.4 million, respectively. The total cash received from employees as aresult of employee stock option exercises, net of taxes paid for SARs exercisedand restricted stock units (“RSU”) vested, during the nine months ended September 30,2008 and 2007 was approximately $2.9 million and $17.9 million, respectively.

 

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

 

A summary of the status ofthe Company’s RSU activity for the nine months ended September 30, 2008 isas follows:

 

| ** **                                           | ** ** | ** **              | ** ** | **Weighted**        | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                                           | ** ** | **Number of**      | ** ** | **Average**         | ** ** |
| ** **                                           | ** ** | **Shares**              | ** ** | **Grant Date** | ** ** |
| ** **                                           | ** ** | **(in thousands)** | ** ** | **Fair Value** | ** ** |
| ** **                                           | ** ** | ** **              | ** ** | ** **          | ** ** |
| Outstanding and unvested at  December 31, 2007  |       | 571                     |       | $                   | 34.62      |   |
|                                                 |       |                    |       |                |       |
| RSUs granted                                         |       | 260                     |       | $                   | 41.94      |   |
|                                                 |       |                    |       |                |       |
| RSUs vested                                          |       | (110                    | )          | $                   | 29.29      |   |
|                                                 |       |                    |       |                |       |
| RSUs canceled                                        |       | (27                     | )          | $                   | 37.65      |   |
|                                                 |       |                    |       |                |       |
| Outstanding and unvested at  September 30, 2008 |       | 694                     |       | $                   | 38.09      |   |

 

Theweighted average grant date fair value was determined based on the closingmarket price of the Company’s common stock on the date of the award. Theaggregate intrinsic value of RSUs outstanding at September 30, 2008 was$24.4 million, based on the closing price of $35.23 per share as of September 30,2008.

 

7

----

Table of Contents

 

**Stock-BasedCompensation Expense**

 

Theeffect of stock-based employee compensation expense recognized on Advent’scondensed consolidated statement of operations for the three and nine monthsended September 30, 2008 and 2007 was as follows (in thousands):

 
| ** **                                                      | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Statement of operations classification**                      |       |                                                    |       |                                                   |       |   |   |   |   |
| Cost of term license, maintenance and other  recurring revenues |       | $                                                       | 368        |                                                   | $          | 295 |   | $ | 981 |   | $ | 870 |   |
| Cost of professional services and other  revenues               |       | 280                                                     |       | 189                                                    |       | 775 |   | 546 |   |
| Total cost of revenues                                          |       | 648                                                     |       | 484                                                    |       | 1,756 |   | 1,416 |   |
|                                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Sales and marketing                                             |       | 1,339                                                   |       | 998                                                    |       | 3,476 |   | 3,134 |   |
| Product development                                             |       | 1,110                                                   |       | 749                                                    |       | 2,990 |   | 2,386 |   |
| General and administrative                                      |       | 1,957                                                   |       | 988                                                    |       | 4,084 |   | 3,111 |   |
| Total operating expenses                                        |       | 4,406                                                   |       | 2,735                                                  |       | 10,550 |   | 8,631 |   |
|                                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Total stock-based employee compensation  expense                |       | $                                                       | 5,054      |                                                   | $          | 3,219 |   | $ | 12,306 |   | $ | 10,047 |   |
|                                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Tax effect on stock-based employee  compensation                |       | (1,873                                                  | )          | (1,232                                                 | )          | $ | (4,524 | ) | $ | (3,561 | ) |
|                                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Net effect on net income                                        |       | $                                                       | 3,181      |                                                   | $          | 1,987 |   | $ | 7,782 |   | $ | 6,486 |   |

 

Adventcapitalized stock-based employee compensation expense of $246,000 and $283,000during the nine months ended September 30, 2008 and 2007, respectively,associated with the Company’s software development, internal-use software andprofessional services implementation projects.

 

Asof September 30, 2008, total unrecognized compensation cost related tounvested awards not yet recognized under all equity compensation plans,adjusted for estimated forfeitures, was $31.0 million and is expected to berecognized through the remaining vesting period of each grant, with a weightedaverage remaining period of 3.0 years.

 

**Valuation Assumptions**

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option valuation model and the straight-line attribution approachwith the following assumptions:

 
| ** **                       | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|----------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Stock Options & SARs**     | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expected volatility              |       | 42.0% - 43.7%                                           |       | 33.1% - 35.5%                                          |       | 41.8% - 43.7% |   | 32.9% - 38.4% |   |
| Expected life (in years)         |       | 5.27                                                    |       | 4.58                                                   |       | 3.82 - 5.27 |   | 3.75 - 4.58 |   |
| Risk-free interest rate          |       | 2.7% - 3.4%                                             |       | 4.2% - 5.0%                                            |       | 2.6% - 3.9% |   | 4.2% - 5.2% |   |
| Expected dividends               |       | None                                                    |       | None                                                   |       | None |   | None |   |
|                             |       |                                                    |       |                                                   |       |   |   |   |   |
| **Employee Stock Purchase Plan** |       |                                                    |       |                                                   |       |   |   |   |   |
| Expected volatility              |       | 46.0%                                                   |       | 35.5%                                                  |       | 43.8% - 46.0% |   | 35.5% - 36.5% |   |
| Expected life (in months)        |       | 6                                                       |       | 6                                                      |       | 6 |   | 6 |   |
| Risk-free interest rate          |       | 2.0%                                                    |       | 5.0%                                                   |       | 2.0% - 3.4% |   | 4.2% - 5.0% |   |
| Expected dividends               |       | None                                                    |       | None                                                   |       | None |   | None |   |

 

Theexpected stock price volatility was determined based on an equally weightedaverage of historical and implied volatility of the Company’s commonstock. Advent determined that a blend of implied volatility andhistorical volatility is more reflective of the market conditions and a betterindicator of expected volatility than using purely historical volatility. The expected life was determined based onhistorical experience of similar awards, giving consideration to thecontractual terms of the stock-based awards, vesting schedules and expectationsof future employee behavior. The risk-free interest rate is based on theU.S. Treasury yield curve in effect at the time of grant for periodscorresponding with the expected life of the option. The dividend yieldassumption is based on the Company’s history of not paying dividends and theresultant future expectation of dividend payouts.

 

**Note 4—NetIncome Per Share**

 

Basic netincome per share is computed by dividing net income by the weighted averagenumber of common shares outstanding during the period. Diluted net income pershare is computed by dividing net income by the sum of the weighted averagenumber of common shares outstanding and the potential number of dilutive commonshares outstanding during the period, excluding the effect of any anti-dilutivesecurities. Potential common shares consist of the shares issuable upon theexercise of stock options and SARs, the vesting of restricted stock awards andfrom withholdings associated with the Company’s employee

 

8

----

Table of Contents

 

stockpurchase plan. Potentialcommon shares are reflected in diluted earnings per share by application of thetreasury stock method, which in the current period includes consideration ofunamortized stock-based compensation and windfall tax benefits, as a result ofthe implementation of SFAS 123R.

 

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

 
| ** **                                                                                                                                | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Numerator:**                                                                                                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Net income                                                                                                                                |       | $                                                       | 2,712      |                                                   | $          | 3,296 |   | $ | 12,702 |   | $ | 8,830 |   |
|                                                                                                                                      |       |                                                    |       |                                                   |       |   |   |   |   |
| **Denominator:**                                                                                                                          |       |                                                    |       |                                                   |       |   |   |   |   |
| Denominator for basic net income per  share-weighted average shares outstanding                                                           |       | 26,788                                                  |       | 25,781                                                 |       | 26,690 |   | 26,541 |   |
|                                                                                                                                      |       |                                                    |       |                                                   |       |   |   |   |   |
| Dilutive common equivalent shares:                                                                                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Employee stock options and other                                                                                                          |       | 1,410                                                   |       | 1,620                                                  |       | 1,509 |   | 1,370 |   |
|                                                                                                                                      |       |                                                    |       |                                                   |       |   |   |   |   |
| Denominator for diluted net income per  share-weighted average shares outstanding, assuming exercise of potential  dilutive common shares |       | 28,198                                                  |       | 27,401                                                 |       | 28,199 |   | 27,911 |   |
|                                                                                                                                      |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic net income per share                                                                                                                |       | $                                                       | 0.10       |                                                   | $          | 0.13 |   | $ | 0.48 |   | $ | 0.33 |   |
| Diluted net income per share                                                                                                              |       | $                                                       | 0.10       |                                                   | $          | 0.12 |   | $ | 0.45 |   | $ | 0.32 |   |

 

Weightedaverage stock options, SARs and RSUs of approximately 1.4 million and 1.2million for the three and nine months ended September 30, 2008, respectively,were excluded from the calculation of diluted net income per share becausetheir inclusion would have been anti-dilutive. Similarly, weighted averagestock options, SARs and RSUs of approximately 0.8 million and 1.4 million forthe three and nine months ended September 30, 2007, respectively, wereexcluded from the calculation of diluted net income per share.

 

**Note 5—Goodwill**

 

The changes in the carrying value of goodwill for the nine months endedSeptember 30, 2008 were as follows (in thousands):

 

| ** **                         | ** ** | **Goodwill** | ** ** |
|------------------------------------|------------|--------------|------------|
| ** **                         | ** ** | ** **   | ** ** |
| Balance at December 31, 2007  |       | $            | 106,520    |   |
| Translation adjustments            |       | (1,775       | )          |
|                               |       |         |       |
| Balance at September 30, 2008 |       | $            | 104,745    |   |

 

Foreigncurrency translation adjustments totaling $1.8 million reflect thestrengthening of the U.S. dollar versus European currencies during the ninemonths ended September 30, 2008.

 

9

----

Table of Contents

 

**Note 6—OtherIntangibles**

 

The following is a summary of other intangibles as of September 30,2008 (in thousands):

 
| ** **                                 | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                 | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                                 | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                                 | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
| ** **                                 | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Purchased technologies                     |       | 4.9              |       | $                | 16,302     |             | $          | (13,564          | )          | $ | 2,738 |   |
| Product development costs                  |       | 3.0              |       | 8,111            |       | (3,669           | )          | 4,442            |       |
|                                       |       |             |       |             |       |             |       |             |       |
| Developed technology sub-total             |       |             |       | 24,413           |       | (17,233          | )          | 7,180            |       |
|                                       |       |             |       |             |       |             |       |             |       |
| Customer relationships                     |       | 5.5              |       | 22,946           |       | (22,262          | )          | 684              |       |
| Other intangibles                          |       | 3.5              |       | 396              |       | (317             | )          | 79               |       |
|                                       |       |             |       |             |       |             |       |             |       |
| Customer relationships and other sub-total |       |             |       | 23,342           |       | (22,579          | )          | 763              |       |
|                                       |       |             |       |             |       |             |       |             |       |
| Balance at September 30, 2008         |       |             |       | $                | 47,755     |             | $          | (39,812          | )          | $ | 7,943 |   |

 

The following is a summary of other intangibles as of December 31,2007 (in thousands):

 
| ** **                                 | ** ** | **Average**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                 | ** ** | **Amortization** | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
| ** **                                 | ** ** | **Period**       | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                                 | ** ** | **(Years)**      | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                                       |       |             |       |             |       |             |       |             |       |
| Purchased technologies                     |       | 4.9              |       | $                | 16,529     |             | $          | (13,001          | )          | $ | 3,528 |   |
| Product development costs                  |       | 3.0              |       | 6,290            |       | (2,081           | )          | 4,209            |       |
|                                       |       |             |       |             |       |             |       |             |       |
| Developed technology sub-total             |       |             |       | 22,819           |       | (15,082          | )          | 7,737            |       |
|                                       |       |             |       |             |       |             |       |             |       |
| Customer relationships                     |       | 5.5              |       | 22,673           |       | (21,130          | )          | 1,543            |       |
| Other intangibles                          |       | 3.6              |       | 404              |       | (308             | )          | 96               |       |
|                                       |       |             |       |             |       |             |       |             |       |
| Customer relationships and other sub-total |       |             |       | 23,077           |       | (21,438          | )          | 1,639            |       |
|                                       |       |             |       |             |       |             |       |             |       |
| Balance at December 31, 2007          |       |             |       | $                | 45,896     |             | $          | (36,520          | )          | $ | 9,376 |   |

 

The changes in the carrying value of other intangibles during the ninemonths ended September 30, 2008 were as follows (in thousands):

 
| ** **                         | ** ** | **Other**        | ** ** | ** **       | ** ** | **Other**        | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                         | ** ** | **Intangibles,** | ** ** | **Accumulated**  | ** ** | **Intangibles,** | ** ** |
| ** **                         | ** ** | **Gross**        | ** ** | **Amortization** | ** ** | **Net**          | ** ** |
|                               |       |             |       |             |       |             |       |
| Balance at December 31, 2007  |       | $                | 45,896     |             | $          | (36,520          | )          | $ | 9,376 |   |
| Additions                          |       | 1,703            |       | —           |       | 1,703            |       |
| Stock-based compensation additions |       | 118              |       | —           |       | 118              |       |
| Amortization                       |       | —           |       | (3,049           | )          | (3,049           | )          |
| Translation adjustments            |       | 38               |       | (243             | )          | (205             | )          |
|                               |       |             |       |             |       |             |       |
| Balance at September 30, 2008 |       | $                | 47,755     |             | $          | (39,812          | )          | $ | 7,943 |   |

 

10

----

Table of Contents

 

Based on the carrying amount of intangible assets as of September 30,2008, the estimated future amortization is as follows (in thousands):

 
| ** **                        | ** ** | **Three**             | ** ** | ** **                                 | ** ** | ** ** | ** ** |
|-----------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **Months Ended** | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **December 31**  | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **2008**              | ** ** | **2009**                                   | ** ** | **2010**   | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Estimated future amortization of: | ** ** | ** **            | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Developed technology              |       | $                     | 762        |                                       | $          | 2,678      |       | $ | 2,125 |   | $ | 970 |   | $ | 616 |   | $ | 29 |   | $ | 7,180 |   |
| Other intangibles                 |       | 275                   |       | 344                                        |       | 33         |       | 27 |   | 27 |   | 57 |   | 763 |   |
|                              |       |                  |       |                                       |       |       |       |   |   |   |   |   |   |   |   |
| Total                             |       | $                     | 1,037      |                                       | $          | 3,022      |       | $ | 2,158 |   | $ | 997 |   | $ | 643 |   | $ | 86 |   | $ | 7,943 |   |

 

**Note7—Balance Sheet Detail**

 

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

 
| ** **                       | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|----------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                       | ** ** | **2008**              | ** ** | **2007**             | ** ** |
| ** **                       | ** ** | ** **            | ** ** | ** **           | ** ** |
| Prepaid commission               |       | $                     | 5,705      |                 | $          | 5,364 |   |
| Prepaid contract expense         |       | 7,138                 |       | 5,353                |       |
| Prepaid royalty                  |       | 1,952                 |       | 2,624                |       |
| Other                            |       | 4,869                 |       | 6,236                |       |
|                             |       |                  |       |                 |       |
| Total prepaid expenses and other |       | $                     | 19,664     |                 | $          | 19,577 |   |

 

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

 
| ** **                          | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                          | ** ** | **2008**              | ** ** | **2007**             | ** ** |
|                                |       |                  |       |                 |       |
| Long-term investments, net          |       | $                     | 500        |                 | $          | 500 |   |
| Long-term prepaid commissions       |       | 4,486                 |       | 5,368                |       |
| Deposits                            |       | 2,859                 |       | 2,628                |       |
| Prepaid contract expense, long-term |       | 3,223                 |       | 1,838                |       |
| Other                               |       | 39                    |       | 311                  |       |
|                                |       |                  |       |                 |       |
| Total other assets, net             |       | $                     | 11,107     |                 | $          | 10,645 |   |

 

Long-terminvestments include an equity investment in a privately held company. Thisequity investment is carried at the lower of cost or fair value at September 30,2008 and December 31, 2007.

 

OnApril 30, 2007, the Company, together with other LatentZero Limited (“LatentZero”)shareholders, sold their ownership in LatentZero to royalblue group plc. Themaximum possible consideration due to the Company from the sale of itsownership interest in LatentZero is approximately $17 million, which iscomprised of initial consideration of $10 million, paid at completion of thesale transaction and up to an aggregate $7 million of deferred contingentconsideration for fiscal years 2007 and 2008. Consideration is denominated inPounds Sterling (GBP) and the actual amounts of consideration in U.S. dollarsto be received by the Company may differ depending on foreign exchange rates atthe time of payment. During the second quarter of 2008, the Company receivedthe first deferred contingent payment of $3.4 million for fiscal 2007 andrecorded this gain in “interest and other income, net” on its condensedconsolidated statement of operations for the nine months ended September 30,2008.

 

OnJune 30, 2008, the Company, together with other LatentZero shareholders,executed a Deed of Amendment to fix the deferred contingent consideration forfiscal 2008 at approximately $3 million payable in March 2009. The Companywill record this contingent gain when realized.

 

Depositsinclude restricted cash of $1.9 million and $1.6 million as of September 30, 2008 and December 31,2007, respectively, to secure a bank letter of credit associated with the Company’sdefinitive lease agreement, as amended, with Toda Development, Inc. (“Toda”)for its San Francisco headquarters facility.

 

11

----

Table of Contents

 

Thefollowing is a summary of accrued liabilities (in thousands):

 
| ** **                             | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|----------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                             | ** ** | **2008**              | ** ** | **2007**             | ** ** |
|                                   |       |                  |       |                 |       |
| Salaries and benefits payable          |       | $                     | 12,795     |                 | $          | 18,696 |   |
| Accrued restructuring, current portion |       | 957                   |       | 2,531                |       |
| Other                                  |       | 11,732                |       | 8,101                |       |
|                                   |       |                  |       |                 |       |
| Total accrued liabilities              |       | $                     | 25,484     |                 | $          | 29,328 |   |

 

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

 

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

 
| ** **                               | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                               | ** ** | **2008**              | ** ** | **2007**             | ** ** |
|                                     |       |                  |       |                 |       |
| Deferred rent                            |       | $                     | 8,610      |                 | $          | 8,902 |   |
| Accrued restructuring, long-term portion |       | 1,332                 |       | 1,734                |       |
| Reserve for uncertain tax positions      |       | 4,960                 |       | 4,746                |       |
| Other                                    |       | 1,033                 |       | 970                  |       |
|                                     |       |                  |       |                 |       |
| Total other long-term liabilities        |       | $                     | 15,935     |                 | $          | 16,352 |   |

 

**Note8—Comprehensive Income**

 

Thecomponents of comprehensive income (net of tax, if any) were as follows for theperiods presented (in thousands):

 
| ** **                               | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                     |       |                                                    |       |                                                   |       |   |   |   |   |
| Net income                               |       | $                                                       | 2,712      |                                                   | $          | 3,296 |   | $ | 12,702 |   | $ | 8,830 |   |
| Unrealized gain on marketable securities |       | —                                                  |       | —                                                 |       | — |   | 8 |   |
| Foreign currency translation adjustment  |       | (4,350                                                  | )          | 2,014                                                  |       | (1,928 | ) | 3,080 |   |
|                                     |       |                                                    |       |                                                   |       |   |   |   |   |
| Total comprehensive income               |       | $                                                       | (1,638     | )                                                      | $          | 5,310 |   | $ | 10,774 |   | $ | 11,918 |   |

 

**Note 9—Restructuring Charges**

 

Restructuringinitiatives have been implemented in the Company’s Advent Investment Managementand Other operating segments to reduce costs and improve operating efficienciesby better aligning the Company’s resources to its near-term revenueopportunities. These initiatives have resulted in restructuring chargescomprised primarily of costs related to properties abandoned in connection withfacilities consolidation, related write-down of leasehold improvements andseverance and associated employee termination costs related to headcountreductions. Advent’s restructuring charges included accruals for estimatedlosses on facility costs based on the Company’s contractual obligations net ofestimated sublease income. Advent periodically reassesses this liability basedon market conditions.

 

##### ***During the nine months ended September 30, 2008, Advent recorded arestructuring charge of $96,000 which primarily related to a partial leasesurrender fee of $200,000 to exit the data center portion of the facility spacelocated 303 2nd Street in San Francisco, California and the presentvalue amortization of facility exit obligations. These charges were partiallyoffset by adjustments to facility exit assumptions. During the ninemonths ended September 30, 2007, Advent recorded a net restructuringcharge of $902,000 due to the update of certain sub-lease assumptions forAdvent’s prior San Francisco headquarters facility located at 301 BrannanStreet, which the Company exited in October 2006, and interest accretion.***

 

12

----

Table of Contents

 

The following table sets forth an analysis of the components of thecash payments and restructuring charges made against the accrual during thenine months ended September 30, 2008 (in thousands):

 

| ** **                                                   | ** ** | **Facility Exit** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **Costs**              | ** ** |
| ** **                                                   | ** ** | ** **             | ** ** |
| Balance of restructuring accrual at  December 31, 2007  |       | $                      | 4,265      |   |
| Cash payments                                                |       | (2,183                 | )          |
| Reversal of deferred rent related to  facilities exited      |       | 111                    |       |
| Restructuring charges                                        |       | 96                     |       |
|                                                         |       |                   |       |
| Balance of restructuring accrual at  September 30, 2008 |       | $                      | 2,289      |   |

 

The remaining excess facility costs of $2.3 million are stated atestimated fair value, net of the present value of estimated sublease income ofapproximately $4.2 million. Advent expects to pay the remaining obligationsassociated with the vacated facilities no later than over the remaining leaseterms, which expire on various dates through 2012.

 

#### **Note10—Commitments and Contingencies**

 

*Lease Obligations*

 

Advent leases office space and equipment under non-cancelable operatinglease agreements, which expire at various dates through December 2018.Some operating leases contain escalation provisions for adjustments in theconsumer price index. Advent is responsible for maintenance, insurance, andproperty taxes. As of September 30, 2008, Advent’s remaining operatinglease commitments through 2018 were approximately $47.3 million, net of futureminimum rental receipts of $4.9 million to be received under non-cancelablesub-leases.

 

*Indemnifications*

 

Aspermitted or required under Delaware law and to the maximum extent allowableunder that law, Advent has certain obligations to indemnify its current andformer officers and directors for certain events or occurrences while theofficer or director is, or was serving, at Advent’s request in such capacity.These indemnification obligations are valid as long as the director or officeracted in good faith and in a manner the person reasonably believed to be in ornot opposed to the best interests of the corporation, and, with respect to anycriminal action or proceeding, had no reasonable cause to believe his or herconduct was unlawful. The maximum potential amount of future payments Adventcould be required to make under these indemnification obligations is unlimited;however, Advent has a director and officer insurance policy that mitigatesAdvent’s exposure. The Company believes the estimated fair value of theseindemnification obligations is minimal.

 

*LegalContingencies*

 

On March 8, 2005, certain of the former shareholders of Kinexusand the shareholders’ representative filed suit against Advent in the DelawareChancery Court. The complaint alleges that Advent breached the Agreement andPlan of Merger dated as of December 31, 2001 pursuant to which Advent acquiredall of the outstanding shares of Kinexus due principally to the fact that noamount was paid by Advent on an earn-out of up to $115 million. The earn-out,which was payable in cash or stock at the election of Advent, was based uponKinexus meeting certain revenue targets in both 2002 and 2003. The complaintseeks unspecified compensatory damages, an accounting and restitution forunjust enrichment. Advent advised the shareholders’ representative in January 2003that the earn-out terms had not been met in 2002 and accordingly no earn-outwas payable for 2002 and would not be payable for 2003. Discovery iscontinuing between the parties. Advent disputes the plaintiffs’ claimsand believes that it has meritorious defenses and intends to vigorously defendthis action. Management believes that any potential loss associated with thislitigation is neither probable nor reasonably estimable at this time andaccordingly has not accrued any amounts for any potential loss.

 

Fromtime to time, Advent is involved in claims and legal proceedings that arise inthe ordinary course of business. Based on currently available information,management does not believe that the ultimate outcome of these unresolvedmatters, individually and in the aggregate, is likely to have a materialadverse effect on the Company’s financial position or results of operations.However, litigation is subject to inherent uncertainties and our view of thesematters may change in the future. Were an unfavorable outcome to occur, thereexists the possibility of a material adverse impact on our financial positionand results of operations for the period in which the unfavorable outcomeoccurs, and potentially in future periods.

 

13

----

Table of Contents

 

**Note11—Segment Information**

 

*Description of Segments*

 

Advent’s organizational structure is based on a number of factors thatthe chief operating decision maker (“CODM”) uses to evaluate, view and run itsbusiness operations which include, but are not limited to, customer base,homogeneity of products and technology. Advent’s operating segments are basedon this organizational structure and information reviewed by Advent’s CODM toevaluate the operating segment results. Advent has determined that itsoperations are organized into two reportable segments: Advent InvestmentManagement and MicroEdge. Future changes to this organizational structure mayresult in changes to the business segments disclosed. A description of thetypes of products and services provided by each operating segment follows.

 

Advent Investment Management is the Company’s core business and derivesrevenues from the development, marketing and sale of software products, data,data interfaces and related maintenance and services that automate, integrateand support certain mission critical functions of investment managementorganizations. MicroEdge derives revenues from the sale of software andservices for grant management, matching gifts and volunteer tracking for thegrantmaking community.

 

*Segment Data*

 

The results of the operating segments are derived directly from Advent’sinternal management reporting system. The accounting policies used to deriveoperating segment results are substantially the same as those used by theconsolidated company. Management measures the performance of each operatingsegment based on several metrics, including income (loss) from operations.These results are used, in part, to evaluate the performance of, and to assignresources to, each of the operating segments. Certain operating expenses,including stock-based employee compensation expense, and amortization ofdeveloped technology and other intangibles, which Advent manages separately at thecorporate level, are not allocated to the operating segments. Advent does notseparately accumulate and review asset information by segment.

 

Segment information for the periods presented is as follows (inthousands):

 
| ** **                                           | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenues:                                        | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advent Investment Management                         |       | $                                                       | 58,152     |                                                   | $          | 49,892 |   | $ | 171,395 |   | $ | 138,992 |   |
| MicroEdge                                            |       | 6,768                                                   |       | 5,657                                                  |       | 19,025 |   | 16,912 |   |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Total net revenues                                   |       | $                                                       | 64,920     |                                                   | $          | 55,549 |   | $ | 190,420 |   | $ | 155,904 |   |
| ** **                                           | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income from operations:                              | ** ** | ** **                                              | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Advent Investment Management                         |       | $                                                       | 8,744      |                                                   | $          | 8,522 |   | $ | 25,970 |   | $ | 17,029 |   |
| MicroEdge                                            |       | 1,902                                                   |       | 1,287                                                  |       | 2,901 |   | 4,225 |   |
| Unallocated corporate operating costs and  expenses: |       |                                                    |       |                                                   |       |   |   |   |   |
| Stock-based employee compensation                    |       | (5,054                                                  | )          | (3,219                                                 | )          | (12,306 | ) | (10,047 | ) |
| Amortization of developed technology                 |       | (725                                                    | )          | (332                                                   | )          | (2,179 | ) | (1,018 | ) |
| Amortization of other intangibles                    |       | (141                                                    | )          | (463                                                   | )          | (870 | ) | (1,403 | ) |
|                                                 |       |                                                    |       |                                                   |       |   |   |   |   |
| Total income from operations                         |       | $                                                       | 4,726      |                                                   | $          | 5,795 |   | $ | 13,516 |   | $ | 8,786 |   |

 

*Major Customers*

 

No single customer represented 10% or more of Advent’s total netrevenues in any period presented.

 

**Note 12—Line of Credit**

 

On February 14, 2007, Advent and certain of its subsidiariesentered into a senior secured credit facility agreement (the “Credit Facility”)with Wells Fargo Foothill, Inc. (the “Lender”) for a term of three years.Under the Credit Facility, the Lender will provide the Company with a revolvingline of credit up to an aggregate amount of $75.0 million to fund therepurchase of outstanding common stock, capital expenditures and generalcorporate requirements. The Company has the option of selecting an interestrate for any drawdown under the Credit Facility equal to either: (a) theBase Rate (Wells Fargo prime rate); or (b) the then applicable LIBOR Rateplus 1.50% per annum. The loan is secured by the Company’s property and assetsand is subject to a financial covenant. The financial covenant in the CreditFacility is limited to a maximum ratio of senior debt to earnings beforeinterest, taxes, depreciation, and amortization (EBITDA), adjusted for costcapitalizations, extraordinary gains (losses) and non-cash stock-based employeecompensation. Covenant testing will commence upon either the occurrence of anevent of default or when excess availability, defined as the Credit Facilityline of $75.0 million less amounts drawn, plus qualified cash and cashequivalents is less than $50.0 million.

 

14

----

Table of Contents

 

As of September 30, 2008 and December 31, 2007, the Companymaintained a zero debt balance and was in compliance with all associatedcovenants.

 

**Note 13—Income Taxes**

 

Thefollowing table summarizes the activity relating to the Company’s unrecognizedtax benefits during the nine months ended September 30, 2008 (inthousands):

 
| ** **                                                | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------|------------|------------|------------|
| ** **                                                | ** ** | ** ** | ** ** |
| Balance at December 31, 2007                         |       | $          | 5,899      |   |
|                                                      |       |       |       |
| Gross decreases related to tax positions in  prior period |       | (197       | )          |
| Gross increases related to current period  tax positions  |       | 329        |       |
|                                                      |       |       |       |
| Balance at September 30, 2008                        |       | $          | 6,031      |   |

 

AtSeptember 30, 2008 and December 31, 2007, Advent had $6.0 million and$5.9 million of gross unrecognized tax benefits, respectively. During thefirst nine months of 2008, Advent recognized a tax benefit of $0.2 millionrelating to accrued interest and penalties as a result of a lapse of a statuteof limitations while increasing the amount of unrecognized tax benefits by $0.3million relating to California research credits. If all the unrecognized taxbenefits were to be recognized at September 30, 2008, our tax provisionwould decrease by $5.0 million. The impact on net income reflects theliabilities for unrecognized tax benefits net of the federal tax benefit ofstate income tax items. The Company’s liabilities for unrecognized tax benefitsare included in “Other long-term liabilities” on the condensed consolidatedbalance sheet and relate to federal research credits, California research andenterprise zone tax credits and various state net operating losses that havebeen recorded as deferred tax assets but have yet to be utilized.

 

Advent is subject to taxation in the U.S. and various states andforeign jurisdictions. Advent is not under examination in any income taxjurisdiction at the present time.  The material jurisdictions that aresubject to examination by tax authorities include California for tax yearsafter fiscal 2002 and the U.S. and New York for tax years after 2003.

 

**Note14—Fair Value Measurements**

 

Effective January 1,2008, Advent implemented SFAS No. 157, “Fair Value Measurement”, for theCompany’s financial assets and liabilities that are measured and reported atfair value at each reporting period, and non-financial assets and liabilitiesthat are re-measured and reported at fair value at least annually. Inaccordance with the provisions of FSP No. FAS 157-2, “Effective Date ofFASB Statement No. 157”, the Company has elected to defer implementationof FAS 157 as it relates to non-financial assets and non-financial liabilitiesthat are recognized and disclosed at fair value in the financial statements ona nonrecurring basis until January 1, 2009. Advent is evaluating theimpact, if any, this will have on the Company’s non-financial assets andliabilities.

 

Theadoption of SFAS 157 to Advent’s financial assets and liabilities andnon-financial assets and liabilities that are measured and reported at fairvalue at least annually did not have an impact on the Company’s financialresults.

 

SFASNo. 157 clarifies that fair value is an exit price, representing theamount that would be received to sell an asset or paid to transfer a liabilityin an orderly transaction between market participants. As such, fair value is amarket-based measurement that should be determined based on assumptions thatmarket participants would use in pricing an asset or liability. As a basis forconsidering such assumptions, SFAS No. 157 establishes a three-tier valuehierarchy, which prioritizes the inputs used in measuring fair value asfollows:

 
| **Level  Input** | ** ** | **Input Definition**                                                                                                                                                  |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                  |
| Level  I         |       | Inputs  are unadjusted, quoted prices for identical assets or liabilities in active  markets at the measurement date.                                                 |
|             |       |                                                                                                                                                                  |
| Level  II        |       | Inputs  other than quoted prices included in Level I that are observable for the  asset or liability through corroboration with market data at the measurement  date. |
|             |       |                                                                                                                                                                  |
| Level  III       |       | Unobservable  inputs that reflect management’s best estimate of what market participants  would use in pricing the asset or liability at the measurement date.   |

 

15

----

Table of Contents

 

Thishierarchy requires the Company to use observable market data, when available,and to minimize the use of unobservable inputs when determining inputs anddetermining fair value.  The Companymeasures certain financial assets and liabilities at fair value on a recurringbasis, including available-for-sale securities and our equity investment. Thefair value of these certain financial assets was determined using the followinginputs as of September 30, 2008 (in thousands):

 
| ** **                                     | ** ** | **Fair Value Measurements at Reporting Date Using** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | ** **                                                                        | ** ** | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **                                                                        | ** ** | **Quoted Prices in** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                                     | ** ** | ** **                                                                        | ** ** | **Active Markets for** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                     | ** ** | ** **                                                                        | ** ** | **Identical Assets** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                                     | ** ** | **Total**                                                                         | ** ** | **(Level  1)** | ** ** | **(Level  2)** | ** ** | **(Level  3)** | ** ** |
| Assets                                         | ** ** | ** **                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed income available-for-sale securities (1) |       | $                                                                                 | 22,932     |   | $ | 22,932 |   | $ | — |   | $ | — |   |
|                                                |            |                                                                                   |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  Includedin cash and cash equivalents on our condensed consoldiated balance sheet

 

Fixedincome available-for-sale securities consist of cash equivalents with remainingmaturities of three months or less at the date of purchase and are composedprimarily of U.S. government and treasury obligation money market mutual funds.The fair value of these securities is determined through market, observable andcorroborated sources.

 

 Non-marketable investments, which totaled $0.5million at September 30, 2008, represent the Company’s investment in aprivately held company. Non-marketable investments are priced at the lower ofcost or fair value due to an absence of market activity and market data, andare not reported in the above table of assets measured at fair value as of September 30,2008.

 

**Note15**—Common Stock RepurchaseProgram

** **

Advent’s Board has approved common stockrepurchase programs authorizing management to repurchase shares of the Company’scommon stock as a means to enhance shareholder value. The timing and actualnumber of shares subject to repurchase are at the discretion of Advent’smanagement and are contingent on a number of factors, including the price ofAdvent’s stock, Advent’s cash balances and working capital needs, generalbusiness and market conditions, regulatory requirements, and alternativeinvestment opportunities. Repurchased shares are returned to the status ofauthorized and un-issued shares of common stock.

 

OnMay 7, 2008, Advent’s Board authorized the repurchase of up to 1.0 millionshares of the Company’s common stock. Consistent with prior repurchaseprograms, there was no expiration date and repurchases could be limited orterminated at any time at the discretion of management.

 

Thefollowing table provides a summary of the quarterly repurchase activity duringthe nine months ended September 30, 2008 under the stock repurchaseprogram approved by the Board in May 2008 (in thousands, except per sharedata):

 
| ** ** | ** ** | **Total**          | ** ** | ** ** | ** ** | **Average**        | ** ** |
|------------|------------|--------------------|------------|------------|------------|--------------------|------------|
| ** ** | ** ** | **Number**         | ** ** | ** ** | ** ** | **Price**          | ** ** |
| ** ** | ** ** | **of Shares** | ** ** | ** ** | ** ** | **Paid**           | ** ** |
| ** ** | ** ** | **Purchased**      | ** ** | **Cost**   | ** ** | **Per Share** | ** ** |
|       |       |               |       |       |       |               |       |
| Q1 2008    |       | —             |       | $          | —     |               | $          | — |   |
| Q2 2008    |       | —             |       | $          | —     |               | $          | — |   |
| Q3 2008    |       | 360                |       | $          | 15,032     |               | $          | 41.76 |   |
|       |       |               |       |       |       |               |       |
| Total      |       | 360                |       | $          | 15,032     |               | $          | 41.76 |   |

 

In October 2008,Advent repurchased the remaining 640,000 shares under the program authorized bythe Board in May 2008 for an average price of $30.41 per share.

 

16

----

Table of Contents

 

**Note16—Subsequent Events**

** **

On October 1, 2008, Advent completed theacquisition of privately held Tamale Software, Inc. (“Tamale”). Advent hasacquired all of the outstanding capital stock of Tamale for approximately $28million in cash and 906,000 shares of Advent’s common stock. Tamale providessoftware solutions designed specifically to help investment professionalsmanage their investment ideas more effectively and easily access all of thefirm’s research.

 

On October 30, 2008, the Board of Directorsauthorized a share repurchase program of up to 3.0 million shares.

 

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

 

**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

 

You should read the following discussion in conjunction with ourconsolidated financial statements and related notes. The following discussioncontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 as amended and Section 21E of the Securities ExchangeAct of 1934 as amended, including, but not limited to statements referencingour expectations relating to future revenues, expenses and operating margins.Forward-looking statements can be identified by the use of terminology such as “may,”“will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”“potential,” “continue” or other similar terms and the negative of such termsregarding beliefs, plans, expectations or intentions regarding the future.Forward-looking statements include, among others, statements regarding growthin the investment management market and opportunities for us related thereto,future expansion, acquisition, divestment of or investment in other businesses,projections of revenues, future cost and expense levels, expected timing andamount of amortization expenses related to past acquisitions, the adequacy ofresources to meet future cash requirements, estimates or predictions of actionsby customers, suppliers, competitors or regulatory authorities, future clientwins, future hiring and future product introductions. Such forward-lookingstatements are based on our current plans and expectations and involve knownand unknown risks and uncertainties which may cause our actual results orperformance to be materially different from any results or performanceexpressed or implied by such forward-looking statements. Such factors include,but are not limited to the “Risk Factors” set forth in “Part II, Item 1A.Risk Factors” in this Form 10-Q, as well as other risks identified fromtime to time in other Securities and Exchange Commission (“SEC”) reports. Youshould not place undue reliance on our forward-looking statements, as they arenot guarantees of future results, levels of activity or performance and representour expectations only as of the date they are made.

 

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

 

**Overview**

 

We offerintegrated software, products and services for automating and integrating dataand work flows across the investment management organization, as well asbetween the investment management organization and external parties. Ourproducts are intended to increase operational efficiency, improve the accuracyof client information and reporting, and enable better decision-making. Eachsolution focuses on specific mission-critical functions of the front, middleand back offices of investment management organizations and is designed to meetthe needs of the particular client, as determined by size, assets undermanagement and complexity of the investment environment.

 

Thesoftware solutions offered through our MicroEdge segment support the grantmanagement, gifts matching and volunteer tracking processes for thegrant-making community.

 

*CurrentEconomic Environment*

 

InSeptember 2008, the effects of the subprime mortgage and broader creditcrisis intensified. The U.S. government acted to take control of thegovernment-sponsored mortgage enterprises Fannie Mae and Freddie Mac. TheFederal Reserve provided loans to a multinational insurance giant, a largeinvestment bank sold out to one of the largest U.S. banks, and anotherinvestment bank filed for bankruptcy. A large unrelated institutional moneymarket mutual fund that was holding securities devalued by these events wentinto liquidation. The two remaining major independent investment banks followedwith applications to convert to bank holding companies and submit themselves tothe more stringent net capital requirements for commercial banks.

 

17

----

Table of Contents

 

Inthe midst of this, global equity markets fell dramatically and liquidity andother banking constraints spread throughout the world. By mid-October, centralbanks and governments acted in concert to shore up their financial institutionsby injecting liquidity into the global banking system, including by directgovernment investment in national banks and lowering of interest rates. In theUnited States, the Federal Reserve twice reduced the federal funds rate by 50basis points to 1.0% in October 2008. The credit markets are now justbeginning to open up and the equity markets are still volatile. Fears of anuncertain timeframe for economic recovery weigh on investors.

 

Thecurrent economic environment has impacted our business in the followingspecific ways during the third quarter of 2008:

 

·                  Our perpetuallicense revenues decreased. A large percentage of our perpetual licenserevenues are sales of additional seats or modules to our existing client base.During the latter half of the third quarter, our customers significantlyreduced both the number and size of these perpetual add-on sales.  We expect that perpetual licenses revenueswill remain depressed in the near term. However, we do expect perpetual licenserevenues to be slightly higher in the fourth quarter of 2008 compared to thethird quarter due to two perpetual AUA arrangements that are measured annuallyin the fourth quarter of each year.

 

·                  The interestearned on our excess cash has reduced. We maintain our excess cash in treasury instrument based money marketmutual funds.  These investments havebecome increasingly popular since mid-September and accordingly the yieldon these instruments has decreased.  Inaddition, in October we completed the acquisition of Tamale Software aswell as the stock repurchase program authorized by our Board in May 2008,which together utilized cash of approximately $47.5 million. Accordingly, weexpect minimal interest income in the fourth quarter of 2008.  Additionally, if we were to borrow fundsunder our line of credit, we anticipate the interest costs on these borrowingsto be higher than they have been historically.

 

Webelieve that the fourth quarter of 2008 and fiscal 2009 will continue to be adifficult period for the investment management industry in the UnitedStates.  We believe that some hedge fundswill go out of business and we expect that most investment managers will seetheir revenues decrease as a result of decreases in their assets undermanagement.

 

Wecontinue to evaluate how this trend for our customers may affect our business.If our customers cease operations, lose money or earn significantly less money, our revenues from those customerscould decrease.  However, as we believeour software is mission critical to our customers, we expect our customers willcontinue to require our software and pay for it. Additionally, some customersmay choose our solutions in an effort to reduce their overall costs or mitigaterisk.

 

Longerterm, we also believe that there will be additional regulation in the industryand that investment managers will be increasingly focused on servicing theircustomers.  These factors havetraditionally been demand drivers for our products.

 

Asthe current economic situation evolves, we will continue to evaluate the impactof this environment on our business and we will remain focused on deliveringsolutions for our customers. Additionally, we will carefully manage ourexpenses and headcount growth.

 

*Operating Overview*

 

Highlightsof our third quarter of 2008 include:

 

·                  Acquired Tamale Software, Inc. (“Tamale”).In September 2008, we signed a definitive agreement to acquire privatelyheld Tamale Software which provides software solutions designed specifically tohelp investment professionals manage their investment ideas more effectivelyand access all of the firm’s research easily. On October 1, 2008, wecompleted the acquisition of Tamale.

 

·                  Advent Client Conference. We held our AdventClient Conference in September 2008 which was our largest ClientConference to date, and included executives from the many market segments weserve including: asset managers, financial advisors, hedge funds, primebrokers, fund administrators, family offices, banks, broker dealers and trusts.

 

·                  Expanded customer relationships andacceptance of our product offerings. We experienced continued demand for bothour newest and largest portfolio management and accounting platforms: AdventPortfolio Exchange (“APX”) and Geneva. We signed 29 APX contracts, bringing thetotal number of licenses sold 

 

18

----

Table of Contents

 

globally to 266, and we added 10 new Geneva clients which brings thetotal number of Geneva licenses sold to 186 as of September 30, 2008.

 

·                  Strong Bookings. Total term license contractvalue (“TCV”), including APX migrations, was $18.1 million. Although a decreaseof 12% from TCV of $20.5 million in the third quarter of 2007, with an averageterm of 2.9 years, these contracts will add approximately $6.2 million inannual revenue (“annual term license contract value” or “ACV”) once they arefully implemented, an increase of 5% over the same period last year.

 

·                  We have expanded our global footprint. Wecurrently have a strong EMEA pipeline and our license business had a recordthird quarter. We also had significant customer wins in the United Kingdom andMiddle East, and signed our first client in India.

 

·                  Common Stock Repurchases. During the thirdquarter of 2008, we repurchased 360,000 shares under our Board-authorized sharerepurchase plans for a total cash outlay of $15.0 million and an average priceof $41.76. In October 2008, we repurchased the remaining 640,000 sharesunder the stock repurchase program authorized by the Board in May 2008 atan average price of $30.41 per share. On October 30, 2008, our Boardauthorized a share repurchase program of up to an additional 3.0 millionshares.

 

*FinancialOverview*

 

Werecognized revenue of $64.9 million during the third quarter of 2008, ascompared to $55.5 million in the third quarter 2007. Our existing termlicenses, maintenance and other recurring revenues provide a consistent,recurring revenue during the term of those agreements. We have grown netrevenue year-over-year for several reasons, including the following:

 

·                  Our product innovation helped driveacquisition of new customers and created new revenue opportunities withexisting clients, resulting in incremental TCV and professional servicesbillings.

 

·                  Our completion of term licenseimplementations resulted in incremental term license and professional servicesrevenues.

 

·                  We have a large installed base of customerswho have upgraded and expanded their usage of our products and services, suchas subscription data management and outsourcing, resulting in highermaintenance and other recurring revenues.

 

Totalrecurring revenues, which we define as term license, perpetual maintenance, andother recurring revenues, increased slightly to 80% of total net revenuesduring the third quarter of 2008, as compared to 77% during the same period of2007. Term license revenue increased 51% to $15.4 million in the third quarterof 2008, from $10.2 million in the third quarter of 2007. Maintenance revenuewas up $1.5 million, or 7% year-over-year, while other recurring revenue wasalso up $2.0 million or 17%. Additionally, professional services posted anincrease of 34% to $8.6 million in the third quarter of 2008. In addition,international revenue was $8.3 million or 13% of total revenue during the thirdquarter of 2008, compared to $6.4 million or 12% of total revenue in the thirdquarter of 2007. These increases were offset by a $1.5 million decrease inrevenues from our perpetual license fees.

 

Total expenses, including cost ofrevenues, were $60.2 million in the third quarter of 2008, compared with $49.8million in the third quarter of 2007. Our expenses increased in 2008 over 2007largely as a result of increased payroll, variable compensation and benefitexpenses resulting from an increase in headcount as we invested in clientsupport, product development, professional services and sales and marketing tosolidify our position as a market leader.

 

Ourincome from operations in the third quarter of 2008 was $4.7 million or 7% ofrevenue, compared to $5.8 million or 10% of revenue in the third quarter of2007.

 

Duringthe third quarter of 2008, we recognized $1.8 million of income tax expensewhich equates to an effective tax rate of 41%, compared to $2.4 million or 42%,respectively, in the third quarter of 2007. On October 3, 2008, thefederal research credit was retroactively extended for amounts paid or incurredafter December 31, 2007. Since this occurred after the end of the quarter,we did not reflect the impact of the research credit in our tax provision forthe third quarter. The entire amount of the federal research credit will berecognized in the fourth quarter.

 

19

----

Table of Contents

 

Weearned net income of $2.7 million, resulting in diluted earnings per share of$0.10 for the third quarter of 2008, compared to $3.3 million or $0.12,respectively, in the third quarter of 2007.

 

Wegenerated $19.1 million in cash from operations in the third quarter of 2008,which compares to $12.4 million in the third quarter of 2007. This 54% increasein operating cash flows was primarily due to an increase in our deferredrevenues. The increase in deferred revenues primarily reflected ourcontinued transition to the term license model. Under the term model, wegenerally bill and collect for a term agreement in equal installments inadvance of each annual period. These amounts are deferred at billing andrecognized over the annual term period, which has the effect of increasingdeferred revenue when compared to a perpetual license model where no licenserevenue is deferred.

 

*TermLicense and Term License Deferral*

 

Weare continuing the process of converting the Company’s license revenues from aperpetual model to a predominantly term model. Under a perpetual pricing model, customers purchase a license to useour software indefinitely and generally we recognize all license revenue at thetime of sale; maintenance is purchased under an annual renewable contract, andrecognized ratably over the contract period. Under a term pricing model,customers purchase a license to use our software and receive maintenance for alimited period of time and we recognize all of the revenue ratably over thelength of the contract. This has the effect of lowering revenues in the earlystages of the transition, but increasing the total potential value of thecustomer relationship. Moving new customer sales in the Advent InvestmentManagement (AIM) segment from a perpetual to a term licensing model has had theeffect of lowering our reported revenue growth rates over the past four fiscalyears and may, depending on our new term license bookings, continue to have animpact through 2009. Because our products are used by customers for an averageof approximately ten years, we believe this change to our business model issignificant for the long-term growth and value of the business as we expecttotal revenues from a customer to increase over time, as reflected in the 22%increase in total net revenues in the nine months ended September 30, 2008from the comparable period of 2007. For example, over a ten-year period, acustomer may enter into two or more contracts for the same software product andservices under a term license model.

 

When a customer purchases a term license together with implementationservices, we do not recognize any revenue under the contract until theimplementation services are complete and the remaining services aresubstantially complete. If the implementation services are still in progress asof quarter-end, we will defer all of the contract revenues to a subsequentquarter. At the point professional services are substantially completed,we recognize a pro-rata amount of the term license revenue, professionalservices fees earned and related expenses, based on the elapsed time from thestart of the term license to the substantial completion of professionalservices. Term license revenue for the remaining contract years and theremaining deferred professional services revenue and related expenses arerecognized ratably over the remaining contract length.

 

During the third quarter of 2008, we deferred net revenue of $3.9million and directly-related expenses of $1.0 million associated with our termlicensing model. The impact of these deferrals on our operating income wasapproximately $2.8 million. The $3.9 million net deferral of revenue wasprimarily composed of a net deferral of $2.1 million of professional servicesrevenue and $1.7 million of term license revenue. We continue to deferprofessional services as the deferral for current projects exceeded the amountrecognized from completed past projects. We expect that the term licensecomponent of the deferred revenue balance will increase or decrease in thefuture depending on the amount of new term license bookings relative to thenumber of implementations that reach substantial completion in a particularquarter. We currently expect that the professional services component of thedeferred revenue balance will continue to increase through at least 2009.

 

20

----

Table of Contents

 

Amounts ofrevenue and directly-related expenses deferred as of September 30, 2008and December 31, 2007 associated with our term licensing deferral were asfollows (in millions):

 
| ** **                | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|---------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                | ** ** | **2008**              | ** ** | **2007**             | ** ** |
| Deferred revenues         | ** ** | ** **            | ** ** | ** **           | ** ** |
| Short-term                |       | $                     | 25.1       |                 | $          | 17.9 |   |
| Long-term                 |       | 5.1                   |       | 3.3                  |       |
|                      |       |                  |       |                 |       |
| Total                     |       | $                     | 30.2       |                 | $          | 21.2 |   |
|                      |       |                  |       |                 |       |
| Directly-related expenses |       |                  |       |                 |       |
| Short-term                |       | $                     | 7.7        |                 | $          | 5.7 |   |
| Long-term                 |       | 2.2                   |       | 1.3                  |       |
|                      |       |                  |       |                 |       |
| Total                     |       | $                     | 9.9        |                 | $          | 7.0 |   |

 

Deferred net revenue and directly-related expenses are classified as “Deferredrevenues” (short-term and long-term), and “Prepaid expenses and other,” and “Otherassets, net,” respectively, on the condensed consolidated balance sheets.

 

The transition to a term model also has had the effect of decreasingoperating cash flows in the early stages of the transition. Under perpetualpricing, the entire license fee and the first year of maintenance is generallybilled and collected at the commencement of the arrangement. Under termpricing, a typical contract term is three years. We generally bill and collectterm license fee installments in advance of each annual period. The amount ofthe annual term billing is less than the perpetual billing, resulting in lowercash flows in the initial annual term license period. Annual term billingresults in an increase in deferred revenue and an increase in operating cashflows at the commencement of each annual billing period.

 

**Critical Accounting Policies and Estimates**

 

Management’sdiscussion and analysis of our financial condition and results of operationsare based on our condensed consolidated financial statements and related notes,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. We review the accounting policiesused in reporting our financial results on a regular basis. The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent liabilities.

 

Onan ongoing basis, we evaluate the process we use to develop estimates. We baseour estimates on historical experience and on other information that we believeis reasonable for making judgments at the time they are made. Actual resultsmay differ from these estimates due to actual outcomes being different fromthose on which we based our assumptions.

 

Webelieve the following accounting policies contain the more significantjudgments and estimates used in the preparation of our condensed consolidatedfinancial statements.

 

·                  Revenue recognition and deferred revenues;

 

·                  Income taxes;

 

·                  Stock-based compensation;

 

·                  Restructuring charges and related accruals;

 

·                  Business combinations;

 

·                  Goodwill;

 

·                  Impairment of long-lived assets;

 

·                  Legal contingencies; and

 

·                  Sales returns and accounts receivableallowances

 

21

----

Table of Contents

 

Therehave been no significant changes in our critical accounting policies and estimatesduring the nine months ended September 30, 2008 as compared to thecritical accounting policies and estimates disclosed in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included in our Annual Report on Form 10-K for the year ended December 31,2007.

 

**RecentDevelopments**

 

On October 30, 2008, our Board of Directorsauthorized a share repurchase program of up to 3.0 million shares.

 

**RecentAccounting Pronouncements**

 

With the exception of those discussed below, there have been no recentaccounting pronouncements or changes in accounting pronouncements during thenine months ended September 30, 2008, as compared to the recent accountingpronouncements described in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2007, that are of significance, or potentialsignificance, to the Company.

 

In April 2008, the Financial Accounting Standards Board (“FASB”)issued FASB Staff Position (“FSP”) No. 142-3, “Determination of the UsefulLife of Intangible Assets”. FSP 142-3 amends the factors an entity shouldconsider in developing renewal or extension assumptions used in determining theuseful life or recognized intangible assets under FASB Statement No. 142, “Goodwilland Other Intangible Assets”. This new guidance applies prospectively tointangible assets that are acquired individually or with a group of otherassets in business combinations and asset acquisitions. FSP 142-3 is effectivefor financial statements issued for fiscal years and interim periods beginningafter December 15, 2008. Early adoption is prohibited. We are currentlyevaluating the impact, if any, that FSP 142-3 will have on our consolidatedfinancial statements.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy ofGenerally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies thesources of accounting principles and the framework for selecting the principlesto be used in the preparation of financial statements that are presented inconformity with generally accepted accounting principles in the United States.This statement is effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples.” We do not expect SFAS 162 to have a material impact on ourconsolidated financial statements.

 

22

----

Table of Contents

 

**RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,2008 AND 2007**

 

The following table sets forth, for theperiods indicated, certain financial information as a percentage of total netrevenues. The financial information and the ensuing discussion should be readin conjunction with the accompanying condensed consolidated financialstatements and notes thereto:

 
| ** **                                     | ** ** | **Three Months Ended September 30** | ** ** | **Nine Months Ended September 30** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                                | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net revenues:**                              |       |                                                    |       |                                                   |       |   |   |   |   |
| Term license, maintenance and other  recurring |       | 80                                                      | %          | 77                                                     | %          | 80 | % | 79 | % |
| Perpetual license fees                         |       | 7                                                       |       | 11                                                     |       | 8 |   | 11 |   |
| Professional services and other                |       | 13                                                      |       | 12                                                     |       | 12 |   | 10 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total net revenues                             |       | 100                                                     |       | 100                                                    |       | 100 |   | 100 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Cost of revenues:**                          |       |                                                    |       |                                                   |       |   |   |   |   |
| Term license, maintenance and other  recurring |       | 18                                                      |       | 18                                                     |       | 18 |   | 18 |   |
| Perpetual license fees                         |       | 0                                                       |       | 0                                                      |       | 0 |   | 0 |   |
| Professional services and other                |       | 17                                                      |       | 14                                                     |       | 14 |   | 13 |   |
| Amortization of developed technology           |       | 1                                                       |       | 1                                                      |       | 1 |   | 1 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total cost of revenues                         |       | 37                                                      |       | 32                                                     |       | 34 |   | 32 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Gross margin                                   |       | 63                                                      |       | 68                                                     |       | 66 |   | 68 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Operating expenses:**                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Sales and marketing                            |       | 24                                                      |       | 24                                                     |       | 24 |   | 26 |   |
| Product development                            |       | 17                                                      |       | 17                                                     |       | 19 |   | 19 |   |
| General and administrative                     |       | 15                                                      |       | 15                                                     |       | 15 |   | 16 |   |
| Amortization of other intangibles              |       | 0                                                       |       | 1                                                      |       | 0 |   | 1 |   |
| Restructuring charges                          |       | 0                                                       |       | 0                                                      |       | 0 |   | 1 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Total operating expenses                       |       | 56                                                      |       | 57                                                     |       | 59 |   | 63 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Income from operations                         |       | 7                                                       |       | 10                                                     |       | 7 |   | 6 |   |
| Interest and other income (expense), net       |       | (0                                                      | )          | (0                                                     | )          | 2 |   | 3 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| Income before income taxes                     |       | 7                                                       |       | 10                                                     |       | 9 |   | 8 |   |
| Provision for income taxes                     |       | 3                                                       |       | 4                                                      |       | 2 |   | 3 |   |
|                                           |       |                                                    |       |                                                   |       |   |   |   |   |
| **Net income**                                 |       | 4                                                       | %          | 6                                                      | %          | 7 | % | 6 | % |

 

# **NET REVENUES**

 
| ** **                        | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                        | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                        | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total net revenues (in thousands) |       | $                                                       | 64,920     |       | $          | 55,549                                                 |       | $          | 9,371      |   | $ | 190,420 |   | $ | 155,904 |   | $ | 34,516 |   |
|                                   |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Our netrevenues are made up of three components: term license, maintenance and otherrecurring revenue; perpetual license fees; and professional services and otherrevenue. Term license fees include both the software license fees andmaintenance fees recorded under a time based contract. Maintenancerevenues are derived from maintenance fees charged for perpetual licensearrangements and recurring revenues are derived from our subscription-based ortransaction-based services.Perpetuallicense revenues are derived from the licensing of software products under aperpetual arrangement. Professionalservices and other revenues include fees for consulting, training services, andservices and our client conferences. Sales returns, which we generally donot provide to customers, are accounted for as deductions to these threerevenue categories based on our historical experience.

 

Prior to fiscal 2006, each of the major revenue categories varied as apercentage of net revenues. Since fiscal 2006, revenues from recurring sourceshave grown from 75% in 2006, to 77% in 2007 and to 80% in the first nine monthsof 2008. 

 

23

----

Table of Contents

 

This variability has been primarily due to the introduction of newproducts and subscription services, the relative size and timing of individualperpetual software license sales, as well as the size and timing of completionof term license implementations. As we continue to sign term license agreementsfor new customers, grow our subscription, data management and outsourcedservices revenues, and our customers renew their perpetual maintenance, weexpect our revenue from recurring sources to continue to increase as apercentage of net revenues and therefore we expect less variability between ourmajor categories of revenues.

 

Netrevenues increased during the nine months ended September 30, 2008compared to the same periods of 2007 due to growing information technologyspending by our customers, as well as a general increase in customer adoptionfor many of our products and services, which principally includes increases insales of our APX and Geneva products. The year-over-year growth in total netrevenues for the three and nine months ended September 30, 2008 was dueprincipally to substantially higher term license, maintenance and otherrecurring revenues, which reflected 20% and 24% growth, respectively, in termlicense revenues over the three and nine month comparative periods, as well asa 29% increase in revenue from international sales in the third quarter of2008.

 

Internationalsales, which are based on the location to which the product is shipped,contributed to our growth during fiscal year to date September 2008 andwere $8.3 million and $6.4 million in the third quarter of 2008 and 2007,respectively. We plan to continue expanding our international sales efforts,both in our current markets and elsewhere. The revenues from customers in anysingle international country did not exceed 10% of total net revenues.

 

We expect total net revenues for the fourth quarter of 2008 to bebetween $68 million and $70 million.

 

***Term License, Maintenance and Other RecurringRevenues***

 
| **(in thousands, except percent of**      | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| **total net revenues)**                             | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                          |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Term license revenues                                         |       | $                                                       | 15,359     |       | $          | 10,179                                                 |       | $          | 5,180      |   | $ | 44,808 |   | $ | 27,312 |   | $ | 17,496 |   |
| Maintenance revenues                                          |       | 23,049                                                  |       | 21,500     |       | 1,549                                                  |       | 68,440     |       | 63,278 |   | 5,162 |   |
| Other recurring revenues                                      |       | 13,328                                                  |       | 11,367     |       | 1,961                                                  |       | 38,465     |       | 32,192 |   | 6,273 |   |
| Total term license, maintenance and other recurring  revenues |       | $                                                       | 51,736     |       | $          | 43,046                                                 |       | $          | 8,690      |   | $ | 151,713 |   | $ | 122,782 |   | $ | 28,931 |   |
| Percent of total net revenues                                 |       | 80                                                      | %          | 77         | %          |                                                   |       | 80         | %          | 79 | % |   |   |

 

Term license revenues, which include software license and maintenancefees for term licenses, grew $5.2 million or 51% during the third quarter of2008 compared to the same quarter in 2007, and represented 30% of total termlicense, maintenance and other recurring revenues as compared to 24% in thethird quarter of 2007. We began our transition to a term licensing model in2004 and have experienced growth in our term license bookings since that time.The growth of term license revenues in the three and nine months ended September 30,2008 has primarily resulted from term licenses which have been implementedsince the third quarter of 2007. The increase in term license revenue principallyreflects the continued market acceptance of our Geneva, APX, Partner and Moxyproducts.

 

Maintenance revenues increased $1.5 million and $5.2 million during thethree and nine months ended September 30, 2008, respectively compared tothe same periods of 2007. This increase was attributable to the impact of priceincreases on annual perpetual maintenance renewals purchased by our installedcustomer base, up-selling to higher value maintenance plans and, to a lesserextent, an increase in new perpetual maintenance support contracts, partiallyoffset by attrition from within our existing installed customer base.Effective with the third quarterof 2007, we disclose a blended renewal rate that includes both perpetualmaintenance and term contracts but excludes the Axys clients that are migratingto APX from the calculation. We disclose our renewal rate one quarter inarrears in order to include substantially all payments received against theinvoices for that quarter. Historically, this renewal rate has increased by 2to 9 points after the initial disclosure as cash continues to be collected. Ourrenewal rate was 86% for the second quarter of 2008, which is lower than ourrange of 91% to 94% over the previous four quarters. The decrease in therenewal rate reflected less cash collected, at the point of our initialdisclosure, associated with both perpetual maintenance and term contractrenewals as more customers either did not renew or remained in the process ofrenewing.

 

Other recurring revenues increased $2.0 million and $6.3 million duringthe three and nine months ended September 30, 2008, respectively, comparedto the same periods of 2007. This was primarily due to revenue increasesassociated with growth in our subscription, data management and outsourcedservices of $1.6 million and $4.5 million during the three and nine monthsended September 30, 2008, respectively, and higher transaction chargesgenerated by our partners of $0.4 million and $1.7 million.

 

24

----

Table of Contents

 

We expect that term license, maintenance and other recurring revenueswill increase in the fourth quarter of 2008 compared to the third quarter, dueprincipally to term license revenue from term contracts sold in prior periodsbecoming fully implemented, the layering effect of new term revenue and theeffects from the Tamale acquisition.

 

***Perpetual License Fees***

 
| ** **                            | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Perpetual license fees (in thousands) |       | $                                                       | 4,565      |       | $          | 6,054                                                  |       | $          | (1,489     | ) | $ | 15,432 |   | $ | 17,670 |   | $ | (2,238 | ) |
| Percent of total net revenues         |       | 7                                                       | %          | 11         | %          |                                                   |       | 8          | %          | 11 | % |   |   |
|                                       |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Perpetual license fees decreased 25% and 13% during the three and ninemonths ended September 30, 2008, respectively, compared to the sameperiods of 2007. As a percentage of total net revenues, perpetual license feesdecreased to 7% in the third quarter of 2008 from 11% in the same period of2007. Consistent with our transition to term licensing, perpetual license feescontinue to account for a smaller percentage of total net revenues.Additionally, we licensed fewer perpetual seats and modules to our existing perpetualclient base. Incremental AUA fees from perpetual licenses included in perpetuallicense fees were $1.5 million and $4.9 million for the three and nine monthsended September 30, 2008, respectively, and were flat as compared to thesame periods in 2007.

 

We expect perpetual license fees will increase in the fourth quarter of2008 compared to the third quarter, primarily as a result of two perpetual AUAcontracts that are measured annually in the fourth quarter of each year.

 

***Professional Services and Other Revenues***

 
| ** **                                               | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                               | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                     |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Professional services and other revenues (in  thousands) |       | $                                                       | 8,619      |       | $          | 6,449                                                  |       | $          | 2,170      |   | $ | 23,275 |   | $ | 15,452 |   | $ | 7,823 |   |
| Percent of total net revenues                            |       | 13                                                      | %          | 12         | %          |                                                   |       | 12         | %          | 10 | % |   |   |
|                                                          |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Professional services and other revenues primarily include consultingservices (which generally also includes project management, custom integration,data conversion and training services) and reimbursable travel. Professionalservices projects related to Axys, Moxy and Partner products generally can becompleted in a two- to six-month time period, while services related to Genevaand APX products may require a four- to nine-month implementation period.

 

Professional services and other revenues increased in the comparativeperiods due to the following (in thousands):

 
| ** **                            | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|---------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                            | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                  |       |                       |       |                       |       |
| Increased consulting services         |       | $                          | 1,672      |                       | $          | 6,649 |   |
| Increased reimbursable travel revenue |       | 260                        |       | 934                        |       |
| Increased conference                  |       | 215                        |       | 261                        |       |
| Various other items                   |       | 23                         |       | (21                        | )          |
|                                  |       |                       |       |                       |       |
| Total change                          |       | $                          | 2,170      |                       | $          | 7,823 |   |

 

Professional services increased 34% and 51% during the three and ninemonths ended September 30, 2008, respectively, as compared to thecomparable periods of 2007, primarily reflecting growth in our consultingrevenues from increased revenue generating professional services headcount andthird party service providers.

 

When services are performed with term license implementations, servicerevenue is deferred until the implementation services are substantiallycomplete. Upon substantial completion, we recognize a pro-rata amount ofprofessional services fees earned based on the elapsed time from the start ofthe term license to the substantial completion of professional services. Theremaining deferred professional services revenue is recognized ratably over theremaining contract length. We have experienced an increase in implementationservices after the launch of our APX product and the sales success of ourGeneva product. Also included in professional services and other were $1.6million of revenues generated from the Advent Client Conference in September 2008,which was an increase of $0.2 million over the prior year.

 

We expect professional services and other revenue to decrease in thefourth quarter of 2008, primarily due to less conference revenue as our annualAdvent client conference occurred in the third quarter of 2008.

 

25

----

Table of Contents

 

***Revenues by Segment***

*** ***
| ** **                   | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| **(in thousands)**      | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                         |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Advent Investment Management |       | $                                                       | 58,152     |       | $          | 49,892                                                 |       | $          | 8,260      |   | $ | 171,395 |   | $ | 138,992 |   | $ | 32,403 |   |
| MicroEdge                    |       | 6,768                                                   |       | 5,657      |       | 1,111                                                  |       | 19,025     |       | 16,912 |   | 2,113 |   |
|                         |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Total net revenues           |       | $                                                       | 64,920     |       | $          | 55,549                                                 |       | $          | 9,371      |   | $ | 190,420 |   | $ | 155,904 |   | $ | 34,516 |   |

 

We have two reportable segments: Advent Investment Management (“AIM”)and MicroEdge. AIM derives revenues from the development, marketing and sale ofsoftware products, data interfaces and related maintenance and services thatautomate, integrate and support certain mission critical functions ofinvestment management organizations. MicroEdge derives revenues from the saleof software and services for grant management, matching gifts and volunteertracking for the grant-making community.

 

The 17% and 23% increase in AIM’s revenue in the three and nine monthsended September 30, 2008 was due principally to increased term license,maintenance and other recurring revenues, reflecting the continued marketacceptance of Axys, APX, Moxy, Partner and Geneva products as well as increasedinternational sales. AIM’s revenue increases during the nine monthsended September 30, 2008 also reflected an increase in new perpetualmaintenance support contracts as a result of price increases for maintenancecontracts from our installed customer base, up-selling existing customers tohigher value maintenance plans and new perpetual license deals, partiallyoffset by attrition from within our existing installed customer base.International sales were $8.3 million or 13% of total revenues in the thirdquarter of 2008, representing an increase of $1.9 million or 29%, from $6.4million or 12% of total revenues in the third quarter of 2007.

 

The20% and 12% increase in MicroEdge revenue during the three and nine monthsended September 30, 2008 primarily reflected an increase in perpetuallicense sales in MicroEdge’s core product Gifts and to a lesser extentmaintenance revenues due to price increases and continued strong customerretention. The technology spending patterns of organizations in MicroEdge’sprimary markets (independent foundations, community foundations andcorporations) are directly affected by economic fluctuations as foundationbudgets are largely driven by endowment income. Given that endowments oftencontain market-exposed components, they are significantly affected by theeconomy and foundation spending typically decreases in an economic downturn.Community foundations are subject to similar influences, compounded by the factthat in many cases much of their ongoing funding and endowment comes fromactive donors who may increase or reduce their giving depending on the economicclimate and the related effect on their income and wealth. Corporationstypically fund charitable activities from operating budgets, and the allocationto charitable donations and supporting company charitable operations is oftenclosely tied to a company’s performance. Thus, corporate philanthropy andspending on related technology are correlated with company and overall economicperformance.

 

### **COST OFREVENUES**

 
| ** **                            | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total cost of revenues (in thousands) |       | $                                                       | 23,956     |       | $          | 17,969                                                 |       | $          | 5,987      |   | $ | 64,509 |   | $ | 49,437 |   | $ | 15,072 |   |
| Percent of total net revenues         |       | 37                                                      | %          | 32         | %          |                                                   |       | 34         | %          | 32 | % |   |   |
|                                       |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Our cost of revenues is made up of four components: cost of termlicense, maintenance and other recurring; cost of perpetual license fees; costof professional services and other; and amortization of developed technology.The increase in total cost of revenues in absolute dollars was due principallyto new hires in our client support and services groups to support ourincreased new term license bookings and associated increase in clientimplementation projects. The decrease in gross margin percentage during thethree and nine months ended September 30, 2008 resulted principally fromour shift in revenue mix and term license implementation deferral. Professionalservices and other revenue comprised a greater percentage of total revenuesduring the three and nine months ended September 30, 2008 due to growth of34% and 51%, respectively.  We arecurrently experiencing negative gross margins on professional services revenuesas we defer revenues and costs (direct only) associated with services performedon term license implementations. Indirect costs such as management and otheroverhead expenses are recognized in the period in which they are incurred, withno revenue to offset them.

 

26

----

Table of Contents

 

***Cost of Term License, Maintenance and OtherRecurring***

 
| ** **                                                              | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                                              | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| Cost of term license, maintenance and other  recurring (in thousands)   |       | $                                                       | 11,950     |       | $          | 9,757                                                  |       | $          | 2,193      |   | $ | 34,263 |   | $ | 27,837 |   | $ | 6,426 |   |
| Percent of total term license, maintenance and  other recurring revenue |       | 23                                                      | %          | 23         | %          |                                                   |       | 23         | %          | 23 | % |   |   |
|                                                                         |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of term license fees consists primarily of royalties and otherfees paid to third parties, the fixed direct labor involved in producing anddistributing our software, and cost of product media including duplication,manuals and packaging materials. 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 term license, maintenance and other recurring fluctuated due tothe following (in thousands):

 
| ** **                              | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-----------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                              | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                              | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                    |       |                       |       |                       |       |
| Increased payroll and related costs     |       | $                          | 1,263      |                       | $          | 3,893 |   |
| Increased allocation of corporate costs |       | 181                        |       | 512                        |       |
| Increased depreciation                  |       | 174                        |       | 415                        |       |
| Increased royalty                       |       | 155                        |       | 568                        |       |
| Increased outside services              |       | 134                        |       | 407                        |       |
| Various other items                     |       | 286                        |       | 631                        |       |
|                                    |       |                       |       |                       |       |
| Total change                            |       | $                          | 2,193      |                       | $          | 6,426 |   |

 

The increases for the three and nine months ended September 30,2008 were due primarily to an increase in payroll and related costs resultingfrom increases in salary costs and headcount which enables us to deliver theservices we provide to our growing number of clients in their day-to-day use ofour software. Headcount has grown from 230 employees at September 30, 2007to 272 at September 30, 2008, which also contributed to increasedallocation of corporate (facility and IT) costs.

 

***Cost of Perpetual License Fees***

*** ***
| ** **                                     | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                           |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Cost of perpetual license fees (in  thousands) |       | $                                                       | 225        |       | $          | 218                                                    |       | $          | 7          |   | $ | 766 |   | $ | 632 |   | $ | 134 |   |
| Percent of total perpetual license revenues    |       | 5                                                       | %          | 4          | %          |                                                   |       | 5          | %          | 4 | % |   |   |
|                                                |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of perpetual license fees consists primarily of royalties andother fees paid to third parties, the fixed direct labor involved in producingand distributing our software, and cost of product media including duplication,manuals and packaging materials. The cost of perpetual license fees for thenine months ended September 30, 2008 has increased by $0.1 millioncompared with the same period in 2007 primarily due to slightly higher royalty,depreciation and product and demonstration costs.

 

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

*** ***
| ** **                                                 | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                                 | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| Cost of professional services and other (in  thousands)    |       | $                                                       | 11,056     |       | $          | 7,662                                                  |       | $          | 3,394      |   | $ | 27,301 |   | $ | 19,950 |   | $ | 7,351 |   |
| Percent of total professional services and other  revenues |       | 128                                                     | %          | 119        | %          |                                                   |       | 117        | %          | 129 | % |   |   |
|                                                            |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Cost of professional services and other revenue consists primarily ofpersonnel related costs associated with the client services organization inproviding consulting, custom report writing and conversions of data fromclients’ previous systems. Also included are direct costs associated withthird-party consultants and travel expenses.

 

27

----

Table of Contents

 

Cost of professional services and other increased in dollar amount dueto the following (in thousands):

 
| ** **                                | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                                | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                      |       |                       |       |                       |       |
| Increased payroll and related costs       |       | $                          | 1,886      |                       | $          | 4,728 |   |
| Increased outside services and conference |       | 1,068                      |       | 1,933                      |       |
| Increased travel and entertainment        |       | 380                        |       | 918                        |       |
| Various other items                       |       | 60                         |       | (228                       | )          |
|                                      |       |                       |       |                       |       |
| Total change                              |       | $                          | 3,394      |                       | $          | 7,351 |   |

 

The increase during the three and nine months ended September 30,2008 reflects increases in payroll related expenses, outside services and to alesser extent, travel and entertainment expenses, to address the generalincrease in demand for consulting and training services as a result of higherterm license contract sales. As a result of the increase in our term licensetransactions and customer base, we have increased headcount in our consultinggroups to 143 at September 30, 2008 from 129 at September 30, 2007.

 

We have experienced an increase in implementation services with thelaunch of our APX product and sales of our Geneva product, which are both soldunder the term license model. As there were similar levels of term licenseimplementation projects, primarily Geneva-related, in progress as of September 30,2008 compared to September 30, 2007, our deferral of professional servicecosts has been consistent in 2008. We deferred net professional service costsof $900,000 and $2.7 million during the three and nine months ended September 30,2008, compared to $857,000 and $2.6 million in the comparable periods of 2007.

 

We also utilized more outside service contractors during 2008 to assistwith our professional service projects and our Advent Client Conference in September 2008,which was our largest to date. Also in the third quarter of 2008, we recognized$302,000 of outside services costs from invoices received late from suppliersrelated to the quarterly periods from the fourth quarter of 2007 through thesecond quarter of 2008.

 

In addition, travel expenses increased during the 2008 periods due totravel associated with more service projects as well as price increases.

 

Professional services’ gross margins for the nine months ended September 30,2008 improved but continue to be negative as a result of the significantdeferral of professional services revenues and costs associated with our termlicense implementation. We defer only the direct costs associated with servicesperformed on these arrangements. Indirect costs such as management and otheroverhead expenses are recognized in the period in which they are incurred, withno revenue to offset them. As the deferred professional services revenue andexpense associated with our term licenses continue to flow back into ouroperating results, we believe the margin will continue to improve over time. Inaddition, we have added headcount in our consulting group. Since these newemployees undergo a training period, typically of six months, before becomingfully billable, their associated costs have a near-term negative impact ongross margins.

 

We expect cost of professional services and other in the fourth quarterof 2008 to decrease as compared to the third quarter as our annual Adventclient conference occurred in the third quarter of 2008.

 

***Amortization of Developed Technology***

 
| ** **                                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                          | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| Amortization of developed techology (in  thousands) |       | $                                                       | 725        |       | $          | 332                                                    |       | $          | 393        |   | $ | 2,179 |   | $ | 1,018 |   | $ | 1,161 |   |
| Percent of total net revenues                       |       | 1                                                       | %          | 1          | %          |                                                   |       | 1          | %          | 1 | % |   |   |
|                                                     |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortization of developed technology represents amortization ofacquisition-related intangible assets and capitalized software developmentcosts. The increase in amortization of developed technology reflected increasedamortization from software development costs previously capitalized under SFAS86 and amortization from technology-related intangible assets associated withVivid Orange Limited which our MicroEdge segment acquired in November 2007.

 

We expect amortization of developed technology to increase in thefourth quarter due to amortization from technology-related intangiblesresulting from the Tamale acquisition in October 2008 and to a lesserextent incremental amortization from recently capitalized internally developedsoftware costs.

 

28

----

Table of Contents

 

### **OPERATINGEXPENSES**

 

***Sales and Marketing***

 
| ** **                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                         | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and marketing (in thousands) |       | $                                                       | 15,452     |       | $          | 13,482                                                 |       | $          | 1,970      |   | $ | 46,468 |   | $ | 40,356 |   | $ | 6,112 |   |
| Percent of total net revenues      |       | 24                                                      | %          | 24         | %          |                                                   |       | 24         | %          | 26 | % |   |   |
|                                    |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

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.

 

Sales and marketing expenses increased in dollar amount due to thefollowing (in thousands):

 
| ** **                          | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                          | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                |       |                       |       |                       |       |
| Increased payroll and related costs |       | $                          | 1,779      |                       | $          | 4,235 |   |
| Increased travel and entertainment  |       | 16                         |       | 871                        |       |
| (Decreased) increased bad debt      |       | (8                         | )          | 423                        |       |
| Various other items                 |       | 183                        |       | 583                        |       |
|                                |       |                       |       |                       |       |
| Total change                        |       | $                          | 1,970      |                       | $          | 6,112 |   |

 

The increasein expense in absolute dollars for the three and nine months ended September 30,2008 reflected the growth of our business, while the decrease of expense as apercentage of revenue during the nine month period reflected our achievement ofefficiencies of scale associated with increased revenue growth. The increase inpayroll and related expense was due to an increase in headcount to 189 at September 30,2008 from 167 at September 30, 2007. The increase in travel andentertainment costs during the nine months ended September 30, 2008resulted from increased travel volume, price increases in travel and additionalcosts from our sales group’s offsite meetings and annual sales recognitionevent during the nine months ended September 30, 2008. During the ninemonths ended September 30, 2008, we referred more accounts to collectionswhich resulted in our increased provision for bad debt compared to 2007.

 

We expect sales and marketing expenses to be higher in absolute dollarsin the fourth quarter of 2008 relative to the third quarter due to additionalheadcount from the acquisition of Tamale and increased marketing spendinginternationally.

 

***Product Development***

*** ***
| ** **                         | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                         | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                               |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Product development (in thousands) |       | $                                                       | 11,077     |       | $          | 9,334                                                  |       | $          | 1,743      |   | $ | 36,975 |   | $ | 30,006 |   | $ | 6,969 |   |
| Percent of total net revenues      |       | 17                                                      | %          | 17         | %          |                                                   |       | 19         | %          | 19 | % |   |   |
|                                    |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Product development expenses consist primarily of salary and benefitsfor our development staff as well as contractors’ fees and other costsassociated with the enhancements of existing products and services anddevelopment of new products and services.

 

Product development expenses increased in dollars due to the following(in thousands):

 
| ** **                                       | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                                       | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                             |       |                       |       |                       |       |
| Increased payroll and related costs              |       | $                          | 865        |                       | $          | 4,532 |   |
| Decreased capitalization of product  development |       | 708                        |       | 842                        |       |
| Increased outside services                       |       | 104                        |       | 1,328                      |       |
| Various other items                              |       | 66                         |       | 267                        |       |
|                                             |       |                       |       |                       |       |
| Total change                                     |       | $                          | 1,743      |                       | $          | 6,969 |   |

 

Theincrease in product development expense during the three and nine months ended September 30,2008 was primarily due to increases in payroll related costs as a resultof an increase in headcount and utilization of outside services to help uscontinue to enhance our existing product suite including new versions ofGeneva, APX, Moxy, Advent Partner and Advent Revenue Center. The decreases inthe capitalization of our product development costs during the three and ninemonths ended September 30, 2008 was attributable to the timing of productreleases as we capitalized $1.4 million and $1.8 million, respectively, ofcosts associated with Geneva 7.5, Axys 3.7 and Partner 7.0 during 2008 ascompared with $2.1 million and

 

29

----

Table ofContents

 

$2.7million of costs in the comparable periods of 2007 primarily associated withGeneva 7.0, APX 2.0 and Moxy 6.0. We invested 19% of our revenues in productdevelopment during the nine months ended September 30, 2008 and 2007.

 

Weexpect product development expenses to be significantly higher in the fourthquarter as we expect capitalization of product development to be lower and weexpect increased expense resulting from the acquisition of Tamale.

 

***General and Administrative***

*** ***
| ** **                                | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                      |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| General and administrative (in thousands) |       | $                                                       | 9,527      |       | $          | 8,393                                                  |       | $          | 1,134      |   | $ | 27,986 |   | $ | 25,014 |   | $ | 2,972 |   |
| Percent of total net revenues             |       | 15                                                      | %          | 15         | %          |                                                   |       | 15         | %          | 16 | % |   |   |
|                                           |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Generaland administrative expenses consist primarily of personnel costs forinformation technology, finance, administration, operations and generalmanagement, as well as legal and accounting expenses.

 

Generaland administrative expenses increased in dollars due to the following (inthousands):

 
| ** **                                      | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                                      | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                            |       |                       |       |                       |       |
| (Decreased) increased payroll and related costs |       | $                          | (234       | )                          | $          | 1,372 |   |
| Increased severance costs                       |       | 1,100                      |       | 969                        |       |
| Increased depreciation                          |       | 274                        |       | 270                        |       |
| Increased legal and professional                |       | 276                        |       | 810                        |       |
| Decreased recruiting                            |       | (153                       | )          | (353                       | )          |
| Various other items                             |       | (129                       | )          | (96                        | )          |
|                                            |       |                       |       |                       |       |
| Total change                                    |       | $                          | 1,134      |                       | $          | 2,972 |   |

 

The increase in expense during the nine months endedSeptember 30, 2008 is primarily due to the increases in payroll and other related costs as a result ofan increase in headcount.During the three months ended September 30, 2008, payroll expense wasslightly lower than the comparable period of 2007 due to higher capitalizationof payroll costs associated with our internally developed software projectswhich qualify for capitalization under SOP 98-1 and lower bonus costs.Depreciation was higher during the 2008 periods as a result of accelerateddepreciation associated with our 303 2nd Street facility which we will exit in November2008 instead our previous commitment of May 2012. Additionally,legal and professional fees were higher due to increased services provided byexternal legal and accounting firms. These cost increases were partially offset by lowerrecruiting fees from a lower volume of external recruiting activities. As apercentage of revenue, the decrease in general and administrative expenseduring the nine months ended September 30, 2008 from the comparable periodof 2007 reflects our achievement of efficiencies of scale associated withrevenue growth.

 

Weexpect general and administrative expenses to be higher in the fourth quarterof 2008 due to higher payroll costs resulting from our acquisition of Tamale.

 

***Amortization of Other Intangibles***

 
| ** **                                       | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                       | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                             |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Amortization of other intangibles (in thousands) |       | $                                                       | 141        |       | $          | 463                                                    |       | $          | (322       | ) | $ | 870 |   | $ | 1,403 |   | $ | (533 | ) |
| Percent of total net revenues                    |       | 0                                                       | %          | 1          | %          |                                                   |       | 0          | %          | 1 | % |   |   |
|                                                  |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Amortizationof other intangibles represents amortization of non-technology relatedintangible assets. The decrease during 2008 reflected assets from prioracquisitions becoming fully amortized during 2007 and the first half of 2008,partially offset by additional amortization from non-technology relatedintangible assets associated with Vivid Orange Limited which our MicroEdgesegment acquired in November 2007.

 

Weexpect amortization of other intangibles to be approximately $0.5 millionduring the fourth quarter of 2008 primarily due to additional amortizationresulting from intangible assets associated with our acquisition of Tamale.Additionally, we expect to expense approximately $0.4 million of in-processresearch and development costs associated with our Tamale acquisition duringthe fourth quarter of 2008.

 

30

----

Table ofContents

 

***Restructuring Charges***

 
| ** **                           | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                           | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                 |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Restructuring charges (in thousands) |       | $                                                       | 41         |       | $          | 113                                                    |       | $          | (72        | ) | $ | 96 |   | $ | 902 |   | $ | (806 | ) |
| Percent of total net revenues        |       | 0                                                       | %          | 0          | %          |                                                   |       | 0          | %          | 1 | % |   |   |
|                                      |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Restructuring initiativeshave been implemented in our AIM operating segment to reduce costs and improveoperating efficiencies by better aligning our resources to near-term revenueopportunities. These initiatives have resulted in restructuring chargescomprised primarily of costs related to properties abandoned in connection withfacilities consolidation, related write-down of leasehold improvements andseverance and associated employee termination costs related to headcountreductions. Our restructuring charges included accruals for estimated losses onfacility costs based on our contractual obligations net of estimated subleaseincome. We reassess this liability periodically based on market conditions.

 

##### ***During thethird quarter of 2008, we recorded a net restructuring charge of $41,000 whichprimarily related to a partial lease surrender fee of $200,000 to exit the datacenter portion of our facility space located at 303 2***nd Street in San Francisco, California, partiallyoffset by adjustments to our other facility exit assumptions.  During the first quarter of 2008, we recordeda restructuring charge of $56,000 which related to the present valueamortization of facility exit obligations.

##### *** ***

##### ***During the ninemonths ended September 30, 2007, we recorded aggregate restructuringcharges of $0.9 million which primarily related to the modification of certainsub-lease assumptions for our prior San Francisco headquarters facility locatedat 301 Brannan Street, which the Company exited in October 2006.***

##### *** ***

Foradditional analysis of the components of the payments and charges made againstthe restructuring accrual during the nine months ended September 30, 2008,see Note 9, “Restructuring Charges” to our condensed consolidated financialstatements.

 

***Income from Operations by Segment***

*** ***
| ** **                                          | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| **(in thousands)**                                  | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Advent Investment Management                        |       | $                                                       | 8,744      |       | $          | 8,522                                                  |       | $          | 222        |   | $ | 25,970 |   | $ | 17,029 |   | $ | 8,941 |   |
| MicroEdge                                           |       | 1,902                                                   |       | 1,287      |       | 615                                                    |       | 2,901      |       | 4,225 |   | (1,324 | ) |
| Unallocated corporate operating costs and expenses: |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Stock-based employee compensation                   |       | (5,054                                                  | )          | (3,219     | )          | (1,835                                                 | )          | (12,306    | )          | (10,047 | ) | (2,259 | ) |
| Amortization of developed technology                |       | (725                                                    | )          | (332       | )          | (393                                                   | )          | (2,179     | )          | (1,018 | ) | (1,161 | ) |
| Amortization of other intangibles                   |       | (141                                                    | )          | (463       | )          | 322                                                    |       | (870       | )          | (1,403 | ) | 533 |   |
|                                                |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Total income from operations                        |       | $                                                       | 4,726      |       | $          | 5,795                                                  |       | $          | (1,069     | ) | $ | 13,516 |   | $ | 8,786 |   | $ | 4,730 |   |

*** ***

Theincrease in AIM’s income for operations during the nine months ended September 30,2008 reflected increased efficiencies of scale as AIM revenues increased by$32.4 million or 23% while total expenses increased $23.4 million or 19%. Theincrease in expenses were  primarily dueto payroll and otherrelated costs from higher headcount of 896 employees at September 30, 2008from 800 at September 30, 2007, as the AIM segment has added personnelprimarily in the client support, product development, professional services andsales and marketing groups. Income from operations for the AIM segmentincreased by $0.2 million during the three months ended September 30,2008. While AIM revenues increased $8.3 million during the third quarter of2008, AIM’s expenses increased by $8.1 million primarily due to higher payrollcosts, including severance-related costs, higher utilization of outsideservices contractors to assist in our professional services projects and lesscapitalization of product development costs.

 

MicroEdge’sincome from operations increased by $0.6 million during the three months ended September 30,2008, as compared to the comparable period of 2007, primarily due to anincrease in revenues of $1.1 million which was partially offset by an increasein total operating costs of $0.5 million. During the nine months ended September 30,2008, MicroEdge’s operating income decreased by $1.3 million, primarily due toan increase of $3.4 million in total costs. This increase primarily resultedfrom the investment in our MicroEdge segment reflected by higher payroll andrelated costs as MicroEdge added more headcount from the acquisition of VividOrange Limited in December 2007.

 

31

----

Table ofContents

 

### ***Interest and Other Income(Expense), Net***

 
| ** **                                              | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                                    |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Interest and other income (expense), net (in thousands) |       | $                                                       | (167       | )          | $          | (138                                                   | )          | $          | (29        | ) | $ | 3,619 |   | $ | 4,248 |   | $ | (629 | ) |
| Percent of total net revenues                           |       | 0                                                       | %          | 0          | %          |                                                   |       | 2          | %          | 3 | % |   |   |
|                                                         |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interestand other income (expense), net consists of interest expense and income,realized gains and losses on investments and foreign currency gains and losses.

 

Interestand other income (expense), net decreased in dollars due to the following (inthousands):

 
| ** **                                             | ** ** | **Change From**       | ** ** | **Change From**       | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                             | ** ** | **2007 to 2008** | ** ** | **2007 to 2008** | ** ** |
| ** **                                             | ** ** | **QTD**                    | ** ** | **YTD**                    | ** ** |
|                                                   |       |                       |       |                       |       |
| Increased foreign exchange losses                      |       | $                          | (304       | )                          | $          | (315 | ) |
| Decreased interest income                              |       | (121                       | )          | (497                       | )          |
| Decreased gain on sale of private equity investment    |       | —                     |       | (854                       | )          |
| Decreased impairment loss of private equity investment |       | —                     |       | 585                        |       |
| Decreased interest expense                             |       | 405                        |       | 460                        |       |
| Various other items                                    |       | (9                         | )          | (8                         | )          |
|                                                   |       |                       |       |                       |       |
| Total change                                           |       | $                          | (29        | )                          | $          | (629 | ) |

 

Foreign exchanges lossesincreased during the 2008 periods as the U.S. dollar strengthened againstforeign currencies during the comparable periods of 2007.

 

Despiteour higher average cash and cash equivalent balance during 2008 compared to2007, the decreases in interest income for the three and nine months ended September 30,2008 were attributable to declining market interest rates during 2008.

 

Gain on sale of ourprivate equity investment decreased $0.9 million during the nine months ended September 30,2008 as we received the initial deferred contingent payment of $3.4 million in April 2008as a result of the Company’s sale of its ownership in LatentZero Limited (“LatentZero”)to royalblue group plc. in April 2007. During the nine months endedSeptember 30, 2007, we had recorded an aggregate gain of $4.2 million fromthe sale of two private equity investments, including our investment inLatentZero. Also, during the nine months ended September 30, 2007, werecorded an impairment loss of $585,000 which was associated with one of ourother private equity investments.

 

### **Interest expense decreased during the threeand nine months ended September 30, 2008 as we had no debt outstandingduring the nine months ended September 30, 2008 whereas we had drawn down$25.0 million on our credit facility in June 2007 resulting in higherinterest expense during the comparable periods of 2007. The credit facility wasfully repaid in December 2007.**

### ** **

### ***Provisionfor Income Taxes***

 
| ** **                                | ** ** | **Three Months Ended September 30** | ** ** | ** ** | ** ** | **Nine Months Ended September 30** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|------------|------------|
| ** **                                | ** ** | **2008**                                                | ** ** | **2007**   | ** ** | **Change**                                             | ** ** | **2008**   | ** ** | **2007** | ** ** | **Change** | ** ** |
|                                      |       |                                                    |       |       |       |                                                   |       |       |       |   |   |   |   |
| Provision for income taxes (in thousands) |       | $                                                       | 1,847      |       | $          | 2,361                                                  |       | $          | (514       | ) | $ | 4,433 |   | $ | 4,204 |   | $ | 229 |   |
| Effective tax rate                        |       | 41                                                      | %          | 42         | %          |                                                   |       | 26         | %          | 32 | % |   |   |
|                                           |            |                                                         |            |            |            |                                                        |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

During the three monthsended September 30, 2008, we recorded a provision of $1.8 millionresulting in a 41% effective tax rate for the third quarter of 2008 compared toa provision of $2.4 million reflecting a 42% effective tax rate for the thirdquarter of 2007.  The effective tax rate consists primarily of the federaland state tax rates unfavorably impacted by certain types of stock compensationexpense and favorably impacted by California research credits and deductionsfor disqualifying dispositions of incentive stock options and employee stockpurchase plan shares.

 

Duringthe nine months ended September 30, 2008, we recorded a provision of $4.4million resulting in a year-to-date effective tax rate of 26% compared to aneffective tax rate of 32% over the same period of 2007. The lower effective income tax rate during the nine months ended September 30, 2008is primarily attributable to the recognition of a significant amount of Californiaenterprise zone credits and the release of valuation allowance relating tocapital loss carryovers during the second quarter of 2008

 

The “Emergency EconomicStabilization Act of 2008,” which contains the “Tax Extenders and AlternativeMinimum Tax Relief Act of 2008”, was signed into law on October 3, 2008.Under the Act, the federal research credit was retroactively extended foramounts paid or incurred after December 31, 2007 and before January 1,2010. The effects of the change in the

 

32

----

Tableof Contents

 

tax law will berecognized in our fourth quarter, which is the quarter in which the law wasenacted.  As a result, we now expect our full year effective tax rate for2008 to be between 20% and 25%.

 

### **LIQUIDITYAND CAPITAL RESOURCES**

### ** **

Ouraggregate cash and cash equivalents were $76.1 million at September 30,2008, compared with $49.6 million at December 31, 2007. Cash equivalentsare comprised of highly liquid investments purchased with an original orremaining maturity of 90 days or less at the date of purchase.

 

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

 
| ** **                                          | ** ** | **Nine Months Ended September 30** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Net cash provided by operating activities           |       | $                                       | 54,166     |   | $ | 38,236 |   |
| Net cash provided by (used in) investing activities |       | $                                       | (17,939    | ) | $ | 25,563 |   |
| Net cash used in financing activities               |       | $                                       | (9,564     | ) | $ | (51,424 | ) |

 

***Cash Flows from Operating Activities***

 

Ourcash flows from operating activities represent the most significant source offunding for our operations. The major uses of our operating cash includefunding payroll (salaries, commissions, bonuses and benefits), generaloperating expenses (marketing, travel, computer and telecommunications, legaland professional expenses, and office rent) and cost of revenues. Our cashprovided by operating activities generally follows the trend in our net revenues,operating results and the increase in deferred revenues resulting from termlicense bookings.

 

Ourcash provided by operating activities of $54.2 million during the nine monthsended September 30, 2008 was primarily the result of our net income andnon-cash charges including stock-based compensation and depreciation andamortization, partially offset by a gain from our equity investment activityduring the nine months. Cash flows resulting from changes in assets andliabilities included increases in deferred revenue and accounts payable. Theincrease in deferred revenue primarily reflected our continued transition tothe term license model. Under the term model, we generally bill and collect fora term agreement in equal installments in advance of each annual period. Theseamounts are deferred at billing and recognized over the annual term period.This has the effect of increasing deferred revenue when compared to a perpetuallicense model where no license revenue is deferred. See further discussion ofthe effects of our transition to a term model in the “Overview” section. Otherchanges in assets and liabilities included a decrease in accrued liabilities.The decrease in accrued liabilities reflected cash payments of fiscal 2007liabilities including year-end payables and bonuses, commissions and payrolltaxes.

 

Our cash provided byoperating activities of $38.2 million during the nine months ended September 30,2007 was primarily the result of our net income, increase in deferred revenue,collection of accounts receivable, and non-cash expenses including stock-basedcompensation and depreciation and amortization during the period, partiallyoffset by a net gain from equity investment activity. The increase in deferredrevenue primarily reflected our continued transition to the term license model.The decrease in accounts receivable primarily reflected improved collectionsduring the first nine months of 2007. Days’ sales outstanding decreased to 66days at the end of the third quarter of 2007 from 75 days in the fourth quarterof 2006. Other changes in assets and liabilities included an increase in ourincome taxes payables and decreases in prepaid and other assets, accountspayable and accrued liabilities. The decreases in accounts payable and accruedliabilities reflected cash payments of fiscal 2006 liabilities includingyear-end payables and bonuses, commissions and payroll taxes.

 

Weexpect that cash provided by operating activities may fluctuate in futureperiods as a result of a number of factors including fluctuations in our netrevenues and operating results, the amount of revenue deferred resulting fromour shift to a term license model, collection of accounts receivable, andtiming of payments to vendors and employees.

 

***Cash Flows from Investing Activities***

 

Netcash used in investing activities of $17.9 million for the nine months ended September 30,2008 reflects capital expenditures of $18.4 million primarily related to thebuild-out of additional space at our San Francisco headquarters facility, capitalizedsoftware development costs of $1.7 million, a loan to Tamale Software in theamount of $1.0 million and change in restricted cash of $0.2 million, partiallyoffset by the receipt of $3.4 million for the initial deferred contingentconsideration of our sale of our ownership in LatentZero.

 

33

----

Table ofContents

 

Net cash provided byinvesting activities of $25.6 million for the nine months ended September 30,2007 is primarily from proceeds of $24.9 million from the sale of short terminvestments and from the proceeds of $11.6 million from the sale of two privateequity investments, including our stake in LatentZero Limited. This waspartially offset by capital expenditures of $7.1 million, capitalized softwaredevelopment costs of $2.4 million and an installment payment totaling $1.0million related to the acquisition of East Circle Solutions, Inc. Inaddition, restricted cash increased by $0.4 million associated with amendmentsto the lease agreement with Toda Development, Inc. (“Toda”) to increaseour rentable square footage at our headquarter facility located at 600 TownsendStreet in San Francisco, California. In the event that we default under theterms of this lease agreement, the letter of credit may be drawn upon by Toda.

 

We completed ouracquisition of Tamale Software on October 1, 2008 and paid approximately$28 million in October 2008.

 

***Cash Flows from Financing Activities***

 

Netcash used in financing activities of $9.6 million for the nine months ended September 30,2008 reflected the repurchase of 360,000 shares of our common stock for $15.0million, proceeds of $2.6 million from the issuance of common stock under theemployee stock purchase plan and $2.9 million received from the exercise ofemployee stock options, net of taxes paid associated with the exercise ofstock-settled stock appreciation rights and vesting of restricted stock units.

 

Net cash used infinancing activities of $51.4 million for the nine months ended September 30,2007 reflected the repurchase of 2.6 million shares of our common stock for$91.2 million and the repayment of $5.0 million on our credit facility. Thiswas partially offset by a draw-down of $25.0 million against our creditfacility and proceeds received from the issuance of common stock of $19.8million under our employee stock option and purchase plans

 

In October 2008, werepurchased the remaining 640,000 shares under the program authorized by theBoard in May 2008 for $19.5 million.

 

Ourliquidity and capital resources in any period could be affected by the exerciseof outstanding stock options and issuance of common stock under our employeestock purchase plan. Theresulting increase in the number of outstanding shares from this and from theissuance of common stock from our other outstanding equity awards (RSUs andSARs) could also affect our per share results of operations. However, we cannotpredict the timing or amount of proceeds from the exercise of stock options orSARs, or whether they will be exercised at all.

 

AtSeptember 30, 2008, we had negative working capital of $(18.1) million,compared to negative working capital of $(23.2) million at December 31,2007. Our negative working capital is primarily due to our use of excess cashto repurchase our common stock. We repurchased $91.2 million during fiscal 2007and $15.0 million during the nine months ended September 30, 2008. To alesser extent, our negative working capital was also due to deferred revenuegrowth as we continue to transition the substantial majority of our licenseagreements to term. We expect to continue to have negative working capital atthe end of 2008 as we used $28.0 million in cash to acquire Tamale and $19.5million to repurchase 640,000 shares during October 2008.

 

*Credit Facility*

 

In February 2007,Advent Software, Inc. and certain of our domestic subsidiaries enteredinto a senior secured credit facility agreement (the “Credit Facility”) withWells Fargo Foothill, Inc. (the “Lender”). Under the Credit Facility, theLender will provide the Company with a revolving line of credit up to anaggregate amount of $75 million, subject to a borrowing base formula, toprovide backup liquidity for general corporate purposes, including stockrepurchases, or investment opportunities for a period of three years. As of September 30,2008 and December 31, 2007, the Company maintained a zero debt balance andwas in compliance with all associated covenants. We may choose to draw downupon this credit facility at any time.

 

*Stock Repurchases*

 

On May 7, 2008, ourBoard authorized the repurchase of up to 1.0 million shares of the Company’scommon stock. The purchases will be funded from available working capital oravailable liquidity under our Credit Facility, and repurchased shares will bereturned to the status of authorized but un-issued shares of common stock.During the third quarter of 2008, we repurchased 360,000 shares under the sharerepurchase plan authorized by our Board in May 2008 for a total cashoutlay of $15.0 million and an average price of $41.76.

 

InOctober 2008, we repurchased the remaining 640,000 shares, under theprogram authorized in May 2008, for an average price of $30.41 per share,for a total cost of $19.5 million.

 

34

----

Table ofContents

 

On October 30, 2008,the Board of Directors authorized a share repurchase program of up to 3.0 millionshares, and we may borrow under the credit facility to fund a portion of theserepurchases.

 

We expect that for thenext year, our operating expenses will continue to constitute a significant useof cash flow. In addition, we may use cash to fund other acquisitions,repurchase additional common stock, or invest in other businesses, whenopportunities arise. Based upon the predominance of our revenues from recurringsources, term license bookings performance and current expectations, we believethat our cash and cash equivalents, cash generated from operations andavailability under our Credit Facility will be sufficient to satisfy ourworking capital needs, capital expenditures, investment requirements, stockrepurchases and financing activities for the next year. However, if we identifyopportunities that exceed our current expectation, we may choose to seekadditional capital resources through equity or debt financing. However, suchfinancing may not be available at all, or if available may not be obtainable onterms favorable to us and could be dilutive.

 

**Off-BalanceSheet Arrangements and Contractual Obligations**

 

Wecurrently have no significant capital commitments other than commitments underour operating leases, which decreased from $52.7 million at December 31,2007 to $47.3 million at September 30, 2008.

 

Thefollowing table summarizes our contractual cash obligations as of September 30,2008 (in thousands):

 
| ** **                                           | ** ** | **Three**            | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|----------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                           | ** ** | **Months Ended**     | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **December 31** | ** ** | **Years Ended December 31** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **2008**             | ** ** | **2009**                         | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| Operating lease obligations, net of sub-lease income |       | $                    | 1,877      |                             | $          | 6,465      |       | $          | 5,961      |       | $          | 5,498          |       | $          | 4,913      |   | $ | 22,601 |   | $ | 47,315 |   |
|                                                      |            |                      |            |                                  |            |            |            |            |            |            |            |                |            |            |            |  |  |  |  |  |  |  |

 

At September 30,2008 and December 31, 2007, we had a gross liability of $6.0 million and$5.9 million, respectively, for uncertain tax positions associated with theadoption of FIN 48. If recognized, the portion of unrecognized tax benefits at September 30,2008 that would decrease our tax expense and increase net income is $5.0million. The impact on net income reflects the liabilities for unrecognized taxbenefits net of the federal tax benefit of state income tax items. Since almostall of this liability relates to reserves against deferred tax assets that wedo not expect to utilize in the short term, we cannot estimate the timing ofpotential future cash settlements and have not included any estimates in thetable of contractual cash obligations above. Additionally, with the exceptionof California discussed below, our cash payments for income taxes will continueto be nominal until at least 2011 as we have significant net operating losses,capital losses and tax credit carryforwards to utilize. On September 27,2008, California enacted tax law changes that suspended the utilizationof California net operating losses and limited the utilization ofCalifornia tax credits to 50% of our tax liability for the 2008 and 2009 taxperiods. As a result, we expect to pay cash income taxes in California in2008 and 2009 but do not expect the amount to exceed $750,000 in either year.

 

At September 30,2008 and December 31, 2007, we did not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. As such, we are notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

 

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

 

We are exposed tofinancial market risks, including changes in foreign currency exchange ratesand interest rates. Historically, much of our revenues and capital spending wastransacted in U.S. dollars. However, since the acquisitions of Advent Denmark,Advent Norway, Advent Sweden, Advent Netherlands, Vivid Orange Ltd. and AdventEurope’s remaining distributors in the United Kingdom and Switzerland, whoseservice and certain license revenues and capital spending are transacted inlocal country currencies, we have greater exposure to foreign currencyfluctuations. Additionally as of September 30, 2008, $45.5 million ofgoodwill and $2.5 million of other intangibles from the acquisition of theseinternational entities are denominated in foreign currency. Therefore ahypothetical change of 10% could increase or decrease our assets and equity byapproximately $5 million and could increase or decrease our condensedconsolidated results of operations or cash flows by approximately $0.5 million.

 

Our interest rate riskrelated primarily to our investment portfolio which consisted of $37.3 millionin cash equivalents as of December 31, 2007 and $22.9 million in cashequivalents as of September 30, 2008. These cash equivalent securities

 

35

----

Tableof Contents

 

were comprised of U.S.government debt securities which would not be materially affected by animmediate sharp increase or decrease in interest rates. As of September 30,2008, we did not hold any other securities outside of U.S. government moneymarket mutual fund securities and will continue to hold U.S. governmentsecurities in the near future.

 

We also have interestrate risk relating to debt under our line of credit facility which is indexedto LIBOR or a Wells Fargo prime rate. However, as of September 30, 2008,we essentially have no exposure for market risk for changes in interest ratesassociated with our credit facility, as we have a zero balance of debtoutstanding.

 

We have also invested inseveral privately-held companies. These non-marketable investments are classifiedas other assets on our consolidated balance sheets. Our investments inprivately-held companies could be affected by an adverse movement in thefinancial markets for publicly-traded equity securities, although the impactcannot be directly quantified. These investments are inherently risky as themarket for the technologies or products these privately-held companies haveunder development are typically in the early stages and may never materialize.It is our policy to review investments in privately held companies on a regularbasis to evaluate the carrying amount and economic viability of thesecompanies. This policy includes, but is not limited to, reviewing each of thecompanies’ cash position, financing needs, earnings/revenue outlook, operationalperformance, management/ownership changes and competition. The evaluationprocess is based on information that we request from these privately heldcompanies. This information is not subject to the same disclosure regulationsas U.S. publicly traded companies, and as such, the basis for these evaluationsis subject to timing and the accuracy of the data received from thesecompanies.

 

Our investments inprivately held companies are assessed for impairment when a review of theinvestee’s operations indicates that a decline in value of the investment isother than temporary. Such indicators include, but are not limited to, limitedcapital resources, limited prospects of receiving additional financing, andprospects for liquidity of the related securities. Impaired investments inprivately held companies are written down to estimated fair value. We estimatefair value using a variety of valuation methodologies. Such methodologiesinclude comparing the private company with publicly traded companies in similarlines of business, applying revenue and price/earnings multiples to estimatedfuture operating results for the private company and estimating discounted cashflows for that company. We could lose our entire investment in these companies.At September 30, 2008 and December 31, 2007, our net investments inprivately-held companies totaled $0.5 million.

 

**Item 4. Controls and Procedures**

 

**Evaluation of disclosure controls and procedures.**

 

TheCompany’s management evaluated, with the participation of the PrincipalExecutive and Financial Officer, the effectiveness of the Company’s disclosurecontrols and procedures, as such term is defined under Rule 13a-15(f) ofthe Securities and Exchange Act of 1934, as of the end of the period covered bythis Quarterly Report on Form 10-Q. Based on this evaluation, thePrincipal Executive and Financial Officer has concluded our disclosure controlsand procedures were effective as of September 30, 2008 to ensure thatinformation we are required to disclose in reports that we file or submit underthe Securities Exchange Act of 1934 (i) is recorded, processed, summarizedand reported within the time periods specified in Securities and ExchangeCommission rules and forms and (ii) is accumulated and communicatedto Advent’s management, including our Principal Executive and FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**Changes in internal control overfinancial reporting.**

 

There were no changes inour internal control over financial reporting which were identified inconnection with the evaluation required by Rule 13a-15(e) of theExchange Act that occurred during the third quarter ended September 30,2008 that has materially affected, or is reasonably likely to materiallyaffect, Advent’s internal control over financial reporting.

 

**PART II.OTHER INFORMATION**

 

**Item 1.    LegalProceedings**

 

OnMarch 8, 2005, certain of the former shareholders of Kinexus and theshareholders’ representative filed suit against Advent in the Delaware ChanceryCourt. The complaint alleges that Advent breached the Agreement and Plan ofMerger dated as of December 31, 2001 pursuant to which Advent acquired allof the outstanding shares of Kinexus due principally to the fact that no amountwas paid by Advent on an earn-out of up to $115 million. The earn-out, whichwas payable in cash or stock at the election of Advent, was based upon Kinexusmeeting certain revenue targets in both 2002 and 2003. The complaint seeksunspecified compensatory damages, an accounting and restitution for unjustenrichment. Advent

 

36

----

Table ofContents

 

advisedthe shareholders’ representative in January 2003 that the earn-out termshad not been met in 2002 and accordingly no earn-out was payable for 2002 andwould not be payable for 2003. Discovery is continuing between the parties. Advent disputesthe plaintiffs’ claims and believes that it has meritorious defenses and intendsto vigorously defend this action. Management believes that any potential lossassociated with this litigation is neither probable nor reasonably estimable atthis time and accordingly has not accrued any amounts for any potential loss.

 

From time to time, we areinvolved in claims and legal proceedings that arise in the ordinary course ofbusiness. Based on currently available information, management does not believethat the ultimate outcome of these unresolved matters, individually and in theaggregate, is likely to have a material adverse effect on the Company’sfinancial position or results of operations. However, litigation is subject toinherent uncertainties and our view of these matters may change in the future.Were an unfavorable outcome to occur, there exists the possibility of amaterial adverse impact on our financial position and results of operations forthe period in which the unfavorable outcome occurs, and potentially in futureperiods.

 

**Item 1A. Risk Factors**

 

*Investors should carefully consider the risks described below beforemaking an investment decision. The trading price of our common stock coulddecline due to any of, but are not limited to, these risks. In assessing theserisks, investors should also refer to the other information contained orincorporated by reference in this Quarterly Report on Form 10-Q filed withthe SEC, including our condensed consolidated financial statements and relatednotes thereto.*

 

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

 

Thepurchase of our software products often requires prospective customers toprovide significant executive-level sponsorship and to make major systemsarchitecture decisions. As a result, we must generally engage in relativelylengthy sales and contracting efforts. Sales transactions may therefore bedelayed during the customer decision process because we must provide asignificant level of education to prospective customers regarding the use andbenefit of our products. Our business and prospects are subject touncertainties in the financial markets and can cause customers to remaincautious about capital and information technology expenditures. The sales cycleassociated with the purchase of our solutions is typically between two andtwelve months depending upon the size of the client, and is subject to a numberof significant risks over which we have little or no control, including broaderfinancial market volatility, adverse economic conditions, customers’ budgetingconstraints, internal selection procedures, and changes in customer personnel,among others. Recent volatility in the U.S. and global financial markets willfurther exacerbate this risk. We have recently experienced some clients andprospects delaying or cancelling additional license purchases. In addition,some prospects and clients have gone out of business or have been acquired,which we expect to continue as the financial markets face hardship.

 

Asa result of a lengthy and unpredictable sales cycle, we have limited ability toforecast the timing and amount of specific perpetual license sales, or termlicense sales which we report quarterly as term license contract value (TCV) orannual term license contract value (ACV). The timing of large individuallicense sales is especially difficult to forecast, and we may not be successfulin closing large license transactions on a timely basis or at all. Customersmay postpone their purchases of our existing products or product enhancementsin advance of the anticipated introduction of new products or productenhancements by us or our competitors. Accordingly, our perpetual licenserevenue or our level of TCV in any particular period is subject to significantfluctuation. For example, during the third quarter of 2008, our perpetuallicense revenue was lower than expected as we licensed fewer perpetual seatsand modules to our existing perpetual client base.

 

Whena customer purchases a term license together with implementation services we donot recognize any revenue under the contract until the implementation servicesare substantially complete. In addition, the timing of large implementations isdifficult to forecast. Customers may delay or postpone the timing of theirparticular projects due to the availability of resources or other customerspecific priorities. If we are not able to complete an implementation projectfor a term license in a quarter, it will cause us to defer all of theproportionate contract revenues to a subsequent quarter. Because our expensesare relatively fixed in the near term, any shortfall from anticipated revenuescould result in a significant variation in our operating results from quarterto quarter.

 

**Uncertain Economic and Financial Market Conditions Have in the Past andCurrently Are Adversely Affecting Our Business**

 

Themarket for investment management software systems has been and currently isaffected by a number of factors, including reductions in capital expendituresby customers and poor performance of major financial markets. The currentmarket downturn, dissolution and acquisitions of our clients and prospects, thedecline in  Assets Under Administration(AUA) or Assets Under Management (AUM) as a result of significant declines inasset values of our clients and the accompanying market

 

37

----

Table ofContents

 

uncertaintyaffects and will continue to affect our ability to sell our solutions. Thetarget clients for our products include a range of financial servicesorganizations that manage investment portfolios. In addition, in our MicroEdgebusiness segment, 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. The demand for our solutions has beenand currently is disproportionately affected by fluctuations, disruptions,instability and downturns in the economy and 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. We have recently experienced some clients and prospectsdelaying or cancelling additional license purchases.  In addition, some prospects and clients havegone out of business or have been acquired, which we expect to continue as thefinancial markets face hardship.

 

Beginningin the second half of 2007, difficulties in the mortgage and broader creditmarkets in the United States and elsewhere resulted in a relatively sudden andsubstantial decrease in the availability of credit and a corresponding increasein funding costs.  More recently, thecurrent volatility and uncertainty in the financial markets generally has alsocaused large losses, layoffs, dissolutions and acquisitions by financialinstitutions and other clients, which will likely result in reducedexpenditures for software and related services. Additionally, the economicdownturn has also decreased our clients’ AUA or AUM, which in turn causes ourrevenues to decrease since some pricing is based on assets under administrationor management. In addition, the failure of existing investment firms or theslowdown in the formation of new investment firms, could cause a decline indemand for our solutions. Also, consolidation of financial services firms andother clients will result in reduced technology expenditures or acquiredcustomers using the acquirer’s own proprietary software and services solutionsor the solutions of another vendor.  Insome circumstances where both acquisition parties are customers of Advent, thecombined entity may require fewer Advent products and services than eachindividually licensed, thus reducing our revenue. Challenging economicconditions may also cause our customers to experience difficulty with gainingtimely access to sufficient credit or our customers may become unable to payfor the products or services they have purchased, which could result in theirinability to fulfill or make timely payments to us. If that were to occur, ourdays sales outstanding would be negatively affected, and our reserves fordoubtful accounts and write-offs of accounts receivable may increase.

 

The technology spendingpatterns of organizations in MicroEdge’s primary markets (independentfoundations, community foundations and corporations) are directly affected byeconomic fluctuations as foundation budgets are largely driven by endowmentincome. Given that endowments often contain market-exposed components, they aresignificantly affected by the economy and foundation spending typicallydecreases in an economic downturn. Community foundations are subject to similarinfluences, compounded by the fact that in many cases much of their ongoingfunding and endowment comes from active donors who may increase or reduce theirgiving depending on the economic climate and the related effect on their incomeand wealth. Corporations typically fund charitable activities from operatingbudgets, and the allocation to charitable donations and supporting companycharitable operations is often closely tied to a company’s performance. Thus,corporate philanthropy and spending on related technology are correlated withcompany and overall economic performance.

 

Wehave, in the past, experienced a number of market downturns in the financialservices industry and resulting declines in information technology spending,which has caused longer sales and contracting cycles, deferral or delay ofinformation technology projects and generally reduced expenditures for softwareand related services. The severity of the market downturn and worseningvolatility and uncertainty in the financial markets and the financial servicessector in recent months may have a material adverse effect on our revenues andresults of operations in the longer term.

 

**We Depend Heavily on Our Axys®, Geneva, APX and Moxy Products**

 

Wederive a majority of our net revenues from the license and maintenance revenuesfrom our Axys, Geneva, APX and Moxy products. In addition, Moxy and many of ourapplications, such as Partner and various data services have been designed toprovide an integrated solution with Axys, Geneva and APX. As a result, webelieve that for the next several years a majority of our net revenues willdepend upon continued market acceptance of Axys, Geneva, APX, and Moxy, andupgrades to those products.

 

**Our Current Operating Results May Not Be Reflective of Our FutureFinancial Performance**

 

During fiscal 2007 and the nine months ended September 30,2008, we recognized 77% and 80%, respectively, of total net revenues fromrecurring sources, which we define as revenues from term license, maintenanceon perpetual licenses and other recurring revenue. We generally recognizerevenue from these sources ratably over the terms of these agreements, whichtypically range from one to three years. As a result, almost all of ourrevenues in any quarter are generated from contracts entered into duringprevious periods.

 

Consequently, a significant decline in new businessgenerated in any quarter may not materially affect our results of operations inthat quarter but will have an impact on our revenue growth rate in futurequarters. Additionally, a decline in renewals

 

38

----

Table ofContents

 

ofterm agreements, maintenance or data contracts during a quarter will not befully reflected in our financial performance in that quarter. For example,because we recognize revenue ratably, the non-renewal of term agreements ormaintenance contracts late in a quarter may have very little impact on revenuefor that quarter, but will reduce revenue in future quarters. In addition, wemay be unable to adjust our costs in response to reduced revenue.

 

Further, because of the large percentage of revenuefrom recurring sources, our historical operating results on a generallyaccepted accounting principles (GAAP) basis will not necessarily be the sole ormost relevant factor in predicting our future operating results. Accordingly,we report non-GAAP information, such as our quarterly term license bookingsmetrics (expressed as term license contract value, “TCV”, or annual termlicense contract value, “ACV”) and maintenance renewal rates, that is intendedto provide investors with certain of the information that management uses as abasis for planning and forecasting of future periods. However, placing unduereliance upon non-GAAP or operating information is not appropriate because thisinformation is neither standardized across companies nor subjected to the samecontrol activities and audit procedures that produce our GAAP financialresults. In addition, the current market downturn has started to cause, and mayin the future cause more, clients not to renew their licenses or maintenance,which would affect our renewal rates. Also, the significant declines in marketvalue of our clients affect their AUA or AUM. Consequently, we may also experience a decline in the TCV and ACV ofbookings since the pricing of some of our products is based upon our client’sAUA or AUM.  Furthermore, we have somecontracts for which clients pay us fees based on the greater of a negotiatedannual minimum fee or a calculated fee that is determined by the client’s AUAor AUM. If a client previously had paid us based on the calculated fee, ratherthan the annual minimum fee, we would experience a decline in revenue as aresult of any decline in those clients’ AUA or AUM.

 

**If Our Existing Customers Do Not Renew Their Term License, PerpetualMaintenance or Other Recurring Contracts, Our Business Will Suffer**

 

Revenues recognized from recurring contractsrepresented 77% and 80% of total net revenues in fiscal 2007 and the first ninemonths of 2008, respectively. We expect to continue to derive a significantportion of our revenue from our clients’ renewal of term license, perpetualmaintenance and other recurring contracts and such renewals are critical to ourfuture success. Some factors that may affect the renewal rate of our contractsinclude:

 
| · |   | Impact of the current extreme market volatility on our clients and  prospects;              |
|--------|--------|---------------------------------------------------------------------------------------------|
| · |   | The price, performance and functionality of our solutions;                                  |
| · |   | The availability, price, performance and functionality of competing  products and services; |
| · |   | The effectiveness of our maintenance and support services; and                              |
| · |   | Our ability to develop complementary products and services.                                 |

 

Most of our perpetuallicense customers renew their annual maintenance although our customers have noobligation to renew such maintenance after the first year of their licenseagreements. In addition, our customers may select maintenance levels lessadvantageous to us upon renewal, which may reduce recurring revenue from thesecustomers. In addition, the current market downturn has, and may in the future,caused some clients not to renew their maintenance or reduce their level ofmaintenance, which would affect our renewal rates and revenue.

 

Weonly have limited experience with renewals of our term license contracts.During the third quarter of 2007, we commenced renewing term license contractssigned in the third quarter of 2004. These were the first three-year term license contracts to be renewed byAdvent since our transition to a term pricing model began. Our customers haveno obligation to renew their term license contracts and given the small numberof contracts subject to renewal that were renewed in the second half of 2007and first nine months of 2008, we cannot yet conclude whether customers willrenew in a manner consistent with our perpetual maintenance customers.  Additionally, we cannot predict whether therenewals will be less advantageous to us than the original term contract. Forexample, the renewal periods for our term license contracts are typicallyshorter than our original term license contract and customers may request areduction in the number of users or products licensed, resulting in a lowerannual term license fee.  Further,customers may elect to not renew their term license contracts at all.Additionally, we may incur significantly more costs in securing our termlicense contract renewals than we incur for our perpetual maintenance renewals.If our term license contract customers renew under terms less favorable to usor choose not to renew their contracts, or if it costs significantly more tosecure a renewal for us, our operating results may be harmed.

 

**Our Stock Price May Fluctuate Significantly**

 

Likemany other companies, our stock price has been subject to wide fluctuations inrecent months as part of the high market volatility. If net revenues orearnings in any quarter or our financial guidance for future periods fail tomeet the investment community’s expectations, our stock price is likely todecline. Even if our revenues or earnings meet or exceed expectations, ourstock price is subject to decline in this period of high market volatilitybecause our stock price is affected by trends in the financial

 

39

----

Table ofContents

 

servicessector and by broader market trends unrelated to our performance. Unfavorableor uncertain economic and market conditions, which can be caused by manyfactors, including declines in economic growth, business activity or investoror business confidence; limitation on the availability or increases in the costof credit or capital; increases in inflation, interest rates, exchange ratevolatility, default rates or the price of basic commodities; corporate,political or other scandals that reduce investor confidence in capital markets;outbreaks of hostilities or other geopolitical instability; natural disastersor pandemics; or a combination of these or other factors, have adverselyaffected, and may in the future adversely affect, our business, profitabilityand stock price.

 

**We Operate in a Highly Competitive Industry**

 

Themarket for investment management software is competitive and highly fragmented,is subject to rapid change and is sensitive to new product introductions andmarketing efforts by industry participants. Our largest single source ofcompetition is from proprietary systems used by existing and potential clients,many of whom develop their own software for their particular needs andtherefore may be reluctant to license software products offered by third partyvendors such as Advent. We also face significant competition from otherproviders of software and related services as well as providers of outsourcedservices. Many of our competitors have longer operating histories and greaterfinancial, technical, sales and marketing resources than we do. In addition,consolidation has occurred among some of the competitors in our markets. Competitors vary in size, scope ofservices offered and platforms supported. In recent years, many of ourcompetitors have merged with each other or with other larger third parties, andit is possible that even larger companies will emerge through additionalacquisitions of companies and technologies. Any further consolidation among ourcompetitors may result in stronger competitors in our markets and may thereforeeither result in a loss of market share or harm our results of operations. Inaddition, we also face competition from potential new entrants into our marketthat may develop innovative technologies or business models. Furthermore,competitors may respond to worsening market conditions by lowering prices andattempting to lure away our customers and prospects to lower cost solutions. Wecannot guarantee that we will be able to compete successfully against currentand future competitors or that competitive pressure will not result in pricereductions, reduced operating margins or loss of market share, any one of whichcould seriously harm our business.

 

**We Must Continue to Introduce New Products and Product Enhancements**

 

Themarket for our products is characterized by rapid technological change, changesin customer demands, evolving industry standards and new regulatoryrequirements. New products based on new technologies or new industry standardscan render existing products obsolete and unmarketable. As a result, our futuresuccess will continue to depend upon our ability to develop new products orproduct enhancements that address the future needs of our target markets and respondto their changing standards and practices. For example, in 2007, we releasedmore new products and product upgrades than any other year in our history. In2008, we have released or plan to release product upgrades for Geneva, APX,Moxy, Advent Partner and Advent Revenue Center. In October 2008, weacquired Tamale Software which enables us to offer new product in the nascentresearch management field. However, it is too early to know whether theseproducts will meet anticipated sales or that they will be broadly accepted inthe market or that we will continue to introduce more products.

 

Wemay not be successful in developing, introducing, marketing and licensing ournew products or product enhancements on a timely and cost effective basis, orat all, and our new products and product enhancements may not adequately meetthe requirements of the marketplace or achieve market acceptance. Delays in thecommencement of commercial shipments of new products or enhancements or delaysin client implementations or migrations may result in client dissatisfactionand delay or loss of product revenues. Additionally, existing clients may bereluctant to go through the sometimes complex and time consuming process ofmigrating from our Axys to APX product, which may slow the migration of ourcustomer base to APX. In addition, clients may delay purchases in anticipationof new products or product enhancements. Our ability to develop new productsand product enhancements is also dependent upon the products of other softwarevendors, including certain system software vendors, such as MicrosoftCorporation, Sun Microsystems, database vendors and development tool vendors.If the products of such vendors have design defects or flaws, are unexpectedlydelayed in their introduction, or are unavailable on acceptable terms, ourbusiness could be seriously harmed.

 

**Our Operating Results May Fluctuate Significantly**

 

Weare well over halfway through our transition to a predominantly term licensemodel. Until we substantially complete our transition to a term license model,our net revenues will be affected by the relatively slower revenue recognitionassociated with the term license model, which is typically over athree-year period, and by the reduction in perpetual license revenue. Under aperpetual model, customers purchase licenses to use our software indefinitelyand generally we recognize all license revenue at the time of sale; maintenanceis purchased under an annual renewable contract, and recognized ratably overthe contract period. Under a term model, customers purchase a license to useour software and receive maintenance for a limited period of time and werecognize the revenue ratably over the length of the contract.

 

40

----

Table of Contents

 

Duringthe first nine months of 2008, term license revenues comprised approximately30% of term license, maintenance and other recurring revenues as compared to approximately22% and 14% in fiscal 2007 and 2006, respectively. Term license contracts arecomprised of both software licenses and maintenance services. Individualperpetual software licenses vary significantly in value, and the value andtiming of these transactions can therefore cause our quarterly perpetuallicense revenues to fluctuate.

 

When a customer purchases a term license together with implementationservices we do not recognize any revenue under the contract until theimplementation services are substantially completed and then we recognizerevenue ratably over the remaining length of the contract. If theimplementation services are still in progress as of quarter-end, we will deferall of the contract revenues to a subsequent quarter. As a result of these andother factors, our quarterly net revenues may fluctuate significantly. Ourexpense levels are relatively fixed in the short-term. Due to the fixed natureof these expenses, combined with the relatively high gross margin historicallyachieved on our products, an unanticipated decline in net revenues in anyparticular quarter may adversely affect our operating results. For example,during 2007, we deferred net revenues of $11.8 million and deferred directlyrelated expenses of $4.1 million. The impact of these deferrals on ouroperating income for 2007 was approximately $7.7 million.

 

In addition, we experience seasonality in our licensing. We believethat this seasonality results primarily from customer budgeting cycles and theannual nature of some AUA or AUM contracts, and expect this seasonality tocontinue in the future.  The fourthquarter of the year typically has more licensing activity.  That can result in term license bookings andperpetual license fee revenue being the highest in the fourth quarter, followedby lower term license bookings and perpetual license revenue in the firstquarter of the following year. This seasonality may be adversely affected bythe current market downturn and worsening economic conditions, and there is noguaranty that our fourth quarter term license bookings will be higher thanprevious quarters. Also, term licenses entered into during a quarter may notresult in recognition of associated revenue until later quarters, as we beginrecognizing revenue for such licenses when the related implementation servicesare substantially complete. In addition, we may incur commission and bonusexpenses in the period in which we enter into a license, but not recognize theassociated revenue until later periods.

 

Because of the above factors, we believe that quarter-to-quartercomparisons of our operating results are not necessarily reliable indicators offuture performance.

 

**If Our Relationship with FinancialTimes/Interactive Data Is Terminated or Other Large Subscription-basedRelationships are Terminated, Our Business May Be Harmed**

 

Many of our clients use our proprietary interface to electronicallyretrieve pricing and other data from Financial Times/Interactive Data (“FTID”).FTID pays us a commission based on their revenues from providing this data toour clients. Our software products have been customized to be compatible withtheir system and this software would need to be redesigned if their serviceswere unavailable for any reason. Termination of our current agreement with FTIDwould require at least one year’s notice by either us or them, or 90 daysin the case of material breach. Our operating results would be adverselyimpacted if our relationship with FTID was terminated or their services wereunavailable to our clients for any reason. In recent years, Advent has enteredinto contracts relating to our subscription, data management revenue streamsand outsourced services with contract values that are substantially larger thanwe have customarily entered into in the past, including most recently ouragreement with TIAA-CREF.  It is tooearly to know whether we will be able to continue to sign large recurringrevenue contracts of this nature, and our operating results could be adverselyimpacted if those agreements are not fully implemented, terminated or notrenewed.  Some of these agreements aresubject to milestones, acceptance and penalties and there is no assurance thatthese agreements will be fully implemented, renewed, or that Advent will beable to enter similar or larger sized contracts in the future.

 

**We Must Retain and Recruit Key Employees**

 

We believe that our future success is dependent on thecontinued employment of our senior management and our ability to identify,attract, motivate and retain qualified technical, sales and otherpersonnel. Members of our executive management team have acquiredspecialized knowledge and skills with respect to Advent. We need technicalresources such as our product development engineers to develop new products andenhance existing products; we rely upon sales personnel to sell our productsand services and maintain healthy business relationships; we must recruitprofessional service consultants to support the anticipated increase in productimplementations; we must hire client services personnel to provide technicalsupport to our growing installed base of customers; and we must attract andretain financial and accounting personnel to comply with the requirements of Section 404of the Sarbanes-Oxley Act of 2002. For example, our Chief Financial Officerleft the Company effective as of July 31, 2008 and we have not yet named anew individual to fill that position. If we are unable to secure a replacementin a timely manner for our chief financial officer position, our results ofoperations may be harmed and our ability to report our financial results may beimpaired. We need to identify, attract, motivate and retain suchemployees with the requisite education, backgrounds and industryexperience.  However, experienced personnel in the information technologyindustry are in 

 

41

----

Table of Contents

 

high demand and competition fortheir talents is intense, especially in the San Francisco Bay Area where themajority of our employees are located.

 

We have relied on our ability to grant equity compensation as onemechanism for recruiting and retaining such highly skilled personnel. In makingemployment decisions, particularly in the high-technology industries and SanFrancisco Bay Area, job candidates often consider the value of the equityawards they are to receive in connection with their employment. Fluctuations inour stock price may make it more difficult to retain and motivate employeeswhose strike prices are substantially above current market prices. Similarly,decreases in the number of unvested in-the-money equity awards held by existingemployees, whether because our stock price has declined, equity awards havevested, or because the size of follow-on equity award grants has declined, maymake it more difficult to retain and motivate employees. Additionally,accounting regulations requiring the expensing of equity compensation impairour ability to provide these incentives without reporting significantcompensation costs.

 

We may also choose to create additional performance and retentionincentives in order to retain our employees, including the granting ofadditional stock options, restricted stock, restricted stock units, stockappreciation rights, performance shares or performance units to employees orissuing incentive cash bonuses. Such incentives may either dilute our existingstockholder base or result in unforeseen operating expenses which may have amaterial adverse effect on our operating results, or could result in our stockprice falling; or may not be valued as highly by our employees which may createretention issues.

 

**We Face Challenges in Expanding OurInternational Operations**

 

We market and sell our products in the United States and, to a lesserextent, internationally. From 2001 through 2005, we acquired the subsidiariesof our independent distributor. In addition, we have begun to expand our salesin relatively new jurisdictions for Advent, such as the Middle East, EasternEurope, and continue to explore other market regions, such as Asia. In 2006 weopened a branch office of Advent Europe Ltd. in the United Arab Emirates, aswell as a subsidiary of Advent Software, Inc. in Hong Kong in 2008.  We cannot be certain that establishingbusinesses in other countries will produce the desired levels of revenues, suchas in the case of our Greek subsidiary, Advent Hellas, which produced less thansatisfactory revenues and profitability before its sale by Advent in 2005.Also, the recent worldwide decline in financial markets may disrupt our salesefforts in overseas markets. We currently have limited experience in developinglocalized versions of our products and marketing and distributing our productsinternationally. In addition, international operations are subject to otherinherent risks, including:

 

·                  The impact ofrecessions in economies outside the United States;

·                  Adverse changesin foreign currency exchange rates;

·                  Greaterdifficulty in accounts receivable collection and longer collection periods;

·                  Difficulty ofenforcement of contractual provisions in local jurisdictions;

·                  Unexpectedchanges in foreign laws and regulatory requirements;

·                  US and foreigntrade-protection measures and export and import requirements;

·                  Difficulties insuccessfully adapting our products to the language, regulatory and technologystandards of other countries;

·                  Resistance oflocal cultures to foreign-based companies and difficulties establishing localpartnerships or engaging local resources;

·                  Difficulties inand costs of staffing and managing foreign operations;

·                  Reducedprotection for intellectual property rights in some countries;

·                  Foreign taxstructures and potentially adverse tax consequences; and

·                  Political andeconomic instability.

 

The revenues, expenses, assets and liabilities of our internationalsubsidiaries are primarily denominated in local foreign currencies. We have nothistorically undertaken foreign exchange hedging transactions to cover potentialforeign currency exposure. Future fluctuations in currency exchange rates mayadversely affect revenues and accounts receivable from international sales andthe U.S. dollar value of our foreign subsidiaries’ revenues, expenses, assetsand liabilities. Our international service revenues and certain licenserevenues from our European subsidiaries are generally denominated in localforeign currencies.

 

**Difficulties in Integrating Our Acquisitions and Expanding Into NewBusiness Areas Have Impacted and Could Continue to Adversely Impact OurBusiness and We Face Risks Associated with Potential Acquisitions, Investments,Divestitures and Expansion**

 

Periodically we seek to grow through the acquisition of additionalcomplementary businesses. We entered into a definitive agreement in September 2008to acquire Tamale Software, Inc., and completed the acquisition in October 2008.In November 2007, our MicroEdge subsidiary acquired Vivid Orange Limited,a United Kingdom company providing corporate community involvement and employeecharitable giving technology.  In December 2006,we acquired East Circle Solutions, Inc., 

 

42

----

Table of Contents

 

a developer of investmentmanagement billing solutions to integrate their product into our softwareofferings. From 2001 through the middle of 2003, we made five majoracquisitions, including Kinexus Corporation, Techfi Corporation and AdventOutsource Data Management LLC, and also acquired all of the common stock offive of our European distributor’s subsidiaries. In addition, we purchased ourEuropean distributor’s remaining two subsidiaries in the United Kingdom andSwitzerland in May 2004.

 

The process of integrating our acquisitions has required and willcontinue to require significant resources, particularly in light of ourrelative inexperience in integrating acquisitions, potential regulatoryrequirements and operational demands. Integrating these acquisitions in thepast has been time-consuming, expensive and disruptive to our business. Thisintegration process has strained our managerial resources, resulting in thediversion of these resources from our core business objectives and may do so inthe future. Failure to achieve the anticipated benefits of these acquisitionsor to successfully integrate the operations of these entities has harmed andcould potentially harm our business, results of operations and cash flows infuture periods. For example, in the first quarter of 2003, we closed ourAustralian subsidiary because it failed to perform at a satisfactory profitlevel and similarly in the fourth quarter of 2005, we disposed of our AdventHellas subsidiary because of less than satisfactory profitability. In addition,as we have expanded into new business areas and built new offerings throughstrategic alliances and internal development, as well as acquisitions, some ofthis expansion has required significant management time and resources withoutgenerating required revenues. We have had difficulty and may continue to havedifficulty creating demand for such offerings. Furthermore, we may face otherunanticipated costs from our acquisitions, such as disputes involving earn-outand incentive compensation amounts, similar to those we have experienced withour Kinexus and Advent Outsource acquisitions.

 

We may make additional acquisitions of complementary companies,products or technologies in the future. In addition, we periodically evaluatethe performance of all our products and services and may sell or discontinuecurrent products and services. Failure to achieve the anticipated benefits ofany acquisition or divestiture could harm our business, results of operationsand cash flows. Furthermore, we may have to incur debt, write-off investments,infrastructure costs or other assets, incur severance liabilities, write-offimpaired goodwill or other intangible assets or issue equity securities to payfor any future acquisitions. The issuance of equity securities could dilute ourexisting stockholders’ ownership. Finally, we may not identify suitablebusinesses to acquire or negotiate acceptable terms for future acquisitions.

 

**Impairment of Investments Could Harm OurResults of Operations**

 

We have made and may make future investments in privately heldcompanies, many of which are considered in the start-up or development stages.These investments, which we classify as other assets on our consolidatedbalance sheets, are inherently risky, as the market for the technologies orproducts these companies have under development is typically in the earlystages and may never materialize. The value of the investment in thesecompanies is influenced by many factors, including the operating effectivenessof these companies, the overall health of these companies’ industries, thestrength of the private equity markets and general market conditions. Due tothese and other factors, we have previously determined, and may in the futuredetermine, that the value of these investments is impaired, which has causedand would cause us to write down the carrying value of these investments, suchas the $0.6 million write-down of one of our investments during the secondquarter of 2007. Furthermore, we cannot be sure that future investment,license, fixed asset or other asset write-downs will not occur. If futurewrite-downs do occur, they could harm our business and results of operations.

 

**If We Are Unable to Protect Our Intellectual Property We May BeSubject to Increased Competition that Could Seriously Harm Our Business**

 

Our success depends significantly upon our proprietary technology. Wecurrently rely on a combination of copyright, trademark, patent and tradesecret law, as well as confidentiality procedures and contractual provisions toprotect our proprietary rights. We have registered trademarks and copyrightsfor many of our products and services and will continue to evaluate theregistration of additional trademarks and copyrights as appropriate. Wegenerally enter into confidentiality agreements with our employees, customers,resellers, vendors and others. We seek to protect our software, documentationand other written materials under trade secret and copyright laws. We also haveone registered patent. While we do not believe we are dependent on any one ofour intellectual property rights, we do rely on the combination of intellectualproperty rights and other measures to protect our proprietary rights anddespite our efforts, existing intellectual property laws may afford only limitedprotection. In addition, it may be possible for unauthorized third parties tocopy certain portions of our products or to reverse engineer or otherwiseobtain and use our proprietary information. In addition, we cannot be certainthat others will not develop or acquire substantially equivalent or supersedingproprietary technology, equivalent or better products will not be marketed incompetition with our products, or others may not design around any patent thatmay be issued to us or other intellectual property rights of ours, therebysubstantially reducing the value of our proprietary rights. We cannot be surethat we will develop proprietary products or technologies that are patentable,that any patent, if issued, would provide us with any competitive advantages orwould not be challenged by third parties, or that the patents of others willnot adversely affect our ability to do business. Despite our efforts to protectour proprietary rights, unauthorized parties may attempt to copy aspects of ourproducts or to obtain and use information that we regard as proprietary. Inaddition, the laws of some foreign countries do not protect proprietary rightsto as great an extent as do 

 

43

----

Table of Contents

 

the laws of the United States.Litigation may be necessary to protect our proprietary technology which may betime-consuming and expensive, with no assurance of success.  As a result, we cannot be sure that our meansof protecting our proprietary rights will be adequate.

 

**If We Infringe the Intellectual Property Rights of Others, We May IncurAdditional Costs or Be Prevented from Selling Our Products and Services**

 

We cannot be certain that our products or services do not infringe theintellectual property rights of others. As a result, we may be subject tolitigation and claims, including claims of misappropriation of trade secrets orinfringement of patents, copyrights and other intellectual property rights ofthird parties that would be time-consuming and costly to resolve and may leadto unfavorable judgments or settlements. If we discovered that our products orservices violated the intellectual property rights of third parties, we mayhave to make substantial changes to our products or services or obtain licensesfrom such third parties. We might not be able to obtain such licenses onfavorable terms or at all, and we may be unable to change our productssuccessfully or in a timely or cost-effective manner. Failure to resolve aninfringement matter successfully or in a timely manner would damage ourreputation and force us to incur significant costs, including payment ofdamages, redevelopment costs, diversion of management’s attention andsatisfaction of indemnification obligations that we have with our clients, aswell as prevent us from selling certain products or services.

 

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

 

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

 

**Catastrophic Events Could Adversely AffectOur Business**

 

We are a highly automated business and rely on our networkinfrastructure and enterprise applications, internal technology systems and ourWeb site for our development, marketing, operational, support, and salesactivities. A disruption or failure of these systems in the event of majorearthquake, fire, telecommunications failure, cyber-attack, terrorist attack,or other catastrophic event could cause system interruptions, reputationalharm, delays in our product development and loss of critical data and couldaffect our ability to sell and deliver products and services and other criticalfunctions of our business. Our corporate headquarters, a significant portion ofour research and development activities, our data centers, and certain othercritical business operations are located in the San Francisco Bay Area, whichis a region of seismic activity. We have developed certain disaster recoveryplans and certain backup systems to reduce the potentially adverse effect ofsuch events, but a catastrophic event that results in the destruction ordisruption of any of our data centers or our critical business or informationtechnology systems could severely affect our ability to conduct normal businessoperations and, as a result, our future operating results could be adverselyaffected. Further, such disruptions could cause further instability in thefinancial markets or the spending of our clients and prospects upon which wedepend.

 

In addition to the severe market conditions of recent months, othercatastrophic events such as abrupt political change, terrorist acts, conflictsor wars may cause damage or disruption to the economy, financial markets andour customers. The potential for future attacks, the national and internationalresponses to attacks or perceived threats to national security and other actualor potential conflicts or wars, including the ongoing crisis in the MiddleEast, have created many economic and political uncertainties. Although it is impossibleto predict the occurrences or consequences of any such events, they couldunsettle the financial markets or result in a decline in information technologyspending, which could have a material adverse effect on our revenues.

 

**Undetected Software Errors or Failures Found in New Products May Resultin Loss of or Delay in Market Acceptance of Our Products that Could SeriouslyHarm Our Business**

 

Our products may contain undetected software errors or scalabilitylimitations at any point in their lives, but particularly when first introducedor as new versions are released. Despite testing by us and by current andpotential customers, errors may not be found in new products until aftercommencement of commercial shipments, resulting in a 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 agreements with customers that attempt to limit ourexposure to liability claims may not be enforceable in jurisdictions where weoperate.

 

44

----

Table of Contents

 

**Two of Our Principal StockholdersHave an Influence Over our Business Affairs and May Make BusinessDecisions with Which You Disagree and Which May Adversely Affect the Valueof Your Investment**

 

OurChief Executive Officer and the Chairman of our board of directors own orcontrol, indirectly or directly, a substantial number of shares of our commonstock (approximately 36% as of October 31, 2008). As a result, if thesepeople act together, they will have the ability to exert significant influenceon matters submitted to our stockholders for approval, such as the election orremoval of directors, amendments to our certificate of incorporation or theapproval of a business combination. These actions may be taken even if they areopposed by other stockholders or it may be difficult to approve these actionswithout their consent. This concentration of ownership may also have the effectof delaying or preventing a change of control of our company or discouragingothers from making tender offers for our shares, which could prevent ourstockholders from receiving a premium for their shares.

 

**Changes in Securities Laws and Regulations May IncreaseOur Costs**

 

The Sarbanes-Oxley Act (“the Act”) of 2002 required changes in some ofour corporate governance and securities disclosure and/or compliance practices.As part of the Act’s requirements, the SEC has enacted new rules on avariety of subjects, and the Nasdaq Stock Market has enacted new corporategovernance listing requirements. These developments have increased and may inthe future increase our accounting and legal compliance costs and could alsoexpose us to additional liability if we fail to comply with these new rules andreporting requirements. In fiscal 2007, 2006 and 2005, we incurredapproximately $0.9 million, $1.3 million and $1.8 million, respectively, inSarbanes-Oxley related expenses consisting of external consulting costs andauditor fees, and the Company anticipates similarly spending a significantamount for its 2008 compliance activities. In addition, such developments maymake retention and recruitment of qualified persons to serve on our board ofdirectors, or as executive officers, more difficult. We continue to evaluateand monitor regulatory and legislative developments and cannot reliablyestimate the timing or magnitude of all costs we may incur as a result of theAct or other related legislation or regulation.

 

**Changes in, or Interpretations of, AccountingPrinciples Could Result in Unfavorable Accounting Charges**

 

                                                Weprepare our consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America. These principlesare subject to interpretation by us, the SEC and various bodies formed tointerpret and create accounting principles. A change in these principles or achange in the interpretations of these principles can have a significant effecton our reported results and may even retroactively affect previously reportedtransactions. Some of our accounting principles that recently have been or maybe affected include:

 

·                  Software revenue recognition

·                  Accounting for stock-basedcompensation

·                  Accounting for income taxes

·                  Accounting for business combinationsand related goodwill

 

In particular,in the first quarter of 2006, we adopted SFAS 123R which requires themeasurement of all stock-based compensation to employees, including grants ofemployee stock options, restricted stock units and stock appreciation rights,using a fair-value-based method and the recording of such expense in ourconsolidated statements of operations. The adoption of SFAS 123R had asignificant adverse effect on our results of operations. It will continue tosignificantly adversely affect our results of operations and has resulted inchanges to our compensation practices, such as an increased reliance on usingequity vehicles such as stock-settled stock appreciation rights (SAR) andrestricted stock units (RSU).

 

Iffactors change and we employ different assumptions for estimating stock-basedcompensation expense in future periods or if we decide to use a different valuationmodel, the future periods may differ significantly from what we have recordedin the current period and could materially affect our operating income, netincome and net income per share.

 

Wecurrently use the Black-Scholes option pricing model to determine the fairvalue of stock-based compensation awards and employee stock purchase planshares. The Black-Scholes option pricing model was developed for use inestimating the fair value of traded options that have no vesting restrictionsand are fully transferable, characteristics not present in our option grantsand employee stock purchase plan shares. Existing valuation models, includingthe Black-Scholes and lattice binomial models, may not provide reliablemeasures of the fair values of our stock-based compensation. Consequently,there is a risk that our estimates of the fair values of our stock-basedcompensation awards on the grant dates may bear little resemblance to theactual values realized upon the exercise, expiration, early termination or forfeitureof those stock-based payments in the future. Certain stock-based payments, suchas employee stock options, restricted stock units and stock appreciationrights, may expire worthless or otherwise result in zero intrinsic value ascompared to the fair values originally estimated on the grant date and reportedin our consolidated financial statements. Alternatively, value may be realizedfrom these instruments that are significantly higher than the fair valuesoriginally estimated on the grant date and reported in our financialstatements. There currently is no market-based mechanism or other practicalapplication to verify the reliability and 

 

45

----

Table of Contents

 

accuracy of the estimates stemming from thesevaluation models, nor is there a means to compare and adjust the estimates toactual values.

 

Additionally, in December 2007, the FASB issued SFAS No. 141(revised 2007) (“SFAS 141R”), “Business Combinations”. SFAS 141R establishesprinciples and requirements for how the acquirer of a business recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, and any non-controlling interest in the acquiree. SFAS141R is effective for financial statements issued for fiscal years beginningafter December 15, 2008. Accordingly, any business combinations we engagein will be recorded and disclosed following existing generally acceptedaccounting principles (GAAP) until January 1, 2009. We currently believethat the adoption of SFAS 141R will result in the recognition of certain typesof expenses in our results of operations that we currently capitalize pursuantto existing accounting standards and may also impact our financial statement inother ways. Additionally, the nature and magnitude of the specific effects willdepend upon the nature, terms and size of the acquisitions the Companyconsummates after the effective date.

 

**Security Risks May Harm Our Business**

 

Maintaining the security of computers, computer networks, hostedsolutions and the transmission of confidential information over public networksis essential to commerce and communications, particularly in the market inwhich Advent operates. Efforts of others to seek unauthorized access to Advent’sor its clients’ computers and networks or introduce viruses, worms and othermalicious software programs that disable or impair computers into our systemsor those of our customers or other third parties, could disrupt or make oursystems inaccessible or allow access to proprietary information and data ofAdvent or its clients.  Advances incomputer capabilities, new discoveries in the field of cryptography or otherevents or developments, also could result in compromises or breaches of oursecurity systems. Our security measures may be inadequate to prevent securitybreaches, exposing us to a risk of data loss, financial loss, harm toreputation, business interruption, litigation and other possible liabilities,as well as possibly requiring us to expend significant capital and otherresources to protect against the threat of security breaches or to alleviateproblems caused by such breaches.

 

**Potential Changes in Securities Laws and Regulation Governing theInvestment Industry’s Use of Soft Dollars May Reduce Our Revenues**

 

As of December 31, 2007, approximately 360 or 8% of our clientsutilized trading commissions (“soft dollar arrangements”) to pay for softwareproducts and services. During fiscal 2007 and 2006, the total value of Adventproducts and services paid with soft dollars was approximately 4% and 5% of ourtotal billings. Such soft dollar arrangements could be impacted by changes inthe regulations governing those arrangements.

 

Duringthe fourth quarter of 2006, we completed the wind down of the “soft dollar”business of our SEC-registered broker/dealer subsidiary, Second StreetSecurities, as it no longer fits with our corporate strategy. Second StreetSecurities’ soft dollar business offered our customers the ability to pay forAdvent products and other third party products and services through brokeragecommissions and other fee-based arrangements. We will continue to allow clientsto utilize soft dollar arrangements to pay for Advent software products andservices through other independent broker/dealers.

 

InJuly 2006, the SEC published an Interpretive Release that providesguidance on money managers’ use of client commissions to pay for brokerage andresearch services under the safe harbor set forth in Section 28(e) ofthe Securities Exchange Act of 1934. The Interpretive Release clarifies thatmoney managers may use client commissions (“soft dollars”) to pay only for eligible brokerage and research services. Among othermatters, the Interpretive Release states that eligible brokerage includes thoseproducts and services that relate to the execution of the trade from the pointat which the money manager communicates with the broker-dealer for the purposeof transmitting an order for execution, through the point at which funds orsecurities are delivered or credited to the advised account.  In addition, for potentially “mixed-use”items (such as trade order management systems) that are partly eligible andpartly ineligible, the Interpretive Release states that money managers mustmake a reasonable allocation of client commissions in accordance with theeligible and ineligible uses of the items. Based on this new guidance, ourcustomers may change their method of paying all or a portion of certain Adventproducts or services from soft to hard dollars, and as a result reduce theirusage of these products or services in order to avoid increasing expenses,which could cause our revenues to decrease.

 

**Borrowings Under Our Credit Facility Must beRepaid if we Fail to Comply with Certain Covenants**

 

In February 2007, we entered into a seniorsecured facility agreement which provides us with a revolving line of credit upto an aggregate amount of $75.0 million. We have in the past, and may in thefuture, borrow under the credit facility in order to fund working capitalrequirements, make share repurchases of our common stock or fund acquisitions.In addition, if our anticipated cash flow from our recurring sources of revenueis materially impaired due to customer defaults or failure to 

 

46

----

Table of Contents

 

renew term licenses or maintenance contracts,our ability to borrow under the credit facility, or continue to meet thecontractual covenants, may be compromised. Our continued ability to borrowunder our credit facility is subject to compliance with certain financial andnon-financial covenants. The financial covenant is limited to a maximum ratioof senior debt to earnings before interest, taxes, depreciation, andamortization (EBITDA), adjusted for cost capitalizations, extraordinary gains(losses) and non-cash stock compensation. Our failure to comply with such covenantscould cause default under the agreement, and we may then be required to repaysuch debt with capital from other sources. Under those circumstances, othersources of capital may not be available to us, or be available only onunfavorable terms. In the event of default which is not remedied within theprescribed timeframe, the assets of the Company (subject to the amountborrowed) may be attached or seized by the lender. As of September 30,2008 and December 31, 2007, we had no outstanding borrowings under thiscredit facility and were in compliance with all covenants. However, on October 30,2008, the Board of Directors authorized a share repurchase program of up to 3.0million shares, and we may borrow under the credit facility to fund a portionof these repurchases.

 

**If We Fail to Maintain an Effective System of Internal Control, We May Notbe Able to Accurately Report Our Financial Results or Our Filings May Notbe Timely. As a Result, Current and Potential Stockholders Could LoseConfidence in Our Financial Reporting, Which Would Harm Our Business and theTrading Price of Our Stock**

 

Effective internal controlis necessary for us to provide reliable financial reports. If we cannot providereliable financial reports, our business and operating results could be harmed.We have in the past discovered, and may in the future discover, areas of ourinternal control that need improvement including control deficiencies that mayconstitute material weaknesses. For example, as of December 31, 2005, theCompany did not maintain effective controls over the accounting for incometaxes, including the determination of deferred income tax liabilities and therelated income tax provision. This control deficiency resulted in adjustmentsto the fourth quarter of 2004 and 2005 financial statements and a restatementof the Company’s financial statements for each of the first three quarters offiscal 2004 and 2005.

 

The Company also did notmaintain effective controls over the accuracy, presentation and disclosure ofthe pro forma stock-based compensation expense in conformity with generallyaccepted accounting principles as of December 31, 2005. As a result ofthis control deficiency, the Company’s disclosures of stock-based compensationexpense for fiscal 2003 and 2004 and the first three quarters of 2004 and 2005were revised.

 

During 2006, we implementedcontrols and procedures to improve our internal control over financialreporting and address the material weaknesses identified in fiscal 2004 and2005. Management has concluded that the Company’s internal control overfinancial reporting was effective as of December 31, 2006 and 2007.

 

We do not expect that ourinternal control over financial reporting will prevent all errors or fraud. Acontrol system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives willbe met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Controls can be circumvented by individual acts ofsome persons, by collusion of two or more people, or by management override ofthe controls. Over time, controls may become inadequate because changes inconditions or deterioration in the degree of compliance with policies orprocedures may occur. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected.

 

Any failure to implement ormaintain improvements in our internal control over financial reporting, ordifficulties encountered in the implementation of these improvements in ourcontrols, could cause significant deficiencies or material weaknesses in ourinternal controls and consequently cause us to fail to meet our reportingobligations. Any failure to implement or maintain required new or improvedinternal controls could also cause investors to lose confidence in our reportedfinancial information, which could have a negative impact on the trading priceof our stock.

 

**OurAbility to Conclude that a Control Deficiency is Not a Material Weakness orthat an Accounting Error Does Not Require a Restatement Can be Affected By aNumber of Factors Including Our Level of Pre-Tax Income**

 

Underthe Sarbanes-Oxley Act of 2002, our management is required to assess the impactof control deficiencies based upon both quantitative and qualitative factors,and depending upon that analysis we classify such identified deficiencies aseither a control deficiency, significant deficiency or a material weakness.

 

Oneelement of our quantitative analysis of any control deficiency is its actual orpotential financial impact, and any impact that is greater than 5% of ourpre-tax income in any quarter may be more likely to result in that deficiencybeing determined to be a significant deficiency or a material weakness. Forexample, our assessment of a control deficiency as a significant deficiency ormaterial weakness remains dependent in part on our level of profitabilityduring a particular quarter. If 

 

47

----

Table of Contents

 

our quarterly or fiscal year pre-tax incomewere to decrease, this will make it statistically less likely for us and ourindependent registered public accounting firm to determine that a controldeficiency is not a material weakness.

 

Inaddition, if management or our independent registered public accountantsidentify errors in our interim or annual financial statements, it isstatistically more likely that such errors may meet the quantitative thresholdestablished under Staff Accounting Bulletin No. 99, “Materiality”, thatcould, depending upon the complete qualitative and quantitative analysis,result in our having to restate previously issued financial statements.

 

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

 

**Issuer Purchases of Equity Securities**

 

Our Board of Directors (the “Board”) has approved common stockrepurchase programs authorizing management to repurchase shares of the Company’scommon stock in the open market. The timing and actual number of shares subjectto repurchase are at the discretion of management and are contingent on anumber of factors, including the price of our stock, general market conditionsand alternative investment opportunities. The purchases are funded fromavailable working capital or debt.

 

On May 7, 2008, Advent’sBoard authorized the repurchase of up to 1.0 million shares of the Company’soutstanding common stock. During the third quarter of 2008, Advent repurchasedan aggregate of 360,000 shares of common stock for a total cash outlay of $15.0million and at an average price of $41.76 per share. The following tableprovides a month-to-month summary of the repurchase activity under the stockrepurchase programs approved by the Board in May 2008 during the threemonths ended September 30, 2008:

 
| ** **          | ** ** | ** **                 | ** ** | ** **         | ** ** | **Maximum**                              | ** ** |
|---------------------|------------|----------------------------|------------|--------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **Total**                  | ** ** | **Average**        | ** ** | **Number of Shares That** | ** ** |
| ** **          | ** ** | **Number**                 | ** ** | **Price**          | ** ** | **May Yet Be Purchased**  | ** ** |
| ** **          | ** ** | **of Shares**         | ** ** | **Paid**           | ** ** | **Under Our Share**            | ** ** |
| ** **          | ** ** | **Purchased**              | ** ** | **Per Share** | ** ** | **Repurchase Programs**             | ** ** |
| ** **          | ** ** | **(shares  in thousands)** | ** ** |
| ** **          | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **                               | ** ** |
| July 2008      |       | —                     |       | $                  | —     |                                     | 1,000      |   |
| August 2008    |       | —                     |       | $                  | —     |                                     | 1,000      |   |
| September 2008 |       | 360                        |       | $                  | 41.76      |                                     | 640        |   |
|                |       |                       |       |               |       |                                     |       |
| Total               |       | 360                        |       | $                  | 41.76      |                                     | 640        |   |

 

In October 2008, Advent repurchased theremaining 640,000 shares under the program authorized by the Board in May 2008for an average price of $30.41 per share. On October 30, 2008, ourBoard of Directors authorized a share repurchase program to repurchase up toadditional 3.0 million shares.

 

**Item 3.****   Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.****   Other Information**

 

None.

 

**Item 6.****   Exhibits**

 

31.1               Certification of Principal Executive andFinancial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1               Certification of Principal Executive andFinancial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

 

48

----

Tableof Contents

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   |                         | ADVENT SOFTWARE, INC. |
|--------|------------------------------|-----------------------|
|   |                         |                  |   |
|   | Dated: November 7, 2008 | By:                   | /s/ Stephanie G. DiMarco |
|   |                         |                  | Stephanie G. DiMarco *Executive President,**Chief Executive Officer and President**(Principal Executive and Financial  Officer)* |
|   |                         |                  |   |
|   |                         |                  |   |
|   | Dated: November 7, 2008 | By:                   | /s/ James S. Cox |
|   |                         |                  | James S. Cox *Vice President and Corporate Controller**(Principal Accounting Officer)* |

 

49

----